MANUAL Volume 1 - Principles 2022-23 Edition Gary Donell (Downloa...

SOLUTIONS

MANUAL (Volume 1) For Gary Donell Byrd & Chen’s Canadian Tax Principles 2022-23 Edition Gary Donell (Download link at the end of this File) 1 / 3

Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition Copyright © 2023 Pearson Education Inc. 1-1 Instructor’s Solutions Manual

Chapter 1 – Solutions to Assignment Problems

Solution to AP 1-1 There is, of course, no one solution to this problem. Further, student answers will be limited as, at this point, their understanding of tax concepts and procedures is fairly limited. However, the problem should provide the basis of an interesting discussion. What we have provided here are some suggested comments related to the 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 individuals with high levels of income 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 taxes 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. 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 2022/23 Edition Copyright © 2023 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 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. 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.Any change in income tax rates has an impact on CERTAINTY.Depending on whether changes are made to corporate rates or, alternatively, individual rates, this could have an impact on FAIRNESS or EQUITY.Trying to match rates in the U.S. reduces the FLEXIBILITY of the Canadian 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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