The History of taxes in Canada Past to Present Lunacy

Since ancient times, tax has been defined as a mandatory contribution, accepted willingly or unwillingly by the members of the country, known as “taxpayers.Taxes are believed to be for the purpose of funding the public expenditure of the state, for such things as roads, bridges, railroads, hospitals and schools.

In order for citizens to willingly accept paying income tax and consumption taxes, they must perceive that the taxes are necessary, fair and reasonable, and are being used to help ensure the taxpayers well-being and security.

More than 3,000 years ago, the inhabitants of ancient Egypt and Greece paid income tax, consumption taxes and customs duties. These payments were made in various forms, such as goods, days of unpaid labour and fines.

In ancient India, a tax was levied on livestock and precious stones. In Athens, grain was taxed. The Emperor Augustus (27 B.C.) introduced an excise tax on goods, including slaves, sold in the public markets of Rome.

The salt tax, dates back to the start of the Roman period, that is, to the 8th century B.C.

Upon the arrival of the first European explorers to North America, such as Christopher Columbus in 1492 and Jacques Cartier in 1534, North America was populated by native nations that had their own “taxation” system.
Certain Native groups that served as intermediaries in the fur trade claimed a toll or a tax in kind when they conveyed pelt bales from one place to another.

The Algonquians on the Ottawa River, for example, collected a percentage on furs, cornmeal, sunflower oil and medicinal herbs, in exchange for which they allowed travellers to portage in peace around the rapids. In 1636, the Jesuit Paul Le Jeune observed that this system, which he referred to as the “Law of the Land,” was strictly observed by all the native nations.
Around 1637, to encourage French immigrants to settle in the St. Lawrence Valley, then known as “Canada,” the king of France implemented the seigneurial system, by distributing large tracts of land to settlement agents called “seigneurs.” These agents had to subdivide the tracts of land into lots or pieces of land, each measuring approximately three arpents of frontage by 30 arpents in depth. These lots were granted at no cost to new arrivals. In return for this “free” land, a habitant was required to pay certain annual fees, which constituted the income tax and consumption taxes of that era.

Beginning in 1670, tenants under the seigneurial system were required to remit a tax, or tithe, to the Church. The tithe, equal to 1/26th of the wheat crop, was used to maintain the religious buildings and property that the tenants used, such as the chapel, the rectory and the cemetery. Finally, the obligation to provide days of unpaid labour, dating back to the Middle Ages, remained in effect. A habitant was required to provide three to five days of unpaid labour each year to the seigneur for the maintenance of bridges and roads and for the construction of various buildings or structures, such as the manor house, the mill, barns, stables and fences. In return, the habitant had access to the seigneury’s services and conveniences, and benefited from the security provided by the seigneury.

New France was turned over to England under the Treaty of Paris in 1763. At that time, and more specifically from 1791 on, the primary source of revenue for Lower Canada (Québec) was customs and excise duties on manufactured goods, wine, spirits and tobacco. In Upper Canada (Ontario), which has no seaports, revenue was derived from land (or property) taxes.

When the Canadian federation was formed in 1867, the British North America Act attempted to create a federal government with virtually unlimited revenue gathering abilities, except for modes of direct taxation (section 92(2) of the Income Tax Act), which were reserved exclusively to the provinces.

The federal government was entrusted with the high cost programs of the time, most notably defence and the building of railways. The provinces were given limited taxation power as they could only impose direct taxes such as sales taxes, property taxes, resource revenues and income taxes.

At the time, it was believed that the provinces had adequate revenue sources. This did not consider the future when governments would also be funding social assistance and Medicare. That is a responsibility which has been taken up by the Federal Government.
For the early part of Canadian history most federal government revenue came from tariffs on trade and as the major source of government funding.

The largest source of provincial funding was licenses, permits, and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.

In the 1880s, faced with an urgent need to bail out its finances, Québec exercised its right of direct taxation, not on inhabitants but on business corporations, such as banks and insurance companies. Thus begin a whole new source of tax revenue.

A crisis developed during the Great Depression largely because the provinces were responsible for skyrocketing welfare costs, but could not raise enough revenue to handle the enormous costs of social welfare.

At that time, the federal government still had considerable revenues and it became necessary to institute a system of transfer payments between the two levels of government. The transfer payments are still in place today and are used by the Federal Government for purposes they believe in their own best interest.

The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. That was War Measures Act and is still going strong, although it is no longer called the War Measures Act. Now it is simply called the Income Tax Act. (ITA)

The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. Wars have always been a good time to introduce new taxes because the population buys into the need for these “temporary” taxes.
The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. As a result massive tax sytem change was brought about and Canadians began to pay income taxes and direct taxes. Direct taxes have now become the largest source of government revenue. There is a reason CRA is called “Canada REVENUE Agency.”

