Chapter 25 - taxation

Question 1

how is interest income taxed?

Answer 1

full amount added to taxable income
- paying the same marginal tax rate as employment income

Question 2

how are dividends taxed? for eligible dividends (from canadian companies)

Answer 2

1. dividend is grossed up by 38% for tax purposes
2. dividend tax credit equal to 25% of the grossed up amount
3. multiple the grossed up amount by the marginal tax rate (gross taxes owed)
4. gross taxes owed - the dividend tax credit = net dividend taxes
5. net dividend taxes/original dividend = tax rate

Question 3

how are capital gains/losses taxed

Answer 3

only taxable when you sell an investment
- can be triggered strategically (tax loss selling)
only 50% of the capital gain is taxed at the marginal tax rate
losses can be accrued over time and used to reduce capital gains (but not taxable income)

Question 4

define tax efficiency

Answer 4

the source of income that produces the lowest effective ta rate depends on the marginal tax rate
- it’s never interest income

Question 5

define non-registered plan/account

Answer 5

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 the investments are interest, dividends, capital gains

Question 6

define registered pension plans

Answer 6

RPP + RRSP = identical except employers + employees contribute to an RPP, individuals contribute to an RRSP
- created to help save for retirement
- provides a tax deduction for contributions
- are not taxes as investment income while in the plan
- withdrawals from the plan are taxed
- Canadians are contribute to an RRSP based on 18% of their income up to a max of 29210
- can carry forward contribution amount indefinetly

Question 7

what’s a TFSA

Answer 7

contribution room starts at age 18 - can carry forward the contribution amount
- deposits into a TFSA aren’t tax deductible
- investment income inside TFSA aren’t taxed
- withdrawal from a TFSA aren’t taxed

Question 8

investing plans conclusions

Answer 8

TFSAs will always outperform non-registered plan (tax free investment income)
RRSPs are more/less attractive depending on the differential between tax rates at contribution and withdrawal

Question 9

what’s a FHSA

Answer 9

FHSA must be used to purchase a home within 15 years of FHSA being opened
carry over amount fo 8000 a year
- deposits are tax deductible
- investment income inside a fhsa aren’t taxed
- withdrawals from a FHSA aren’t taxed