9 - Tax Reduction Strategies Flashcards
Do attribution rules apply to a loan of funds or property to a spouse, minor child
Yes, unless loan is at prescribed rate.
What is attributed back to a spouse if they loan funds for free to spouse, minor child or child over 18.
If to spouse, investment income and capital gains attributed back
If to minor, only investment income attributed back
If to child over 18, only investment income if it is only don’t to avoid tax
Do attribution rules apply if loan is to trust.
Only if spouse or minor children have beneficial interest
Does income attribution apply if you loan to a corporation (other than small business corporations
Yes, if spouse and minor child have direct or indirect interest
How to avoid attribution rules on loans
Use prescribed rate with interest paid within 30:days of end of year
Do attribution rules apply to a gift of funds or property to a spouse
Yes, investment income and capital gains
Do attribution rules apply gift to minor
Yes, but only investment income
Do attribution rules apply gift to child over 18
No
Do attribution rules apply sale to spouse
Not if done at FMV
If done lower, than investment income and capital gains are attributed back
Do attribution rules apply to sale to minor
No, if done at FMV
If done less, than yes but only interest income and not capital gains are attributed back
Do attribution rules apply to sale to a child over 18
No
If attribution rules apply to spouse, do they include capital gains
Always
If attribution rules apply to gif/sale/ loan to minor are capital gains included
Never.
If attribution rules apply to gift/loan/sale to child over 18, are capital gains attributed back.
Never
Benefits of using inter vivo trusts for tax reduction
If done at prescribed rate, no attribution
Transfer assets and still have control
Ability to call back amounts loaned to trust
When can RIF income be split
After 65
What qualified pension income can be split prior to 65
RPP
What income is not considered qualifying pension income for splitting
RRSP withdrawal
OAS
CPP
GIS
How is CPP shared between spouses
Based on contributions made when together. Each share 50%
If getting CPP and QPP both must be shared
One tax reduction strategy is for the higher earner to cover the interest on investment loans, what do you have to watch out for
You can give cash to pay and expense but you have to watch out that you don’t provide collateral, guarantee the loan or pay principal. If the higher income earner does, all will be attributed back to them
Another way of tax reduction is swapping. Explain
Clients swap assets with lower income family member. Ie swap art, jewelry. For tax purposes the swap is considered a deemed disposition
Benefit of using the tax strategy of paying salary to family members
Sole proprietor or partnership Pays spouse salary which is tax deductible to business
Reduces net business income
Spouse contributes to CPP and earns contribution room
How to benefit from paying allowance to working child
You give them allowance so they can use their income to invest, they also accumulate RRSP room
Benefit of making a corporate loan to a related student
Must deal at arms length and be18
If loan not paid by corporate year end, it is taxed to student
Once student graduates, loan can be paid and used as a deduction
Most appropriate if student does not work in company
Company is entitled for deduction for loan
Steps to transfer capital loss to spouse
- X sells shares and triggers loss
- Y buys shares the same shares immediately (within 30 days)
Results. X loss is denied due to superficial loss
Y buys shares lower and loss is added to her cost so greater loss - Y waits 30 days and then sells at a loss, she can use this loss to offset her capital gain.
