Chapter 4 - Income Taxes Flashcards
We all love paying them right?
Why do governments collect taxes?
Taxes fund government services and programs such as healthcare, social benefits, and employment insurance.
How is personal income tax typically paid?
Through withholding, where an employer deducts taxes from an employee’s paycheck.
What form allows your employer to withhold taxes from your paycheck?
The TD1 Personal Tax Credits Return.
What happens if you overpay your income taxes?
You receive a refund when you file your tax return.
If you overpay for taxes and you don’t file your tax return, do you get a refund?
No, you must file a tax return to get your refund
What are the main types of sales taxes in Canada?
Goods and Services Tax (GST), Provincial Sales Tax (PST), and Harmonized Sales Tax (HST).
What are excise taxes?
Special taxes applied to specific products like cigarettes, alcohol, and gasoline.
When are taxes paid on capital assets?
When the asset is sold, gifted, transferred, or inherited.
What is a capital gain?
When an asset is sold for more than its original or adjusted cost.
How is property tax calculated?
By multiplying the assessed value of the property by the property tax rate (mill rate).
What is the deadline for filing income tax returns?
April 30 for most individuals, June 15 for self-employed individuals (but any owed taxes must still be paid by April 30).
What happens if you file your tax return late and owe taxes?
You are charged interest and a late-filing penalty.
What is a Notice of Assessment? Tip: This is a statement that you receive from the CRA
This notice will either confirm your calculations on your tax return or you will be provided with corrections that may result in either additional taxes owing or a larger tax refund.
What is the Canada Workers Benefit (CWB)?
Known as Canada Workers Benefit and it’s a refundable tax credit intended to provide tax relief for eligible low-income individuals
What are Employment Insurance (EI) benefits?
Known as employment Insurance benefits that are government benefits which are payable for periods of time when you are away from work due to specific situations
Ex// Parental leave of absence
Why should students file tax returns?
As a student, you have eligible tuition tax credits that can be used to reduce the amount of tax you have to pay
Also by filling a return, you open your RRSP room earlier and have more contribution room
And if you are working and it just so happens that you paid more tax than necessary, you can get the money you overpaid back
What is the difference between a marginal and average tax rate?
Marginal tax rate: The percentage of tax you pay on your next dollar of taxable income
Average tax rate: the amount of tax you pay as a percentage of your total income
What if you don’t like income taxes, what do you do then?
A. Forget that they exist
B. Cut all ties with the government
C. Call Ben, cause we all know there’s a reason why he’s been keeping a low profile
Please post your answer in the Discord Chat
But we all know the answer is C, right Ben?
What are refundable tax credits?
This is tax money that is returned to you if you have overpaid.
Examples include GST/HST credit for low income individuals, the Canada Child Benefit, and the CWB
What is a Registered Education Savings Plan (RESP)?
A tax-sheltered account that allows contributions for a child’s education, with government grants such as the Canada Education Savings Grant (CESG). The investments grow tax-free within the account
Its opened by someone other than the student and prof’s opinion is that owners should self-direct the RESP and make their own decisions
The person that own the plan, chooses how the money is invested
No more than 50,000 lifetime can be contributed per child and Lifetime maximum CESG is $7200 per child
NOTE: Generally, anyone can contribute money to an RESP. However, contributers do not receive a tax deduction for the contributions they make.
What is a Tax-Free Savings Account (TFSA)?
A tax-free investment account where contributions are made with after-tax dollars, and withdrawals are not taxed.
If a student is not able to make the maximum annual contribution, the contribution room is carried forward.
A big advantage of this savings account is that any money you withdraw will be added back to your contribution room for the following year, thereby allowing you to maintain your average annual contribution limit
What is the benefit of contributing to a Registered Retirement Savings Plan (RRSP)?
Contributions are tax-deductible, reducing taxable income and providing future retirement savings.
How long should tax returns and supporting documents be kept?
It is recommended to keep them indefinitely, as the CRA can request documents older than seven years during audits.
When does the Tax Year End?
December 31
Income tax is the greatest form of tax you pay in Canada? T/F
True
What are the steps to completing an income Tax & Benefit Return?
- Provide personal information.
- Calculate total income.
- Calculate net income by subtracting deductions.
- Calculate taxable income
- Calculate Federal Tax
- Calculate Provincial Tax
- Calculate refund or balance owing.
If you earn $1 dollar working, and earn $1 from a dividend (owning shares of a company), are these dollars taxed equally?
No you end up paying less tax on $1 earned from Canadian dividends compared to $1 from your salary
How are Capital Gains taxed?
Only 50% of your capital gain is taxed while the other is not.
This is only if you realize the gain! Only if you actually sell your bitcoin for example
Also note that capital gain is based on a weighted average. This is important when you buy the same stock at different prices throughout the years. When you sell, your gain is a based on a weighted average
What is Capital Property?
