Byrd Chens Canadian Tax

SOLUTIONS

MANUAL

Volume 1 (Chapter 1-10) Gary Donell Byrd & Chen’s Canadian Tax Principles 2023-24 Edition Gary Donell

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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition Copyright © 2024 Pearson Education Inc. 1-1 Instructor’s Solutions Manual

Chapter 1 – Solutions to Assignment Problems

Solution to AP 1-1 Although there may not be one single solution to this problem, and student answers will be limited to their preliminary understanding of income tax concepts and procedures, this problem provides the basis for an interesting discussion of various qualitative characteristics.

Equity or Fairness The increase provides both horizontal and vertical equity. Individuals with the same income will receive the same treatment, while individuals with different income will be treated differently.

Neutrality The increase is not neutral. It targets high-income individuals and is likely to influence their economic decisions.

Adequacy While the increase was intended to create additional revenues, there is some evidence that the opposite has happened. This reflects the fact that high-income individuals are sometimes in a position to move some, or all, of that income out of Canada (e.g., move their residence to the U.S.) and to engage in complex income splitting transactions.

Flexibility With respect to flexibility, the rate can be changed at any time. However, as a practical matter, such changes would need to be on an annual basis.

Simplicity and Ease of Compliance This change would not appear to present any compliance issues.Certainty The increase makes it clear to individual taxpayers the amount of income tax that they will be required to pay.

Balance between Sectors Unfortunately, this change will increase the imbalance in the Canadian tax system between corporate and individual taxpayers. Before the change, individuals were already paying a disproportionate share of tax revenues. The intent of this change was to further increase this imbalance.

International Competitiveness This increase further widens the gap between Canadian and U.S. personal income tax rates, making Canada far less competitive with the U.S.However, Canadian income tax rates are not out of line with income tax rates in other industrialized countries.

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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition Copyright © 2024 Pearson Education Inc. 1-2 Solution to AP 1-2 Instructor Note There is no definitive solution to this problem. What follows represents possible comments that could be made.

For the Canadian income tax system to be more competitive with the U.S., both individual and corporate income tax rates would have to be lowered. The most obvious conflict that would arise would be with ADEQUACY of revenues. Income tax rate reductions reduce revenues and would create additional problems with the large budget deficits that exist in Canada.Another issue is BALANCE BETWEEN SECTORS . The Canadian system is heavily dependent on individual income tax as opposed to corporate income tax. Lowering corporate rates would further exacerbate this problem.The question of NEUTRALITY could also be involved. Trying to match either U.S. individual or U.S. corporate income tax rates could have an impact on economic decisions.Depending on whether changes are made to corporate income tax rates or, alternatively, individual income tax rates, this could have an impact on FAIRNESS or EQUITY.Trying to match income tax rates in the U.S. reduces the FLEXIBILITY of the Canadian income tax system.

Solution to AP 1-3

• Diamonds, South Africa In a monopoly, the tax will likely be shifted to employees

and/or consumers. The incidence shift will depend on competition in world markets and employment levels. If the international diamond market is price sensitive and there is high unemployment in South Africa, then the tax will be shifted almost entirely to employees.The shifting assumptions affect evaluation of the tax using the characteristics of a “good” tax system. A tax that is entirely shifted to employees is similar to one on wages and is non-neutral, as it affects the decisions of employees to continue working. Some employees will work less and thus increase the excess burden resulting from the imposition of the tax.

• Diamonds, Sierra Leone The taxing authorities will find it difficult to enforce the tax, due

to their inability to track diamond movements. Records maintained by the mine will likely be inaccessible, and those presented will be incomplete. The tax will not be effective, and the tax revenue will be uncertain and inadequate.

• Principal Residences, Canada This exemption is non-neutral because investment

decisions are affected by the tax preference. Given the choice of investing in real estate to hold for resale or a principal residence, both of which are likely to increase in value, a taxpayer will invest in a principal residence so that the gain on disposition is tax exempt.

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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition Copyright © 2024 Pearson Education Inc. 1-3 It is also vertically inequitable because it benefits high-income families who can invest in more expensive residences, which have the potential of generating higher gains.

• Business Meals, Canada This restriction adds complexity to accounting for deductible

expenses, as all business meals have to be accounted for and accumulated separately from other promotion expenses. The income tax could be shifted to consumers, employees, and/or shareholders. If it is shifted to consumers, it could be more advantageous to raise personal income tax so that incidence is more certain. If it is shifted to shareholders or employees, then it would be non-neutral as it could affect investment decisions and willingness to work.

• Head Tax A head tax is neutral as it does not affect economic choices. However, it is

vertically inequitable, based on the ability to pay concept of equity, as all taxpayers, regardless of their income levels, pay the same amount. This tax serves the objectives of certainty, simplicity, and ease of compliance.

Solution to AP 1-4 While there is not one “correct” solution to this problem, the following solution contains comments on each of the listed qualitative characteristics.

Equity or Fairness The toll is clearly regressive in nature in that it is assessed almost exclusively on lower-income individuals. In general, regressive taxes are viewed as being less fair. While the toll has horizontal equity (individuals with the same taxable income would pay the same amounts), it lacks vertical equity (the higher-income residents of the island would not normally be subject to the tolls).

Neutrality The concept of neutrality calls for a tax system that interferes as little as possible with decision making. The toll may influence employment decisions. If the non-residents have off-island employment opportunities, they may choose not to work on the island.

Adequacy It would be safe to assume that the toll was established at a level that would be adequate for the funding requirements related to the bridge.

Flexibility This refers to the ease with which the tax system can be adjusted to meet changing economic or social conditions. The tolls can be easily adjusted and therefore get high marks for this characteristic.

Simplicity and Ease of Compliance A good tax system is easy to comply with and does not present significant administrative problems for the people enforcing the system. The toll would be effective in this regard.

Certainty Individual taxpayers should know how much tax they have to pay, the basis for payments, and the due date. There is no uncertainty associated with a clearly posted toll rate.

Balance Between Sectors A good tax system should not be overly reliant on either corporate or individual taxation. The toll is totally reliant on the taxation of individuals.

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