How can capital loss be carried forward and back
Back 3 years
Forward forever
What date is crucial for tax purposes. Ie. superficial loss
Settlement date
Another tax reduction strategy is transferring non refundable tax credits to a spouse that could fully use them. List 4 credits that can be transferred to a spouse
Age credit (if over 65)
Disability credit (if spouse severely ill and form T2201)
Pension credit (if spouse had pension income)
Tuition credit (if spouse attended qualifying school)
Tax reduction with inheritance
Keep inheritance in name of lower income spouse so they are taxed on investment income
Is Canada child benefit taxable
No
What is the tax reduction strategy with Canada child benefit
Invest the payments separately and in the child’s name and there is no attribution
Tax reduction strategy involving dividends
You can report one spouse (lower income spouse) dividends as other spouse income
Lower income is reduced more so higher can claim spouse credit
* only actually able to do this if it results in being able to use spouse tax credit
High income earner can claim dividend tax credit
Another tax reduction strategy is for the higher income earner to pay all the expenses so lower income can invest and pay no tax on investments. They can pay 3 expenses
All household
Lower earners taxes
Lower earners personal debt. Is credit cards
Things to keep in mind when making interest payments tax deductible
Not applicable to registered accounts
Investment must earn investment income, not capital gains
Some investments don’t qualify. Ie. gold
How whole and universal life insurance can be used as tax reduction
If they are exempt policies they allow investment income to accumulate tax sheltered
Exempt test is used to determine if it still qualifies
At death, everything goes to beneficiaries tax free
What is the individual lifetime capital gains exemption
Taxpayers can shelter capital gains with LCGE
applies to disposition of qualified farm or fishing property
or shares in a qualified small business corporation QSBC designated as a Canadian controlled private corporation CCPC
What are the 2 ways a QSBC is defined
CCPC in which 90% or more of assets are used in active business in Canada
CCPC whose assets consist of shares or debt of connected CCPCs that meet definition above
What is donor advised funds DAF
Separate foundation account operating as registered charity
How does the charitable tax credit work
Can donate 75% of net income
Federal tax credit of 15% for first $200 then 29%
If income over $210k , upper is 33%
How long can donations be carried forward
5 year
What special circumstances apply in year of death for donation
Donations can be carried back one year after death
100% (instead of 75%) of net income I preceding and year of death
4 examples of listed personal property
Prints, drawings, sculptures…art
Jewelry
Folio, manuscript, book
Stamps, coins
- not wine, antique etc
2 particular things about tax with listed personal property and personal use property (ie tv, car)
$1000 rule
Capital loss of listed personal property can only go against gain on listed personal property ( not personal use or investment)
Tax credit of LSVCC
They cab be federal registered or provincial
Contribution of up to $5k
Federal has tax credit of 15%, provincial varies
Minimum holding period of 8 years, pay back if earlier
Exception for death etc
Considered a tax shelter
TFSA contributions
2009 - 2012. $5000
2013 - 2014. $5500
2015. $10000
2016 - 2018. $5500
2019 - 2022. $6000
Over contribution charge for TFSA
1% per month on highest amount that month
What is a qualifying TFSA transfer
Transfer made as division of property
RESP rules of when contribution must stop and when it must be closed
No more contribution At end of year 31st anniversary, closed end of year 35 anniversary
I’d disability tax credit, no more contribution at end of year 36 anniversary and close end of year 40th anniversary
Options if no one goes to school
Repay grant
Contributor can transfer up to $50k (AIP) to RSP or SpRSP, only after RESP is open for 10 years and beneficiaries over 21
EAP taken out as income and taxed at 20%
CESG enhancement for low to med income
$47k and less - first $500 gets 40 % grant , then $2k gets 20%
$47k to $92k - first $500 gets 30% grant, then $2k gets 20%
CLB contributions
$500 CLB if under $47k
Additional $100 annually until 15 if income stays under
Benefits of non family RESP
Does not have to be a related. Ie neighbours
Canada disability savings grant
Matches contribution depending on income and amount contributed
$3500 annual maximum, $70k lifetime
Canada disability savings bond
Only lower income
No contribution required
Up to $1k annually, $20k lifetime
When do contributions to RDSP have to end
59
When does matching grant ond bond contributions end for RDSP
49
What ate the contribution limits for RDSP
No annual limit
$200k lifetime limit
Withdraw rules for RDSP
Grants and bonds must stay in for 10 years
If $1 withdrawn, $3 of grant or bond have to be paid back
DPSP can not be registered by CRA if (3)
Related to employer
Owens more than 10%
Beneficiary related to shareholder
How is DPSP started
Trust set up by company with CRA
Not pension legislation
Can be public or private company, partnership or sole proprietor
Pay out business profits
Tax free until withdrawn
How are DPSP taxed
Income when withdrawn
Restrictions on personal service business
Basically a business involving one person only. Ie IT person incorporating
These do not benefit from the small business deduction and therefore not eligible for preferential corporate tax rates
Income splitting with family members-kiddie tax
Income sprinkled as dividends from corporation to adult kids is taxed at highest rate
