Chapter 24: taxation Flashcards
what are the types of income?
- Employment income
- Business income(from producing and selling goods or rendering services)
- Income from property (Income from property includes interest income, dividends, and royalties)
- Capital gains and losses (when a taxpayer sells property)
What is the taxable income bracket rate?
- <48,535: 15%
- 48,535 < income portion < 97,069: 20.5%
- 97,069 < income portion < 150,473: 26%
- 150,473 < income portion < 214,368: 29%
- > 214,368: 33%
What is interest income?
the compensation received by lenders for the use of the funds they lend
What is A dividend tax credit of taxable Canadian companies?
The taxpayer then receives a tax credit that offsets the amount of tax the corporation paid
What is the process to calculate dividend tax? (show in T5)
- The dividend amount: X
- Gross up total amount: X * 138% = Y
- Dividend tax credit = Y * 15.02% = Z
- Dividend tax: Y * tax rate = G
- Net dividend pay: G - Z
How to calculate tax on DIVIDENDS FROM FOREIGN CORPORATIONS?
taxed as regular income, in much the same way as interest income (non-resident withholding taxes are applied by the foreign dividend source. Such investors may be able to use foreign tax credits to offset the Canadian income tax otherwise payable)
How to tax capital gains and losses?
Capital gains earned are taxable and must be reported when they are realized. However, capital gains benefit from favourable tax treatment in Canada because only 50% of the capital gain is taxable
What expenses are allowed to deduct for purpose off earning income from property? (carrying charges)
- Interest paid on funds borrowed
- Fees paid or certain investment advice
3, Fees paid for management, administration, or safe custody of investments - Accounting fees paid for the recording of investment income
What charges cannot be deducted from investment income?
- Interest paid on funds borrowed to buy investments that can only generate capital gains
- Brokerage fees or commissions paid to buy or sell securities
- Interest paid on funds borrowed to contribute to a registered retirement savings plan (RRSP), a registered education savings plan (RESP), a registered disability savings plan (RDSP), or a tax-free savings account (TFSA)
- Administration, counselling, or trustee fees for a regular or self-directed registered retirement savings plan, or for a registered retirement income fund (RRIF)
- Fees paid for advice such as financial planning
- Safety deposit box charges
When will an investor is considered as speculative? (Fully tax the income)
- Short periods of ownership
- A history of extensive buying and selling or quick turnover of securities
- Special knowledge of, or experience in, securities markets
- Substantial investment of time spent studying the market and investigating potential purchases
- Financing share purchases primarily on margin or some other form of debt
- The nature of the shares (e.g., whether they are a speculative, non-dividend type)
How to calculate cost of the investment to calculate the capital gain (called adjusted cost base) for tax purpose?
The adjusted cost base of shares sold is generally composed of the total cost of purchase plus commission expense
How to calculate ADJUSTED COST BASE OF CONVERTIBLE SECURITIES?
the conversion is deemed not to be a disposition of property. Therefore, no capital gain or loss arises at the time of the conversion. Instead, the adjusted cost base of the new shares acquired is deemed to be that of the original convertible securities
How can Investors acquire warrants and rights?
- Through direct purchase in the market
- By owning shares on which a rights offering is made
- By purchasing a unit of securities (such as a bond with warrants attached)
What factors affect the ADJUSTED COST BASE OF SHARES WITH WARRANTS OR RIGHTS?
The method by which warrants and rights are acquired is important because there is a different tax treatment for the shares acquired when the warrants or rights are exercised
How tax is calculated with Direct purchase of warrants and rights
Exercising warrants and rights is deemed not to be a disposition of property. Therefore, no capital gain or loss arises at the time of exercise
How tax is calculated with Rights received from direct share ownership?
When receiving rights from direct ownership and then exercising those rights, the investor must calculate a new cost base for all the common shares owned, including the original shares purchased as well as the new shares purchased when exercising the rights
How tax is calculated with Unexercised warrants or rights?
If the warrants and rights were directly purchased, the capital loss would equal the purchase cost plus commission. If the warrants and rights were acquired at zero cost, neither a capital gain nor loss would apply.
How tax is calculated with Warrants and rights received at zero cost and then sold in the open market?
Their cost is considered to be zero, and all the profits realized are taxed as capital gains
Will Withdrawal from a spousal plan can be considered taxable income to the spouse or to the contributor?
depending on when the withdrawal is made.
- If the contribution was made in the year funds were withdrawn, or within the two calendar years prior to the year of withdrawal, the withdrawal is considered taxable income to the contributor.
- If the withdrawal is made three years or more after the contribution was made, the withdrawal is considered taxable income in the hands of the spouse
what kind Some pension income can be transferred directly to RRSPs without affecting the regular tax-deductible contribution?
• Lump sum transfers from registered pension plans and other RRSPs, if transferred directly to the holder’s RRSP,
are not included in income and no deduction arises.
• Allowances upon retirement for each year of service (commonly known as retiring allowances) are transferable under very specific guidelines.
When can RRSP holder withdraw or deregister their plan?
Any time. However, deregistration is mandatory
during the calendar year when the plan holder reaches age 71.
when the plan holder reaches age 71, what are the options to deregister?
- Withdraw the proceeds as a lump sum payment, which is fully taxable in the year of receipt.
- Use the proceeds to purchase a life annuity.
- Use the proceeds to purchase a fixed-term annuity, which provides benefits to a specified age.
- Transfer the proceeds to an RRIF, which provides an annual income.
What will happen If the plan holder dies before the RRSP is deregistered?
the beneficiary of the plan may transfer the proceeds, free of tax, into his or her own RRSP. The beneficiary can be a surviving spouse or common-law partner. Under certain conditions, the beneficiary can be a financially dependent child or grandchild. If there is no beneficiary, or if the beneficiary does not transfer the proceeds into an RRSP, the proceeds are taxed as the deceased’s income in the year of death.
What are the advantages of RRSP?
- reduce taxable income during high-earning years
- Certain types of lump-sum income can be transferred into an RRSP, and thus sheltered from tax.
• Savings for future retirement can earn compound interest on a tax-free basis until they are withdrawn.
• Income taxes can be deferred until later years when the holder is presumably in a lower tax bracket.
• Spouses can split their retirement income for the following two purposes:
Lower taxation of the combined income
The opportunity to claim two $2,000 pension tax credits