3. Categories of Taxable Income and Deductions Flashcards
1
Q
In Canada, what does taxable income refer to?
A
The income on which taxes must be paid
2
Q
How is income categorized?
A
Into various income types
3
Q
What are some of the most common types of income?
A
- Employment income
- Business income
- Property income
- Capital gains
4
Q
How is each type of income treated?
A
Has its own rules for calculations and tax treatments
5
Q
What is employment income?
A
Earnings derived from employment relationships and typically consists of wages, salaries, tips, bonuses, commissions, and taxable benefits
6
Q
What does individuals that earn employment income also have several tax withholdings mean?
A
Employers deduct items such as income tax, Canada Pension Plan (CPP) premiums and Employment Insurance (EI) premiums at source
7
Q
Each year, what slip do employers provide employees with?
A
T4 slip
8
Q
What is a T4 slip?
A
Summarizes the employee’s income and deductions for the year
9
Q
How do individuals use the T4 slip provided by their employees?
A
To compute their tax liability for the year
10
Q
What are employment income withholdings?
A
Amounts deducted by employers from an employee’s pay to comply with federal and provincial laws
11
Q
What do employment income withholdings ensure?
A
That income taxes and contributions to social programs are collected at the source
12
Q
What are key components of employment income withholdings?
A
- Income Tax
- Canada Pension Plan (CPP) Contributions (or Quebec Pension Plan for Quebec residents)
- Employment Insurance (EI) Premiums
13
Q
Since employment income is subject to federal and provincial/territorial income taxes, how are these accounts remitted to the CRA?
A
By the employer on behalf of the employee with each payment to the employee
14
Q
How do employers calculate withholdings when remitting employee income tax amounts to the CRA?
A
Use tax tables provided by the Canada Revenue Agency (CRA) to calculate withholdings based on the employee’s income, tax credits (e.g., basic personal amount), and province of employment
15
Q
What is the Canada Pension Plan (CPP)?
A
Retirement pension that’s a monthly, taxable benefit that replaces part of your income when you retire
16
Q
How long do you receive CPP retirement pension?
A
If you qualify, receive for the rest of your life
17
Q
How is the CPP funded?
A
Through contributions made by both the employer and employee. Each party contributes an equal amount, up an annual maximum
18
Q
How are CPP contributions calculated?
A
As a percentage of employment income over a basic exemption amount
19
Q
What was the CPP contribution rate for 2024, for both the employer and employee?
A
5.95%
20
Q
What is the basic exemption amount for the CPP?
A
$3,500
21
Q
What is the maximum annual contribution limit for the CPP?
A
$68,500 for 2024 and its updated yearly
22
Q
Are self employed individuals required to contribute to the CPP?
A
Yes, contribute both the employee and employer contributions
23
Q
Who is exempt from CPP contributions?
A
Employees under 18, over 70, or those receiving a CPP retirement pension
24
Q
What amount of income is not subject to CPP contributions?
A
Any income $68,500 (the 2024 annual contribution limit)
25
Marsha has an income of $45,000 in 2024. How much is the total CPP contributions?
Income = $45,000
Basic exemption amount = $3,500
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Pensionable earnings = $41,500
Employee Contribution (5.95%) = $2,469.25
Employer Contribution (5.95%) = $ 2,469.25
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Total CPP Contributions for 2024 = $4,938.50
26
What does the Employment Insurance (EI) program provide?
Temporary income support to unemployed workers while they look for employment or to upgrade their skills
27
The EI program also provides special benefits to workers who take time off due to what specific life events?
- Illness
- Pregnancy
- Caring for a newborn or newly adopted child
- Caring for a critically ill or injured person
- Caring for a family member who is seriously ill with a significant risk of death
28
Under what conditions do workers only receive EI benefits?
if they have paid premiums in the past year and meet qualifying and entitlement conditions
29
Can self-employed workers participate in EI?
Yes may participate and receive special benefits
30
How many % of all insurable earnings to a maximum insurable earnings amount of $63,200 do employees pay (for EI program)?
1.66%
31
How many times the employee premium are employers required to pay for EI?
1.4 times
32
Income over what amount is not subject to EI premiums?
