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
What are the disadvantages of RRSP?
The plan holder pays income tax (not capital gains tax) on the entire amount of a withdrawal, not just on the
earnings from the amount invested.
• The plan holder cannot take advantage of the dividend tax credit on eligible shares that are part of an RRSP.
• If the plan holder dies, all payments out of the RRSP to the plan holder’s estate are subject to tax as income of
the deceased (unless they have been transferred to the beneficiary’s RRSP).
• The assets of an RRSP cannot be used as collateral for a loan
What is RRIF?
Registered retirement income funds.
RRIF is a tax deferral vehicle available to RRSP holders who wish to continue to shelter the assets in their plans
from tax
What are the rules apply When the plan holder transfers the RRSP capital plus accumulated earnings into an RRIF?
- In the year after the RRIF is acquired, and in each following year, the plan holder must withdraw a fraction of the total assets in the RRIF. The plan holder pays income tax on this so-called minimum annual amount
How is the minimum annual amount calculated?
- The amount is determined by factors prescribed by CRA that are designed to provide benefits to the holder until death. The term of the RRIF may be based on the age of the holder’s spouse (if younger), rather the plan holder’s own age
- Before the RRIF holder reaches age 71, the annual minimum amount that must be withdrawn is a percentage based on the person’s age. The percentage is calculated as follows: 1 ÷ (90 – age). At age 71, plans use a percentage prescribed by CRA. The RRIF withdrawal factor at age 71 is 5.28% and increases until age 95, when it is set at 20%
- No maximum withdrawal amount.
How many RRIF taxpayers can have?
more than one. Also like an RRSP, an RRIF may be self-directed by the holder through instructions to the financial institution holding the plan, or it may be managed.
What kind of investment can be invested in RRIF?
stocks, bonds, investment certificates, mutual funds, and mortgages
What is an annuity?
An annuity is an investment contract through which the holder deposits money to be invested in an interest-bearing vehicle. The annuity returns not only interest but also a portion of the capital originally invested. With immediate annuities, payments to the holder start immediately
What is deferred annuity?
With a deferred annuity, payments start at a date specified by the investor in the contract. Both types of annuities can be paid for in full at the beginning of the contract. The deferred annuity can also be paid for in monthly instalments, until the date the annuity begins payment
Will deferred annuity reduce the current taxable income?
no
How is the annuitant taxed?
The annuitant is taxed only on the interest element of the annuity payments, not on the capital portion, because
the annuity is purchased with after-tax income. This contrasts with annuities bought with money from RRSPs. In this case, the full annuity payment is taxable because the principal cost of the annuity was not taxed when first
deposited to the RRSP
Where can they buy deferred annuities?
Deferred annuities are available only through life insurance companies.
What would happen when the annuitant die?
benefits can be transferred to the annuitant’s spouse. Otherwise, the value of any remaining benefits must be included in the deceased’s income in the year of death. Under certain conditions, the remaining benefits may be taxed in the hands of a financially dependent child or grandchild, if named as beneficiary. The child or grandchild may be entitled to transfer the benefits received to an eligible annuity, an RRSP, or an RRIF
What are the qualified investments in TFSA?
e GICs, savings accounts, stocks, bonds, or mutual funds.
How is RESP taxed?
The contributions to the plan are not tax-deductible, but tax-deferred income accumulates within the plan. Upon
withdrawal, the portion of the payments that were not original capital are taxable in the hands of the beneficiary
What is the lifetime maximum contribution of RESP?
$50,000 per beneficiary. Any of this amount can be
contributed in a single calendar year for each beneficiary. Contributions can be made for up to 31 years, but the plan must be collapsed within 35 years of its starting date
What are the types of RESP?
- Pooled RESPs (The pooled funds are managed, usually conservatively, by the plan administrators. Annual contributions are generally pre-set. The administrator determines the amount paid out to beneficiaries)
- Self-directed RESPs (contributors can participate in both the investment and distribution decisions)
What is family plans RESP?
plan that have More than one beneficiary. These
RESPs are often used by families with more than one child. If one of the named beneficiaries does not pursue postsecondary education, all of the income can be directed to the beneficiaries who do attend.
Can the contributor (not the beneficiary) withdraw the income from RESP?
Yes, in 2 cases:
• The plan has been in existence more than 10 years and none of the named beneficiaries has started qualified
post-secondary programs by age 21, or
• All of the named beneficiaries have died.
What will happen if the beneficiaries do not attend qualifying programs?
contributors are allowed to transfer a maximum of $50,000 of RESP income to their RRSPs (providing that there is sufficient contribution room). No taxes are charged on contributions when they are withdrawn by the contributor. However, revenues earned on the contributions are taxed at the contributor’s regular income tax level, plus an additional penalty tax of 20%
What will happen when the contributor start to withdraw income from the RESP?
the plan must be terminated by the end of February of the following year
What is Canada Education Savings Grant (CESG)?
Under this program, the federal government makes a matching grant of 20% of the first $2,500 contributed each year to the RESP of a child under 18. Depending on family income, an additional CESG is available over and above the basic CESG amount. This grant is worth between $500 and $600 per year, depending on family income. It is forwarded directly to the RESP firm and does not count towards the contributor’s lifetime contribution limit. The lifetime grant amount a beneficiary can receive is $7,200. However, The CESG must be repaid if the child does not attend a qualifying postsecondary institution
What is pooled registered pension plans (PRPP)?
A pooled registered pension plan (PRPP) is a type of retirement savings plan offered by the federal government. The plan is designed to address the gap in employer pension plan coverage by providing Canadians with an accessible, large-scale, low-cost pension plan. PRPPs hold assets pooled together from multiple participating employers. They allow workers to take advantage of lower investment management costs that result from membership in a large pooled pension plan. PRPPs are administered by eligible financial institutions such as banks and insurance companies. This design reduces the risk and cost that employers would normally bear when offering a retirement plan for employees.
Who can participate in PRPP?
• Those employed or self-employed in the Northwest Territories, Nunavut, or Yukon
• Those who work in a federally regulated business or industry for an employer who chooses to participate
in a PRPP
• Those who live in a province that has the required provincial standards legislation in place
How is the investment decision in PRPP made?
A PRPP can be designed to permit members to make their own investment decisions, or to select from investment options provided by the plan administrator. Options include varying levels of risk and reward based on investor profiles.
Does PRPP get tax deductible?
yes. Much like an RRSP, contributions to a PRPP are limited to available contribution room based on earned income, and contributions are tax deductible.