Capital property is generally defined as property you have purchased to earn income.
Common types of Capital Property:
* Stocks & Bonds
* Units/Shares in a Mutual Fund/ ETF
* Cottage
* Land/ Building/Equipment used in a rental operation
What are Capital Losses, and how can they be used?
Capital losses occur when a capital asset (such as stocks, real estate, or other investments) is sold for less than its original or adjusted cost
They can be used to offset capital gains, reducing taxable income.
Unused capital losses can be carried forward to future tax years or carried back up to three years to offset past capital gains.
Capital losses cannot be used to reduce other types of income (e.g., employment income).
What is on the T4 slip?
This is a tax document that an employer provides to employees at the end of the year. It summarizes the total income earned and the deductions taken from the employee’s pay
On the slip you can find:
Employment income (salary, wages, bonuses, etc.)
Income tax deducted (federal and provincial/territorial)
Canada Pension Plan (CPP) contributions
Employment Insurance (EI) premiums
Other taxable benefits and deductions
What is a deduction?
This is an item that can be used to reduce total income to determine the taxable income. This is step 3 of completing your tax return
Common Examples:
RRSP Contributions
Union/Professional Dues
Child Care Expenses
Employment Expenses
Etc…
Why do we have “Net Income” & “Taxable Income”?
Net-income-is used to make adjustments to certain government benefits
Taxable-income is used to calculate net federal and provincial income tax
What are non-refundable tax credits? What are they used for?
These are credits that cannot be used to lower your income tax liability below zero!
They are used to reduce the federal and provincial taxes that you owe. The non-refundable credits are multiplied by the lowest marginal tax bracket and then we deduct that value from the federal and provincial taxes we owe
What is a tax refund?
This is when you paid already too much tax and you get some money back
What is tax owing?
The amount you owe is greater than what you have paid, so you need to pay the rest
What is a principal residence?
This is your designated property! You can only have ONE!
You must own the property alone or jointly with another person
If you own multiple properties you can pick your principal property
When can money be withdrawn from the RESP?
Once the child has enrolled in a “qualifying post-secondary education”
Note: There are certain tax consequences for the child. This money will be taxed as the Childs income
What are the 3 buckets that the RESP account is composed of? And can the owner choose which bucket to draw money from?
- Contributions - This is the money deposited into the RESP by the subscriber. When withdrawn, its not taxed.
- CESG Principle - These are government grants. These amounts are taxable when withdrawn by the student.
- Investment Growth – Any interest, dividends, or capital gains earned within the RESP. This amount is taxable when withdrawn by the student, but since students usually have low income, they may pay little to no tax.
And the answer is yes, the plan owner can choose
Do you get a tax deduction from a RRSP?
Yes you do!
What is the maximum amount you can contribute to a RRSP every year?
Max annual contribution room is 18% of prior year’s earned with a max of $31,560
What happens if you don’t contribute the max to a RRSP account every year?
Unused contribution room is carried forward to future years and you can use it until age 71
Is there a minimum age to open an RRSP?
No there isn’t, so the earlier you open it the better!
What is an important thing you need to do every year to to ensure that your RRSP contribution room grows?
Since RRSP contribution room is based on your past income, you MUST file a tax return to build room
Can you choose when to use your tax deduction from RRSP?
Yes you can. You can keep your tax deduction and use it later
Once money is taken out of a RRSP, can it be put back?
No it can not! Once money is taken out, you will never be able to put it back
Give some examples in what you can invest your RRSP money in
Stocks
Bonds
Mutual Funds
GICs
Etc
Do you have to pay tax on any of the interest, dividends and/or capital gains while your money is in the RRSP account?
No!
You only have to pay tax when money is withdrawn from the account
Is there a time when you need to start withdrawing from your RRSP?
Yes, the government requires that withdrawals begin at age 71
Who should you designate as your beneficiary on your RRSP?
You should make your spouse your beneficiary
This will allow them to take over your RRSP as their own without having to take all money out and face tax consequences
What is a TFSA account?
Its a tax free savings account, but it should have never been called a savings account since its better used for long term wealth building
When can you open a TFSA account?
You can only open it when you turn 18
Comment on the TFSA account.
- Is there a limit to your annual contribution?
- What happens if you exceed the contribution limit?
- What if you don’t use you contribution room, does it carry over?
- When do you need to take the money out of the account?
- If I withdraw money, can I then put it back in?
- Annual Limit Set by the Gov’t
- If you put in more money, you will be penalized
- Unused contribution room carries over
- You can leave the money in the account forever
- Yes you can put it back anytime you want, but it can’t be sooner than a year after you withdrew the money
Do you pay tax on ANY income earned in a TFSA account?
No, you never pay tax on any income earned
If you have a TFSA account, you would want to designate your spouse as the ________
Successor Holder
If you don’t do this, the money will be cashed out and it can no longer grow tax free