Any income over $63,200 (the 2024 insurable earnings limit)
33
Marsha has an income of $45,000 in 2024, what are the total EI premiums?
Income = $45,000
Basic exemption amount = n/a
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Insurable earnings = $45,000
Employee Contribution (1.66%) = $747.00
Employer Contribution (1.66% x 1.4) = $1,045.80
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Total EI Premiums for 2024 = $1,792.80
34
What is business income?
Income earned from self-employment or operating a business, wether as a sole proprietor, partner in a partnership, or through other entrepreneurial activities
35
What are individuals earning business income responsible for?
Reporting their earnings and paying taxes on their net profits (revenues - expenses)
36
What business expenses can be deducted in their calculator of net income?
Business expenses
37
What is property income in Canada?
Income earned from investments or property ownership, such as interest, dividends, and rental income
38
Why is each type of property income taxed differently?
Due to specific rules under the Income Tax Act
39
What is interest income?
Earned from savings, accounts, term deposits, bonds, or other interest-bearing investments
40
Is interest tax fully taxable?
Yes
41
How many % of interest income is included in your taxable income
100%
42
At what rate is interest taxed at?
Marginal tax rate (the rate you pay on your last dollar of income)
43
What is interest income typically reported on?
T5 slip provided by the financial institution
44
If you earn $1,000 interest from a savings account, how much is added to your taxable income?
The entire $1,000
45
If you earn $1,000 in interest from a tax savings account and if your income is greater than the highest marginal tax rate (ex. $246,752 in 2024), what is the entire amount taxed at?
33%
46
What does dividend income come from?
Owning shares in corporations
47
Why does dividend income encourage investment in Canadian companies?
It has a preferential tax treatment
48
What does dividend income undergo?
A gross-up and dividend tax credit system
49
Why does dividend income undergo a gross-up and dividend tax credit system?
To prevent taxation
50
Who are eligible dividends typically paid by?
Typically paid for by Canadian public corporations
51
By how many % are eligible dividends grossed up by? What do they qualify for?
38%, and then qualify for a dividend tax credit
52
Why do eligible dividends reduce the effective tax rate?
Because they qualify for a dividend tax credit
53
Who are non-eligible dividends typically paid by?
Typically paid by smaller Canadian corporations
54
How many % are non-eligible dividends grossed up by and what do they qualify for?
15% and qualify for a smaller tax credit
55
Do foreign dividends qualify for the dividend tax credit? How are they taxed?
Don't qualify, taxed as regular income
56
If you receive $1,000 in eligible dividends, the taxable amount is $1,380 (grossed up), but then what offsets some of this tax?
Tax credit offsets some of this tax
57
What is rental income earned from?
Leasing real estate or other property to tenants
58
What is tax paid on?
The net rental income
59
What is net rental income?
The total rent collected - allowable expenses, such as property taxes, maintenance, utilities, and mortgage interest
60
Similar to interest, where is net (rental) income added to, and what is it taxed at?
Your total taxable income and taxed at your marginal tax rate
61
What is a specific expense related to capital property, such as a rental property?
Capital Cost Allowance (CCA)
62
What does Capital Cost Allowance allow you to claim?
Depreciation on the building (but not land)
63
If you earn $20,000 in rent but have $8,000 in allowable expenses, what amount are you taxed on?
$12,000 net rental income
64
What do capital gains arise from?
The sale or disposition of capital property such as real estate (excluding a principal residence), stocks, or other investments
65
How are capital gains calculated as?
the proceeds of the sale minus the adjusted cost base (ACB) of the asset and any associated selling expenses
66
Essentially, what is capital gain?
Any profit made on the sale of capital property
67
Capital gains have favourable tax treatment, what portions of the capital gain is taxable?
- Capital Gains up to $250,000 have an inclusion rate of 50%
- Capital gains amounts over $250,000 have an inclusion rate of 66.67%
- Corporations have capital gains inclusion rate of 66.67%
68
Capital Gains up to $250,000 have what inclusion rate?
50%
69
Capital Gains over $250,000 have what inclusion rate?
66.67%
70
Corporations have what capital gains inclusion rate?
66.67%
71
If you sell stocks for $10,000 that originally cost $7,000, how much is your capital gain?
$3,000
72
If you sell stocks for $10,000 that originally cost $7,000, your capital gain is $3,000. How much do you include in your taxable income?
