Definitions for Responsible Citizenship and Canada's Tax System

Act

A law passed by a government (e.g. the federal Income Tax Act).

Appeal

A process where a taxpayer is allowed to formally object if they feel the facts have been misinterpreted or the laws have been applied incorrectly. If you disagree with the decision resulting from the objection, you can appeal your assessment to the various levels of the judicial system.

Budget

A budget is a statement of planned revenues and expenditures for a fiscal year that the government uses to set priorities for its programs.

Canada Child Tax Benefit (CCTB)

The CCTB is a tax-free monthly payment made to eligible families to help them with the cost of raising children under age 18.

Canada Revenue Agency (CRA)

The federal government agency responsible for administering tax laws for the Government of Canada and for most provinces and territories, and various social and economic benefit and incentive programs delivered through the tax system.

Canada Pension Plan (CPP)

A contributory, earnings related social insurance program. It ensures a measure of protection to a contributor and his or her family against loss of income due to retirement, disability or death. With very few exceptions, every person in Canada over the age of 18 who earns a salary must pay into the CPP or Quebec Pension Plan (QPP).

You and your employer each pay half of the contributions. If you are self-employed, you pay both portions. You do not make contributions if you are receiving a CPP/QPP disability or retirement pension. At age 70, you stop contributing even if you have not stopped working.

Consumption

The purchase and use of goods and services.

Consumption and commodity taxes

Examples are sales tax, fuel and gas tax, tobacco tax, GST/HST, health tax, gaming tax, liquor mark-ups and hotel room tax.

Deductions

Amounts an individual can subtract from his or her total income to determine taxable income (see taxable income).

Direct or indirect tax methods

A person will pay a direct tax, such as sales tax or GST/HST, when purchasing goods and services. For example, you pay taxes on goods you buy at a store and your hydro company will charge GST/HST on your hydro bill. In both cases, the business collects the tax and sends the money to the government.

A product manufacturer or distributor pays taxes to the government for goods and services they buy or use to make their products. They include these expenses as part of the final cost of the goods or service - which is the amount we pay. The amount of excise tax a manufacturer pays on fuel is an example of an indirect tax.

Employment Insurance (EI)

The EI program provides temporary income support to those who are between jobs; cannot work for reasons of sickness, childbirth, or parenting; or who are providing care or support to a family member who is gravely ill with a significant risk of death.

Employers have to deduct EI premiums from their employee's insurable earnings on every dollar up to the yearly maximum, and must also contribute 1.4 times the EI premium withheld for each employee.

Exempt

Earnings or amounts received that are not subject to tax under the Income Tax Act are said to be exempt. Examples of exempt income include lottery proceeds or inheritances. Also, certain entities are exempt from taxation, i.e. registered charities, employees of a country other than Canada (foreign embassy staff), non-profit organizations and persons who qualify under the Indian Act.

Expense

An amount a person incurs to earn business income.

Fine

The amount of money a person or company must pay to a court after being convicted of breaking a law. Canadian courts have the power to apply fines to those who break tax laws.

Guaranteed Annual Income System (GAINS)

The Ontario GAINS program ensures a guaranteed minimum income for Ontario seniors. It provides monthly payments to qualifying pensioners on top of the federal Old Age Security (OAS) pension and the federal Guaranteed Income Supplement (GIS). The Ontario Ministry of Revenue administers the program.

Goods and services tax (GST)

A 5% tax that applies to the supply of most goods and services in Canada. Although the consumer pays the tax, businesses are generally responsible for collecting and remitting it to the government.

Goods and services tax/harmonized sales tax (GST/HST) credit

A tax-free quarterly payment that helps individuals and families with low and modest incomes offset all or part of the GST or HST that they pay.

You are eligible for this credit if, at the beginning of the month in which the CRA makes a payment, you are resident in Canada for income tax purposes, are 19 years of age or older; or have (or previously had) a spouse or common-law partner; or are (or previously were) a parent and live (or previously lived) with your child.

Harmonized sales tax (HST)

Effective April 1, 1997, three provinces - Nova Scotia, New Brunswick, and Newfoundland and Labrador harmonized their provincial sales tax with the GST to create HST. The HST is composed of the GST and the 8% provincial tax and applies to the same base of goods and services that are taxable under GST. HST follows the same general rules as GST.

Income

All salaries, wages (including tips) and other remuneration earned from employment, from operating a business, or from owning property. Other types of income include interest, dividends, royalties, gains on the sale of property, rent on property and the net profit of operating a business.