In Québec, Premier Maurice Duplessis, a staunch defender of provincial autonomy, had the Québec National Assembly enact the Provincial Income Tax Act in 1954, to retain more spending power for the province. Since then, Quebecers have been required to complete two income tax returns, one federal and one provincial. The Government of Quebec has long seen itself as independent of the rest of Canada. One can certainly understand why they feel that way.

Today both the federal and provincial governments have imposed income taxes on individuals, and these are seen as the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue.

The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada are progressively higher depending on amount of income with the high income residents paying a higher percentage of taxes than the lower income residents.

Where income is earned in the form of a capital gain, only half of the gain is included in the yearly income for income tax purposes; the other half is not taxed. Very often Canadians end up paying more in taxes from such gains then if they structured themselves for business gains and losses. Interetingly and unfortunately capital losses can not be used as a deduction against income. Capital Gains Game (GGG) can be a trap, so taxpayers need to beware of the Capital Gains Game trap.

Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) and tax sheltered savings accounts that are intended to help individuals save for their retirement. The operative work here is “deferred.” There is a very real possibility that the taxpayer will pay more tax in the end than what they deferred in the beginning.

Corporate taxes in Canada are … shall we say a complex and interesting game. The common perception among taxpayers is that incorporation is better because Corporations pay less tax. While it is true their tax rate is lower, they still follow the same income tax act, so in many cases the total tax paid between the owner of the corporation and their own personal taxes is in fact higher than if they were a sole proprietor.
Companies and corporations pay tax on profit income and on capital.(in economics, capital or capital goods or real capital refers to factors of production used to create goods or services that are not themselves significantly consumed (though they may depreciate) in the production process. Capital goods may be acquired with money or financial capital. In finance and accounting, capital generally refers to financial wealth especially that used to start or maintain a business. )

These capital purchases in themselves make up a relatively small portion of total tax revenue for the tax man. Corporate Tax is paid on corporate income at the corporate level, before it is distributed to individual shareholders as dividends. Dividends are not tax free income. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed. But the big but in this is that capital losses can not be deducted against business income.)

Trusts have become a favourite tax strategy. Personally I don’t like anything where the government can change the rules at whim. The best example of trusting trusts lies with “Income Trusts.” Starting back in 2002, several large companies converted into “income trusts” in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. I guess you could say that Canadians are truly looking for ways to save taxes. This mere fact is proof that the taxpayer does not feel they need to pay as much tax to be good citizens. They feel “OverTaxed.”

Conversions to Income Trusts were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.

Sales taxes in Canada; The federal government levies a multi-stage sales tax of 5% (6% prior to January 1, 2008), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax.
All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 13% HST is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.

Property taxes have long been the method the municipal levels of government use to support their infrastructure.
Property is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.

Excise taxes; Both the federal and provincial governments impose excise taxes on  goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are often referred to as “sin taxes.”

Payroll taxes; Ontario levies a payroll tax on employers, the “Employer Health Tax”, of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
Quebec levies a similar tax called the “Health Services Fund”. For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer.

Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers’ Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they are considered insurance payments, versus taxes which are used to fund government activities.
Employment Insurance is unlike private insurance because the individual’s yearly income impacts the received benefit. Unlike private insurance, the benefits are treated as taxable earnings and if the individual had a mid to high income for the year, they could have to repay up to the full benefit received. In other words, employment insurance is a premium we are forced to pay that if things go well, we can’t collect on the insurance.
Ontario charges Health and Prescription Insurance Tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligibility for public health care. The Ontario Health Premium is an additional amount charged on an individual’s income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.
Municipalities charge business tax on businesses that are located in their municipality.

Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.
Other provinces, such as British Columbia, charge premiums collected outside of the tax system for the provincial Medicare systems. These are usually reduced or eliminated for low-income people.
Alberta does not levy any taxes or premiums for its provincial medicare.
We tax the dead by way of Estate Taxes. Since the government of Pierre Trudeau repealed Canada’s inheritance tax in 1972, estates have been treated as sales (a “deemed disposition”) upon death, except where the estate is inherited by a surviving spouse or common law partner.
Estate Tax owing is paid by the estate, and not by the beneficiaries. Registered Retirement Savings Plans and Registered Retirement Income Funds are wound down, and the assets are distributed to beneficiaries are treated as withdrawals, i.e., they are taxed as part of the income of the estate at the normal applicable personal income tax rates with no reduction for capital gains. (Dead people cannot complain.) Non-registered capital assets are treated as having been sold, and are taxed at the applicable capital gains tax rates. Interest or other income from non-registered non-capital assets that is accrued up to the date of death is taxed on the final tax return of the deceased as the normal tax rates, and is not included on the tax return of the estate.
International taxation: Canadian individuals and corporations pay income taxes based on their world-wide income.
Canadians are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries.
A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed, by becoming a “Non Resident.” One does not lose their citizenship by becoming non resident and can regain their residency.

