Indirect Taxes Paid by Canadians

Have you every really thought about the difference between direct and indirect taxes? These can both add a great deal to your annual tax obligations. We are accustomed to thinking about ways to reduce our income tax and other taxes that we can “see,” but because indirect taxes are more hidden, it is very important to seek professional advice from certified general accountants like Heather Weber to develop a minimization strategy for indirect tax obligations.

Who is paying the tax?

The basic distinction between direct and indirect taxes is that direct taxes are applied to the firm or person and cannot be transferred to someone else. For example, direct taxes include things like income tax on individual earnings, corporate income taxes, and retail sales tax. In each case, if you earned the income or purchased the good or service, you pay the tax yourself. Indirect taxes are not applied directly to the consumer or earner, but are applied indirectly after being applied at some other point. For example, taxes paid by producers during the production process – perhaps in the form of customs duties applied to imported

Production components – get “passed on” to consumers in the form of higher prices

It basically boils down to this: direct taxes are applied against a person’s income or wealth – income tax, capital gains taxes, property taxes. Indirect taxes are applied to the value of goods and services a person (or business) consumes – sales tax, goods and services or value-added taxes, customs duties.

Who is collecting the tax?

Following on the distinction between direct and indirect taxation, a very sure way of understanding what kind of tax you are paying is to consider who is collecting the tax. If the government is collecting the tax directly from you, the taxpayer, then it is a direct tax. If, however, an intermediary is collecting the tax from you and transmitting to the government, then it is an indirect tax. Don’t make the mistake of thinking that you are not paying the tax – you are, in the form of a higher price for the good or service which the intermediary adds to their own costs.

Tax minimization and avoidance

Another key distinction between direct and indirect forms of taxation is that the obligation to pay a direct tax cannot be “passed on” to someone else, while an indirect tax can be shifted onto another person, the final consumer (though higher prices for goods and services). An implication of this is that tax minimization strategies are more obvious for direct taxes – you can apply various deductions against your income or wealth to reduce the burden you pay. It is more difficult to reduce the indirect tax burden unless you reduce your consumption of services or products. This also means direct taxation is more vulnerable to abuse and fraudulent filings, while indirect taxation is virtually impossible to evade.

Because indirect taxes can be a significant portion the total tax load paid especially by businesses and manufacturers, it is very important that these groups in particular seek professional assistance to develop minimization strategies to ensure that they are not overpaying their share.