Income tax

A compulsory contribution levied on persons, property, or businesses for the support of government for economic and social operations. In other words, it is money paid to a government to fund its programs and services.

Income tax and benefit return

The form that individuals use to report personal information, income, subtract deductions and claim allowable credits in order to calculate the amount of tax they must pay for a taxation year. The result of the calculation will show either an underpayment of tax, resulting in a balance owing, or an overpayment of tax resulting in a refund.

Income tax deducted

An amount an employer deducts at source from an employee's salary or wages. The employer sends this money to the CRA. More than 80% of all personal income tax is sent to the government in this way.

Information slips

Statements of income and deductions that employers and financial institutions have to prepare and send to employees, clients and the CRA annually. Individuals use the information on the slips to prepare their income tax and benefit returns. Two examples of information slips are the form T4, Statement of Remuneration Paid, and the form T5, Statement of Investment Income.

Infrastructure

Infrastructure is the essential or foundational elements of a system or structure. Roads, sewers, water and power are the infrastructure of a city.

Jurisdiction

The area in which a government has the authority to pass and enforce laws. Federal refers to all of Canada, provincial/territorial refers to each individual province or territory, and municipal refers to cities, towns or groupings of rural districts within a province or territory.

Legislature system

A system of government under which provincial and territorial laws are passed by an assembly of elected representatives.

Non-compliance

Failure to obey or comply with tax laws.

Parliamentary system

A system of government under which federal laws are passed by an assembly of elected and appointed representatives such as the House of Commons and the Senate.

Penalties

Amounts taxpayers must pay if they fail to file their return and make any payments on time, or if they try to evade paying tax by not filing a return. Anyone who makes false statements or omissions on their return and who do not provide the information required on a prescribed form must also pay a penalty.

Property and school taxes

A tax based on the assessed value of real estate or personal property.

Quebec Pension Plan (QPP)

A pension plan maintained by the province of Quebec, which is equivalent to the Canada Pension Plan (CPP).

Refund

An overpayment of tax that is returned to you, or a rebate of tax that you can apply to receive.

Self-assessment tax system

The federal and provincial tax systems in Canada are based on the self-assessment system whereby individuals and businesses assess tax owed by completing a tax return and submitting it to the federal and/or the provincial government. It is important to keep in mind that all tax returns may be subject to review and audit.

T4 Slip (Statement of Remuneration Paid)

An information slip that is prepared by employers each year for each of their employees and sent to both the employee and the CRA. It shows all of the income paid to the employee during the taxation year including salaries and wages, taxable benefits or allowances, and deductions such as income tax, CPP/QPP contributions and EI premiums.

T5 Slip (Statement of Investment Income)

An information slip prepared by a financial institution and sent to both the taxpayer and the CRA showing the amounts of interest, dividends or capital gains that they paid to the taxpayer during the taxation year.

Tax avoidance

Tax avoidance occurs when an individual takes action to minimize tax, but while within the letter of the law, those actions contravene the object and spirit of the law.

Tax evasion

Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements. Tax evasion, unlike tax avoidance, has criminal consequences.

Tax year

The calendar year or fiscal period in which income tax is to be paid. The tax year is a 12-month period beginning January 1 and ending December 31. Individuals must file their tax return and pay any income tax owing no later than the April 30th following the end of a taxation year. Corporations and businesses pay tax based on their fiscal period which normally represents a one-year period but with an ending date chosen by the corporation or business. Self-employed individuals generally have to use December 31 as their fiscal period end. The filing deadline for self-employed individuals is usually June 15, however, taxes owing are due on April 30. A corporation must file a corporation income tax return (T2) within six months of the end of every taxation year, even if it doesn't owe taxes.

Taxable income

The total income an individual receives during the tax year minus deductions. One example of a permitted deduction is the amount paid for union dues.

Transfer payments

The federal government collects tax to pay for federally sponsored programs. The federal government also transfers money, known as transfer payments, to the provinces to pay for programs that they administer. The provinces in turn, make further transfer payments to municipalities.

Underground economy

People or businesses that operate in a manner contrary to tax laws to reap benefits from not reporting and paying their required share of the taxes and other dues that they rightfully owe. Their actions negatively impact the government's ability to deliver services to the public. Typical taxes impacted would include income tax, excise tax, GST/HST, retail sales tax, tobacco tax and fuel tax to name a few.

Voluntary compliance

Refers to taxpayers filing required tax returns and payments on time without the need for enforcement or collection activity.