Revenue Canada became Canada Customs and Revenue Agency (CCRA) and later became what it is known as today; Canada Revenue Agency; (CRA). The CRA costs billions of Canadian Dollars to run. We wonder why when we already have a flat tax in the form of GST… why we need income tax. Why not just have a higher HST and no income tax? It would take all the complications of accounting away.  I guess that is so simple that it could never be here in Canada. I think Canadians would support a flat tax, however to support the concept endangers one to ridicule.
So for now at least, we carry on with incredible complexity for the sake of complexity. All the while building more and more resentment in Canadians to what is perceived as an unfair tax regime.
By law, all taxpayers are equal when it comes to taxation. This does not mean that all are subject to the same tax rate, but rather that everyone that owes tax must pay it. The income tax rates are graduated according to taxpayers’ different levels of income.
Tax evasion and the underground economy have replaced the salt smugglers and pirate-smugglers of yesteryear. These offences call into question the fairness of direct taxation because the amounts not remitted by tax evaders must be borne by other taxpayers. So to level the playing field more and more Canadians move underground with some or all of their businesses.
The government has legal remedies to enforce tax legislation but these differ, from the sanctions imposed in 1565 by the Parliament of London. The latter included cutting off the left hand of a person guilty of tax fraud and nailing it to the most visible place in Market Square! If that were the case today, there would be a lot of one handed Canadians. On one hand you would pay tax, but on the other missing hand you would not be able to pay tax.
In days of yore, if you were a tax evader, you would be scorned by your fellow citizens; today your fellow Canadians would want to know how the tax evader is getting way with it.
Today being that the average Canadian sees the tax regime as intolerably unfair, unreasonable and hugely punitive; they no longer see tax evasion is bad unless you get caught.
Canadians are angry about the amount of penalties and interest they are charged on taxes they already can not afford to pay. They don’t understand how it makes sense to charge penalties of up to 100% of the tax owed of which they can’t even pay that. It does not seem like a kinder gentler Canada to those caught in a tax mess and are facing losing their homes and even going bankrupt.

There are thousands of tax auditors out there auditing the books and records of Canadians. As a result of this activity, there are many thousands of Canadians, stressed out wondering if they will need to go bankrupt over unmanageable tax debt. Receiving one of those brown envelopes from CRA often strikes fear and dread in the minds and hearts of Canadians, they are even afraid of opening the brown envelope containing letter the letter of doom.
The tax system is complicated and gets more and more so every year. It is not possible for the vast majority of Canadians to know how to keep their books and records so as to not need to fear the tax man.  It is not part of our educational system to teach personal finance and taxation in a meaningful way.
The greatest fear in the world is “the fear of the unknown.” Not knowing one’s rights, what to do or what to expect is a scary situation for Canadians. They don’t know where to turn and often are in such bad shape financially that they can not afford help.
Very often Canadians feel shame and embarrassment because they have tax problems and don’t realize they have many thousands of fellow Canadians going through the same thing.
Canadians are usually afraid to fight the tax department for fear they will be on the Governments target list for the rest of their lives. So they live in silent tax loneliness.
Many Canadians turn to the underground economy to survive financially. We don’t advocate such activities but we certainly understand why it happens.
With the advent of HST (Harmonized Sales Tax) in Ontario, there is a greater pressure to avoid taxes and go underground. When you consider adding 8% to an already expensive service the total of 13% wipes out even the tax credits for home improvements.
The underground economy in Ontario is so big and so in your face, that small businesses forget that it is illegal. The language of “If you don’t need a receipt, I won’t charge you tax” is part of our everyday experience.
What this means is that the government has lost the respect and support of the average Canadians. Now the movement is to get away with as much as you can. While tax evasion is alluring, it is not the wisest answer.
What we here at Tax Audit Solutions (TAS) recommend; is stay above board in your tax liabilities, learn how to keep perfect business records. All good businesses need to learn how to structure their business affairs and to back up documentation is such a way that they pay a minimal amount of tax. Audit ready bookkeeping is a better solution than the underground economy. To learn more about Audit Ready Bookkeeping contact your local TAS representative.
Dan White

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