Module 1: Basics of Taxation

Characteristics of a tax system

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There are various characteristics that define a tax system, such as:

• who pays the tax;
  
• the base to be taxed;
  
• the rates of tax to be applied to the base;
• general exemptions;
  
• general deductions; and
  
• other selective measures such as how to pay tax.

The value and nature of these characteristics determine how much revenue is generated, how fair the tax system is, and the tax system's ability to generate growth.

A tax system needs to be structured so that everyone at a specific economic level gets the same tax treatment, no matter how they earn their income.

The system must be arranged so that people at a higher economic level pay a larger share of taxes than those at a lower level.

As well, a tax system needs to be neutral so that the tax does not affect the government's economic decisions (including where it spends its budget every year).

It should also be flexible, so it can be used to achieve specific economic objectives.

Finally, the process for administering tax has to be practical and efficient.

The Canadian tax system has evolved over many years to incorporate all of these characteristics.

In Canada, we have guidelines that the federal government applies to new tax legislation. These guidelines include the following:

• Fairness- The tax system must ensure that all taxpayers share the tax burden equally.
  
• Simplicity and compliance- People will be more willing to comply with tax laws if the system is simple and easy to understand.
  
• Balance- Tax revenues raised through personal income tax should be distributed to those who need funds the most.
  
• Stability- The federal government needs a stable and dependable source of tax revenue so it can manage the country's economy.
  
• International competitiveness- The tax system should help Canadian businesses compete internationally.
  
• Economic growth- The tax system should encourage growth through lower tax rates and a broader tax base.
  
• Canadian priorities- The tax system should help meet national and regional social and economic needs that are priorities and values for most Canadians.
  
• Transitional implementation- Tax changes should be put into place in a way that gives Canadians time to understand and adjust to the new tax rules.
  
• Consultation- The federal government is committed to consulting Canadians before making final decisions about tax changes.

The Canadian tax system is also based on self-assessment. The United States, Australia, and New Zealand also use the self-assessment system. Self-assessment is considered the most economical and efficient way to collect income tax.

Under the self-assessment system, non-residents with Canadian income and Canadian residents are responsible for making sure they have paid their taxes according to the Income Tax Act. Income and deductions are listed on the return so both the taxpayer and the CRA can calculate the taxes the taxpayer has to pay.

Based on this approach, the fairness and efficiency of the federal income tax system depend on both the CRA and the taxpayer.

Characteristics of a tax system

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