50% ($1,500)
73
If you sell a cottage for $600,000 that originally cost $250,000, and you paid commissions and legal fees of $30,000, how much is your capital gain?
$320,000. Because your net proceeds are $570,000 (sale of $600,000 less expenses of $30,000).
74
If you sell a cottage for $600,000 that originally cost $250,000, and you paid commissions and legal fees of $30,000, and your capital gains are $320,000. What amount do you add to your taxable income?
$171,669
Your total Capital Gain = $320,000
Capital Gain eligible for 50% inclusion rate = $250,000: $125,000 (included in income)
Capital Gain with 66.7% inclusion rate = $70,000: $46,669 (included in income)
Amount to add to taxable income: $171,669
75
What portion of employment income is taxable?
100%
76
What deductions are allowed for Employment Income?
Limited
77
What portion of business income is taxable?
100% (net expenses)
78
What deductions are allowed for Business Income?
Broad
79
What portion of property income is taxable?
100% (net of expenses)
80
What deductions are allowed for property income?
Expenses
81
What portion of capital gains is taxable?
50% to 66.67%
82
What deductions are allowed for capital gains?
ACB and selling expenses
83
What mechanisms does the Canadian tax system include to reduce the amount of taxes you owe?
- Tax deductions
- Tax credits
They work in different ways
84
What do tax deductions reduce?
Your taxable income, which is the base amount used to calculate the taxes you owe
85
What does deductions lowering your taxable income do?
Effectively reduce the amount of tax calculated at your marginal tax rate
86
What does it mean for deductions to lower your taxable income and effectively reduce the amount of tax calculated at your marginal tax rate?
The higher your marginal tax rate, the more value a deduction provides
87
If your taxable income is $60,000, and you claim a $5,000 deduction, what does your new taxable income become?
$55,000
88
What does your tax savings after you claim a deduction depend on?
Your tax bracket
89
What are examples of tax deductions that are available?
- RRSP (Registered Retirement Savings Plan) contributions
- Union or professional dues
- Employment expenses for certain professions
- Childcare expenses
90
How do tax credits reduce the amount of tax owed?
Reduce the amount of tax owed, rather than the taxable income
91
What are the 2 types of tax credits?
1. Refundable Credits
2. Non-refundable credits
92
How do refundable credits reduce the amount of tax owed?
Excess amounts are refunded to tax payers
93
How do non-refundable credits reduce the amount of tax owed?
These reduce taxes owed but cannot result in a refund
94
What is an example of refundable credits?
GST/HST credit provides financial relief even for those with no tax liability.
95
What is an example of non-refundable credits?
The basic personal amount ($15,000 in 2024) means no federal tax on the first $15,000 of income
96
If you owe $2,000 in taxes and have $500 credit, what are your taxes owed reduced to?
$1,500
97
If the credit is refundable and exceeds the tax owed, what happens?
The difference is refunded to you
98
What do tax deductions reduce?
Taxable income
99
What does tax credit reduce?
Tax payable
100
What value does tax deduction depend on?
Marginal tax rate
101
What value does tax credit depend on?
Credit amount (flat value)
102
What types of tax deduction are there?
N/A
103
What types of Tax credit are there?
Non-refundable and refundable
104
What are examples of tax credit?
Basic Personal Amount (BPA), Medical expenses
105
What is the income level impact of tax deduction?
More beneficial for higher income earners
106
What is the income level impact for tax credit?
Same benefit regardless of income level
107
Suppose your taxable income is $60,000 and you owe $10,000 in federal taxes, using a $5,000 deduction, what are your tax savings?
Your taxable income drops to $55,000. At a marginal tax rate of 30%, your tax savings are $1,500 (30% of $5,000)
108
Suppose your taxable income is $60,000 and you owe $10,000 in federal taxes, using a $5,000 tax credit, how much are your taxes owed now?
Your tax liability of $10,000 is reduced directly by $500. Taxes owed are now $9,500
109
Which one offers more savings, tax deduction or tax credit?
Deductions
110
Deductions reduce income that's subject to what?
Tax
111
Credits reduce taxes directly, providing the _____ benefit to ______ regardless of _____
same, everyone, income
