Chapter 24: taxation

Question 1

what are the types of income?

Answer 1

1. Employment income
2. Business income(from producing and selling goods or rendering services)
3. Income from property (Income from property includes interest income, dividends, and royalties)
4. Capital gains and losses (when a taxpayer sells property)

Question 2

What is the taxable income bracket rate?

Answer 2

1. <48,535: 15%
2. 48,535 < income portion < 97,069: 20.5%
3. 97,069 < income portion < 150,473: 26%
4. 150,473 < income portion < 214,368: 29%
5. > 214,368: 33%

Question 3

What is interest income?

Answer 3

the compensation received by lenders for the use of the funds they lend

Question 4

What is A dividend tax credit of taxable Canadian companies?

Answer 4

The taxpayer then receives a tax credit that offsets the amount of tax the corporation paid

Question 5

What is the process to calculate dividend tax? (show in T5)

Answer 5

1. The dividend amount: X
2. Gross up total amount: X * 138% = Y
3. Dividend tax credit = Y * 15.02% = Z
4. Dividend tax: Y * tax rate = G
5. Net dividend pay: G - Z

Question 6

How to calculate tax on DIVIDENDS FROM FOREIGN CORPORATIONS?

Answer 6

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)

Question 7

How to tax capital gains and losses?

Answer 7

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

Question 8

What expenses are allowed to deduct for purpose off earning income from property? (carrying charges)

Answer 8

1. Interest paid on funds borrowed
2. Fees paid or certain investment advice
   3, Fees paid for management, administration, or safe custody of investments
3. Accounting fees paid for the recording of investment income

Question 9

What charges cannot be deducted from investment income?

Answer 9

• 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

Question 10

When will an investor is considered as speculative? (Fully tax the income)

Answer 10

• 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)

Question 11

How to calculate cost of the investment to calculate the capital gain (called adjusted cost base) for tax purpose?

Answer 11

The adjusted cost base of shares sold is generally composed of the total cost of purchase plus commission expense

Question 12

How to calculate ADJUSTED COST BASE OF CONVERTIBLE SECURITIES?

Answer 12

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

Question 13

How can Investors acquire warrants and rights?

Answer 13

• 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)

Question 14

What factors affect the ADJUSTED COST BASE OF SHARES WITH WARRANTS OR RIGHTS?

Answer 14

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

Question 15

How tax is calculated with Direct purchase of warrants and rights

Answer 15

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

Question 16

How tax is calculated with Rights received from direct share ownership?

Answer 16

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

Question 17

How tax is calculated with Unexercised warrants or rights?

Answer 17

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.

Question 18

How tax is calculated with Warrants and rights received at zero cost and then sold in the open market?

Answer 18

Their cost is considered to be zero, and all the profits realized are taxed as capital gains

Question 19

Will Withdrawal from a spousal plan can be considered taxable income to the spouse or to the contributor?

Answer 19

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

Question 20

what kind Some pension income can be transferred directly to RRSPs without affecting the regular tax-deductible contribution?

Answer 20

• 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.

Question 21

When can RRSP holder withdraw or deregister their plan?

Answer 21

Any time. However, deregistration is mandatory

during the calendar year when the plan holder reaches age 71.

Question 22

when the plan holder reaches age 71, what are the options to deregister?

Answer 22

• 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.

Question 23

What will happen If the plan holder dies before the RRSP is deregistered?

Answer 23

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.

Question 24

What are the advantages of RRSP?

Answer 24

• 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

Question 25

What are the disadvantages of RRSP?

Answer 25

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

Question 26

What is RRIF?

Answer 26

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

Question 27

What are the rules apply When the plan holder transfers the RRSP capital plus accumulated earnings into an RRIF?

Answer 27

• 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

Question 28

How is the minimum annual amount calculated?

Answer 28

• 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.

Question 29

How many RRIF taxpayers can have?

Answer 29

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.

Question 30

What kind of investment can be invested in RRIF?

Answer 30

stocks, bonds, investment certificates, mutual funds, and mortgages

Question 31

What is an annuity?

Answer 31

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

Question 32

What is deferred annuity?

Answer 32

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

Question 33

Will deferred annuity reduce the current taxable income?

Answer 33

no

Question 34

How is the annuitant taxed?

Answer 34

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

Question 35

Where can they buy deferred annuities?

Answer 35

Deferred annuities are available only through life insurance companies.

Question 36

What would happen when the annuitant die?

Answer 36

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

Question 37

What are the qualified investments in TFSA?

Answer 37

e GICs, savings accounts, stocks, bonds, or mutual funds.

Question 38

How is RESP taxed?

Answer 38

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

Question 39

What is the lifetime maximum contribution of RESP?

Answer 39

$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

Question 40

What are the types of RESP?

Answer 40

1. 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)
2. Self-directed RESPs (contributors can participate in both the investment and distribution decisions)

Question 41

What is family plans RESP?

Answer 41

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.

Question 42

Can the contributor (not the beneficiary) withdraw the income from RESP?

Answer 42

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.

Question 43

What will happen if the beneficiaries do not attend qualifying programs?

Answer 43

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%

Question 44

What will happen when the contributor start to withdraw income from the RESP?

Answer 44

the plan must be terminated by the end of February of the following year

Question 45

What is Canada Education Savings Grant (CESG)?

Answer 45

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

Question 46

What is pooled registered pension plans (PRPP)?

Answer 46

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.

Question 47

Who can participate in PRPP?

Answer 47

• 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

Question 48

How is the investment decision in PRPP made?

Answer 48

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.

Question 49

Does PRPP get tax deductible?

Answer 49

yes. Much like an RRSP, contributions to a PRPP are limited to available contribution room based on earned income, and contributions are tax deductible.