AFP 9- Tax Planning Flashcards
Alternative Minimum Tax (AMT)
AFP 9/ FP2 (3)
Alternative Minimum Tax (AMT)
- a tax levied under personal income tax to ensure that high-income Canadians pays a reasonable amount of tax
AMT is calculated as follows:
- Calculate tax using the normal method (allow for all available deductions)
- Calculate tax without using all deductions but use a specified “AMT” deductions
- Federal tax is payable on the greater of the 2 methods
PSB
AFP9/ FP2 (3)
Personal Services Business (PSB)
- In the business of providing services
- The individual performing the services to another taxpayer on behalf of the corporation would, if not for the existence of the corporation would be regarded as an employee of the entry
- The incorporated employee is a “specified” shareholder (owns more than 10%) of the corporation
- Corporation has less than 6 full time employees
- The fees for service are not received from an associated corporation
PSB are not eligible for the small business tax rate or certain other tax benefits
Educational Assistance Payments (EAP)
AFP9
- payments to eligible beneficiary attending post-secondary education
- comes from grants, investment income, and are taxed in the beneficiaries hands
- can be paid to the student for up to 6 months after the enrolment in post secondary school provided that the payments would qualify for EAP
LSVCC’s
Labour-Sponsored Venture Capital Corporations (LSVCC)
- tax credits paid on the first $5000
- -> federal: 15% on the first $5000, max credit of $750
- ->provincial: similar to federal
- Maximum credit is $1500/yr, shares must be held for a minimum of 8 years to avoid recapture of tax credit
William contributes $8000 to his RRSP in LSVCC. He is in a 43% MTR, and the provinces provides a 15% tax credit. What are the after-tax costs?
- $8000 x 43%= $3440
- $5000 x 15%= $750 (both provincial and federal)
- $8000- $750- $750= $3060
Charitable Donations
AFP 9
- The first $200 you get 15%
- 29% on the balance over $200
- The income over $210371 you will get 33% for the income that exceeds
- In the year of death 100% of income, any other year 75%
Val makes $240,000 and did a donation of $40000. How much would her charitable donation tax credit be?
- The first $200 donated: $200 x 15%= $30
- Total income- Income threshold: $240000- $210371= $29629
- $29629 x 33%= $9777.57
- Remainder will receive 29%: $40000- $29629- $200= $10171
- Add it all up: $30+ $9777.57+ $2949.59= $12757
- Double check: 200 + 29629 + 10171= $40000
What happens if a beneficiary of an RESp does not pursue post-secondary education?
AFP 9
The principal
- the principal is withdrawn tax free because no tax credit was given when the funds were contributed
The Grant (CESG) - Grant must be repaid without interest
The income and growth
- taxed at the contributor’s marginal tax rate plus a 20% tax penalty
- taxation of income can be avoided if the funds are transferred to contributors RRSP
What is indicated on the T3, T4, T5
AFP 9
T3 Form ( Statement of Trust Income Allocations and Designation) - mutual funds held outside an RRSP
T4 Form ( Statement of remuneration paid) - provided by employer as it reports employment income including taxable benefits
T5 Form ( Statement of Investment Income) - Investment income outside an RRSP but not apart of a mutual fund
What are some condoned income- splitting strategies?
AFP 9
- paying a salary to a family member: salary must be reasonable
- Intervivos (living trust)
- small business corporations
- -> exempt from attribution rules that apply to loans
- -> capital gains qualify for a lifetime capital gains exemption
- Splitting retirement income
- -> up to 50%
- -> if taxpayer is over 65 (pensions, DPSP, RESP, RRIF)
- -> if taxpayer is under 65 only registered pension income
- Higher income earner covers family expenses, lower income spouse invests
- Tax sheltering
- -> allows clients to claim CCA (depreciation)
- -> should only be done when there is an expectation for profit
- -> ex: oil, gas ventures, mining, small business
