8 -understanding Tax Returns Flashcards
Example of eliminating taxes
TFSA
Example of reducing taxes
Pension income splitting
Example of deferring taxes
Buy and hold equities
Deadline for individual tax return
April 30
Deadline for self employed or unincorporated
June 15, but money owed is due April 30
T3
Statement of trust income
Interest, dividends and capital gains from mutual fund trusts in NR, also from estates and family trusts.
T4A
Pension, annuity and RESP income
T5
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
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
How is net income calculated
Subtract allowable deductions from total income
6 common allowable tax deductions
RRSP contribution
Union dues
Child care
Moving
Carrying charges
Oil and gas flow through expenses
How is taxable income calculated
Subtract additional deductions from net income
4 examples of additional deductions
Stock options
Net capital loss from prior
Non capital loss from prior
Lifetime capital gains exemption
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
How to calculate net federal tax
From taxes owing subtract non refundable personal tax credits, dividend tax credits, and foreign tax credits
What is a tax deduction
Reduces taxable income
What is tax credit
Reduction on taxes payable, value is equal to lowest tax bracket
Are support payments a tax deduction
Yes
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
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
Average tax rate
Divide total amount of net taxes owing by taxable income dv
Marginal tax rate
Rate applied to each additional dollar earned
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
