08. Understanding Tax Return Flashcards
the best approach is to view TAX PLANNING as key part of FP process when making Financial decision
- you prefer 100K and net 60K or 80K, net 70K
Advisor would consider the merits of Investment such as
- suitability,
- Maturity,
- Liquidity
- and expected yield
- also assess the Tax implication when select and recommending investments
Effective Investment Planning , require knowledge of Income Tax Act.
- Investments should be compared only on AFTER TAX basis
Good planning by advisor will Emphasize AFTER tax Income Maximization, rather than simple tax minimization
Tax planning strategies
- Eliminating Tax
TFSA
- Reduce TAX
income splitting technqiues to reduce overall amount of taxes that spouse would pay - Deferring Taxes
defer the realization of capital gains, hold growth securities
- RRSP
Personal income return
- deadline to file Apr 30, next year for previous year
Self employed - Jun 15 , for both spouses
- but self employed need to file corp tax return
T3 – trust income allocation and designation
– from MF company
T4 – Statement for Remuneration paid
–income, taxable benefits form Employer, any source of deduction, Income Tax, CPP and EI
T4A - Statment of Pension, Retirement, ANnuity, other income
- income and deduction from Pension plan, annuities, Scholarships and RESP
T5 - Investment Income
T5008– Statement of Securities Transactions
- amounts received from the sale of securities in taxable, accounts
Calculated TAX
- Total income form all sourece , i.e. Employment income, NET BUSINESS INcome, Investment income, other sources, such as pension, royalties
Step 2 Make allowable tax deductions , get Net Income
- Total income (in step 1) - Allowable tax deductions,
- –such as RRSP contributions, pension contributions, Childcare expense, union/professional dues (teachers union dues, Lawyer’s License fee..)
Step 3 Make additional tax deductions, get Taxable Income
- Net income in step 2 - additional tax deduction
- stock options deductions, net capital losses, Life Tiem Capital gains expmtions
Step 4 Calcuate the amount of Gross tax payable
–Taxable cinome in step 3 X marginal tax rates %
STep 5 calcuate net TAX payable, determine the balance due or refund
–Gross tax payable – Allowable tax credits
Tax deduction –reduce your taxable income, in return, reduce your tax liability
- e.g. RRSP contribution, business loss
Tax credits 0 directly reduce the tax owed
Superficially, many people believe 1000 tax credit would save more than tax deduction, as it is direct reduction in tax.
- However, it depends, mainly about the Marginal tax Rate, if you earn 60.000, mRT 40%, you can keep more of if you hve 1000 deductions
Refundable and Non Refundable tax Credit
Refundable Tax Credit – you get it even if you owe no tax
- Basic personal exemption amount (12000 approximtely each person)
- Age amount - 65 y/o+ as the dec tax year , retired to reduce tax owing
- EI and CPP contributions
Non- refundable tax credit — you get if only if you owe more in taxes than the amount of the credit
- Tuition
- Medical
- Donation
Taxation of Investment income
- Interest and Foreign Source Dividends
- -taxed at Marginal rates,
- - add on to regular employment income - Canadian Source Dividends
- - subject to Gross up and dividend tax credit –DTC
- - G —gross up dividend 38%,
- T—then amount % MRT
- C–using G X15.02
- -Net tax =T-C
- Capital gain
- subject to ‘inclusion rate’ - Return of Capital (ROC)
- generally ROC not taxalbe
- Howver, it may lower your assets Adjusted cost Base –ACB
Taxable and Non-Taxable Employee benefits
Taxable employee benefits
- rent free
- PRizes , free vocation
- Education, fee, unless the education was requirement of your job
- company car
- Stock options
- Employee loan
- Premium of Insurance,
if pays buy Employer –not Taxable benefits to Employee
— premiums are fully deductible for the employer
if pays buy Employee – Qualify towards a medical expense tax credit
Car ALlowance – for employer provide car
Automobile Allowance rate for 2019 as per CRS
- $0.58 on the first 5000 km drive
- -$0.52 on 5000 km over
Reimbursement above these rates are considered taxable benefits
- better to download drive log to record the usage of car
Business meal and Entertainment expense
- –if you reimbursed for such expense, it is not taxable benefit for employee
- however, employer can deduct only 50% of the costs paid for tax purposes..
- to reduce record keeping, companies will issue corporate credit card
Employer paid courses —if it is for employees development in company or mandated by empployer –not taxable,
- e.g. CEO join the workshop for training
Self-improvement courese –taxable benefits
Home purchase, relocation loans—-Depends on Prescribe Rates..
Moving cost — at least 40 Kilo,. closer to the new wrok location
Personal use of company Car
Part 1 standby Charge
- if you leave car at company lot, driver your own car back home, no standby charge taxable benefits
- the standby charge is reduced when car is driven primarily for business purposes, i.e. more than 50% of time for buiness
Part 2 Operation OCst
Club member ship
not taxable benefit as long as it is purely business purposes, securing sales leads,
- however, if fitness or golf club, most likely be considered taxable benefits
as would be difficult for employee to claim to CRA that the membership is soley for business purposes
Stock Option Plan
If Canadian Controlled Private Corporation CCPC, it is possible to defer taxation til the shres are eventually sold
Salary COntinuance plan
you get the incurance, if Employee pay the entire premium—tax free
Employer pay the premiumm–taxalbe
Short term Disability (STD– Employer pays the premium
Long term disability (LTD) - Employee pay premium.
with LTD, employee pay own premium in order to ensure the end benefits are recived tax free
