Chapter 25: Canadian Taxation

Question 1

what are the 3 types of income investments generate

Answer 1

• interest (from bonds)
• dividends
• capital gains/losses

Question 2

what is interest income

Answer 2

the difference investors earn from their discount bond (the fv they got back vs the amount they paid for it)

Question 3

how is interest income taxed

Answer 3

• the full amount of it is taxed
• taxed as if it was regular employment income, so its taxed at the same rate as employment income

Question 4

what is eligible dividends and how is it taxed

Answer 4

• eligible dividends are dividends from canadian corporations
• only the cash amounts you received as dividends
• taxed the way dividends are taxed in canada

Question 5

what is non-eligible dividends and how is it taxed

Answer 5

• they are dividends from non-canadian corporations
• are taxed like interest income

Question 6

how are eligible dividends taxed federally

Answer 6

• the dividend amount is “grossed up” by 38% (multiply dividends by 138%)
• then you determine how much federal tax you need to pay on the dividend, by multiplying the grossed up amount by the % tax bracket you are in (from your employment income)
• then you subtract a dividend tax credit from that amount to get the total amount of tax you need to pay on your dividends
• the dividend tax credit is 25% of the grossed up amount (multiply grossed up amount by 25%)

Question 7

how do you calculate the effective federal tax rate on your dividends after calculating how much tax you need to pay on the dividends (aka how much tax you paid on your dividends)

Answer 7

take the amount of tax you need to pay and divide by the $ amount of dividends you got

Question 8

what is considered a capital gain/loss

Answer 8

• how much you actually gained or lost on a stock
• not how much you bought or sold the stock for

Question 9

what part of capital gains/losses are taxed

Answer 9

• they are taxed on a cash basis (when you actually got the cash)
• aka they are only taxed if you sell an investment (tax deferral)

Question 10

what is tax loss selling

Answer 10

• a strategic way to pay less taxes on capital gains/losses
• holding onto the stock until you are in a lower income tax bracket so you are taxed at a lower rate
• aka when you are retired and not making any/little money, you are go into a lower tax bracket

Question 11

how much of capital gains are taxed & how can you calculate the tax rate vs how much you need to pay in taxes

Answer 11

• only 50% of capital gain is taxed
• can take your income tax rate and divide by 2 to get the capital gain tax rate (effective tax rate on capital gain)
• or can divide your capital gain by 2 and use the full income tax rate

Question 12

what happens if you have capital losses instead of gains

Answer 12

• you can accrue the losses over time and use it to reduce the capital gain that you have (sometime in the future)
• that way the amount of capital gain you are taxed on is less
• you can’t use the losses on your employment income to reduce the amount of taxes you can pay on that

Question 13

Ex You generate $2,000 of capital gains in 2023. how much of it is included in income to be taxed & what is the amount of tax you need to pay if you are in the 26% tax bracket

Answer 13

$2,000 * 50% = $1,000 is included in income
If you are in the 26% tax bracket, your Federal
tax on the capital gain is $1,000 * 26% = $260

Question 14

Ex if you are in the 26% tax bracket. what would your effective tax rate on capital gain be?

Answer 14

26% / 2 = 13%

Question 15

which source of income produces the lowest effective tax rate

Answer 15

• depends on the marginal tax rate
• but its never interest income since it is always fully taxed
• dividends would be lower if you have lower income (aka be in a lower tax bracket)
• capital gains without any dividends would be better if you have higher income

Question 16

what are the different baskets of securities

Answer 16

• non-registered plan/account
• registered pension plan
• tax free savings accounts
• first homebuyers saving accounts

Question 17

what is a non-registered plan/account

Answer 17

• typical trading/investment account
• no maximum to the amount that you can deposit to be invested
• ALL investments are taxed based on whether the income received from interest, dividends, or capital gains

Question 18

what are the different registered pension plans & what is the difference

Answer 18

• registered pension plan (RPP)
• registered retirement savings plan (RRSP)
• they are the exact same
• the only difference is based on who contributes

Question 19

who contributes to the RPP

Answer 19

employers and employees

Question 20

who contributes to the RRSP

Answer 20

individuals

Question 21

what is the point of registered pension plans

Answer 21

to helps save for retirement

Question 22

what is the tax treatment for registered pension plans

Answer 22

• they provide a tax deduction for contributions (reduce current taxable income)
• are NOT taxed as investment income WHILE IN THE PLAN (any gains/income within the plan aren’t taxed)
• WITHDRAWLS from the plan ARE TAXED (ideally in retirement when the individual’s tax rate is lower)

Question 23

what is contribution like for registered pension plans

Answer 23

• Canadians can contribute to an RRSP based on income
• in 2022, they can contribute 18% of their income up to a max of $29,210
• if you don’t have income you can’t contribute to an RRSP
• if you make money one year but don’t contribute it to the RRSP, you can carry the amount you would’ve contributed in that specific year indefinitely and contribute to the RRSP when you want

Question 24

what is contribution like for TFSAs

Answer 24

• all canadians 18 and over can contribute
• in 2024, the maximum contribution is $7k
• if you don’t contribute to a TFSA in one year, or don’t contribute to the maximum amount, you can carry over the amount you didn’t contribute into the next year

Question 25

what is the tax treatment for TFSAs

Answer 25

• deposits are NOT tax deductible
• investment income inside the TFSA is NOT taxed
• withdrawals from a TFSA are NOT taxed

Question 26

what is contribution like for FHSAs

Answer 26

• all canadians 18 and over can contribute to a FHSA
• maximum contribution in 2024 is $8k
• life maximum contribution is $40k per person
• if you don’t contribute to it one year, or don’t contribute to the full amount, you can carry over that amount to the next year up to a maximum contribution of $16k

Question 27

what does tax deductible mean

Answer 27

• when calculating how much taxes you owe, you subtract the amount of contributions you made in RRSPs/FHSAs (because those deposits are tax deductible)
• then you are taxed by that reduced amount
• so the amount of taxes you need to pay are reduced

Question 27

what is the tax treatment like for FHSAs

Answer 27

• deposits ARE tax deductible
• investment income inside a FHSA is NOT taxed
• withdrawals are NOT taxed

Question 27

what are the requirements of an FHSA

Answer 27

• must be a first time home buyer
• FHSA must be used for home purchase within 15 years of opening the FHSA

Question 28

Ex. if you had income of $100k, contributed $5k to an RRSP, and your taxable income becomes $95k, and your total tax payable (30%) is $28.5k, how much is your contribution really

Answer 28

your contribution of $5k is really only, $3.5k since you paid $1.5k less in taxes

$100k x 30% = $30k - $28.5k = $1.5k

• you made a contribution into the RRSP, and you were taxed at the full amount of income not - the contribution, you pay the full $30k of taxes, but since you made a contribution, you only owe $28.5k in taxes, so the government returns $1.5k back to you, and since you have $1.5k on hand its like you only contributed 3.5k (5k - 1.5k)