8 -understanding Tax Returns Flashcards by Chris Farnham

Example of eliminating taxes

TFSA

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Example of reducing taxes

Pension income splitting

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Example of deferring taxes

Buy and hold equities

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Deadline for individual tax return

April 30

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Deadline for self employed or unincorporated

June 15, but money owed is due April 30

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Statement of trust income

Interest, dividends and capital gains from mutual fund trusts in NR, also from estates and family trusts.

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T4A

Pension, annuity and RESP income

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Statement of Investment income

Interest, dividends and capital gains from CC mutual funds, holding companies issue these for dividend payments
HISA, GIC
Shares in nominee accounts

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8 items to calculate total income

Net employment income
Pension
Net business
Taxable dividends- grossed up
Interest income
Rental income
Taxable portion of capital gains
Other income

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How is net income calculated

Subtract allowable deductions from total income

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6 common allowable tax deductions

RRSP contribution
Union dues
Child care
Moving
Carrying charges
Oil and gas flow through expenses

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How is taxable income calculated

Subtract additional deductions from net income

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4 examples of additional deductions

Stock options
Net capital loss from prior
Non capital loss from prior
Lifetime capital gains exemption

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How to calculate taxes owing

Apply federal progressive tax rates to taxable income

From taxes owing subtract non refundable personal tax credits, dividend tax credits, and foreign tax credits

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How to calculate net federal tax

From taxes owing subtract non refundable personal tax credits, dividend tax credits, and foreign tax credits

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What is a tax deduction

Reduces taxable income

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What is tax credit

Reduction on taxes payable, value is equal to lowest tax bracket

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Are support payments a tax deduction

Yes

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10 main tax deductions

Pension contribution
RRSP contribution
Income splitting
Union dues
Childcare expenses
Business investment losses
Moving
Eligible support
Carrying and interest charges
Other employment expenses

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11 common federal non-refundable tax credits

Basic personal
Age
Spouse and dependent
Disability
CPP contribution
EI contribution
Medical
Political
Charitable
Pension income amount
Tuition credit

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Average tax rate

Divide total amount of net taxes owing by taxable income dv

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Marginal tax rate

Rate applied to each additional dollar earned

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Effective tax rate

Dividing total amount of net taxes owing by taxable income

4 types of investment returns

Interest (and foreign source dividends)
Canadian source dividend
Capital gains
ROC

Eligible dividends

From Canadian corporation and is taxed at lowers rate grossed by 38% then offset credit of 15.02%, about 20.73%

Non eligible dividends

Tend to be small private businesses that receive special corporate tax advantages through small business deduction

Problems with dividends for low income retirees

Gross up increases net income, therefore OAS and GIS could be clawed back. Also age and medical credit may be reduced Gross up could increase tax bracket

How many years back can capital loss be applied

3 years

How many years can net capital loss be carried forward

Indefinitely

Superficial loss

Within 30 days after or before

Return of capital

Distribution in excess of taxable income May be due to large amount of non-cash deductions. Ie loss carry forward depreciation

How is ROC taxed

Not taxable in year received, but original cost is reduced by distribution and new ACB is calculated

Tax effect to employer of employer contribution to employee health benefits

Full tax deduction

Tax effect to employees for employer contribution to PHSP

Not taxable benefits

Tax treatment of employee paid premiums to PHSP

Can be claimed as medical expense

Tax treatment of employer car allowance

Allowance in excess of reasonable amount, taxable benefit to employee

Tax treatment of employees being reimbursed for business meals and entertainment

Not taxable benefit to employee

Tax treatment of courses that employee takes ti benefit job

Not taxable benefit to employee

Tax treatment of self improvement courses paid by employer and not related to business

Taxable benefit to employee. On T4

Tax treatment of loans from employer to employee for home

The amount over the CRA prescribed rate is a taxable benefit to the employee

Tax treatment of interest free loans to employees

Amount below prescribed rate is Considered taxable benefit to employee

Tax treatment of interest free loan to executive employee to purchase minimum holdings of company shares

Interest free loan is taxable benefit to employee, but offset by deductible expense because it’s for investment

Tax treatment of employer reimbursement of employee moving expenses

Not taxable benefit to employee * addition amounts are taxable. Ie cash incentive

Tax treatment if employer does not reimburse moving expenses

Employee can deduct expenses if it’s within Canada and 40 km away Deductible from income earned at new work location

Standby charge

Amount included as income when employer makes company car available for personal use *keep track of kms Reduced if company use is over 50% Reduced by amount employee pays for use

2 components used to compute and separate taxable benefits

Standby charge Payment of personal use costs

Tax treatment of employer paid operating costs for personal use of company car

Included in employee income

Amount CRA allows employers to charge employees for operating costs

Flat $0.28 per personal km

Tax treatment of club membership that is part of business

Not taxable benefit to employee

Tax treatment of employer paid gym membership

Taxable benefit to employee

What is employee stock options

Permits employee to buy shares at stated price for stated period, usually 10 yrs

Tax treatment of stock options when option is exercised

When/if exercised, the difference between FMV and exercised price is added to employee income that year. Plus fees

Tax treatment when stock options are sold

Half of amount of the taxable benefit to employee can be used as a deduction if bought at FMV at arms length

Difference in tax treatment of stock options with CCPC

Taxable benefit when exercising options can be delayed until options are sold

Calculation for extra RRSP contribution room for retiring allowance

$2k for each year up to and including 1995 plus $1500 for each year up to and including 1988, as long as employee wasn’t entitled to other pension during this time

What does Cumulative net investment losses do

It reduces the available LCGE