Chapter 4 - Tax

Question 1

When do you have to file a tax return?

Answer 1

1. you have to pay tax for a calendar year (you earned income in that year)
2. CRA sent you a request to file a return
3. you disposed of capital property or realized a taxable gain

Question 2

at what levels do individuals pay tax?

Answer 2

federal, provincial and municipal

Question 3

With respect to taxation, what is the role of the federal government? What is the role of the CRA?

Answer 3

CRA: The federal tax system is administered by the Canada Revenue Agency (CRA). The CRA collects taxes on behalf of all provinces and territories with the exception of Quebec, which collects is own provincial taxes via Revenu Québec.

The federal government: drafts and revises the Income Tax Act, and the CRA administers the Act and distributes and collects the forms and publications that taxpayers use to calculate their income tax.

Question 4

What are taxes paid on?

Answer 4

Taxes are paid on earned income (i.e. earned world-wide income such as employment income, investment income, etc.), consumer purchases, capital assets, and property.

Special taxes, called excise taxes, are levied on certain consumer products such as cigarettes, alcohol, and gasoline.
Corporations pay corporate income tax on operating profits. Homeowners pay property tax on the value of their homes and land.

Question 5

What is the purpose of the TD1 form? Why is it important?

Answer 5

The TD1 form allows an employee to specify the personal tax credits for which he/she qualifies and ensures that the employer is neither withholding too much nor too little income tax. It is completed at time of hiring and should be updated for any major life change, such as marriage or the birth of a child.

Question 6

what are captial assets? when are taxes paid on them?

Answer 6

capital asset - any asset that that is acquired and held for the purpose of generating income

taxes are paid on these assets when they are sold, gifted, transferred or inherited.

Question 7

Provide four reasons why students should file a tax return.

Answer 7

1. you may be eligible for a refundable GST/HST credit (including any related provincial credits!) and Working Income Tax Benefit (WTIB).
2. if you have tuition credits that you will not be using to reduce your taxes, filing a return makes the CRA aware that you have these credits to carry forward to use against future income.
3. there may be other costs such as moving expenses that can be claimed as a deduction.
4. by filing a return and declaring income, you will be reporting income for which you could contribute to an RRSP (filing allows you to keep your RRSP deduction limit for future years current) giving you more room to contribute to your RRSP in the future.

In addition, you may be entitled to a refund! You may also have incurred a capital loss that you would like to carry-forward to use against future capital gains.

Question 8

When does the tax year end? By what date do taxpayers have to file their income tax returns?

Answer 8

The tax year for federal income taxes ends on December 31st. Individual income tax returns must be filed and taxes must be paid by April 30th of the following year. Self-employed individuals have until June 15th to file their income tax returns, although any taxes owing must be paid by April 30th.

Question 9

What is the penalty if you do not pay taxes owing by the due date?

Answer 9

The Canada Revenue Agency will charge arrears interest on unpaid income taxes according to a prescribed interest rate. Arrears interest is compounded daily on any unpaid balance from the balance due date to the date of payment. If you do not file your income tax return by the due date, you will be charged a 5% late filing penalty of the amount owing, plus 1% for each additional full month that your return is late, to a maximum of 12 months.
(Tax tip: so even if you cannot pay your full balance owing on or before April 30th, you can avoid the late-filing penalty by simply filing your return on time.)

Question 10

What are the eight steps to completing a T1 General?

Answer 10

Step 1. Calculate your Total Income
Step 2. Subtract Deductions
Step 3. Calculate Taxable Income
Step 4. Calculate Net Federal Tax Payable (non-refundable tax credits are subtracted here to reduce your tax liability)
Step 5. Calculate Net Provincial Tax Payable
Step 6. Calculate Total Tax Payable
Step 7. Enter Total Income Tax Deducted
Step 8. Determine whether there is a Refund or Balance Owing

Question 11

What is total income? List some types of income that are included in total income. What are some types of payments that you might receive that would not be included in total income?

Answer 11

Total income represents all reportable income from any source, including salary, wages, commissions, business income, government benefits, pension income, interest income, dividend income, and capital gains received during the tax year. Income that is received from sources outside of Canada is also subject to Canadian income tax, and is therefore considered a part of total income.

some types of income that are not included in total income include GST credits, lottery winnings, most gifts and inheritances, and most life insurance death benefits.

Question 12

what is interest income?

Answer 12

Interest earned from investments in various types of savings accounts at financial institutions; from investments in debt securities such as term deposits, GICs, and CSBs; and from loans to other individuals, companies, and governments.

Question 13

what is a t5?

Answer 13

A document provided to you when you receive income other than salary income.

Question 14

what is a t4?

Answer 14

A document provided to you by your employer that shows your salary and all deductions associated with your employment with that specific employer for the previous year. Your employer is required to provide you with a T4 slip by February 28 each year.

Question 15

capital gains vs. capital losses?

Answer 15

capital gains: Money earned when you sell an asset at a higher price than you paid for it.

capital losses: Money lost when you sell an asset at a lower price than you paid for it.

Question 16

what is a deduction? what are the most common types of deductions?

Answer 16

An item that can be deducted from total income to determine taxable income.

common deductions:

• contributions to a Registered Pension Plan (RPP)
• contributions to an RRSP
• union/professional dues
• child care expenses
• support payments
• carrying charges
• moving expenses
• employment expenses

Question 17

how is taxable income calculated?

Answer 17

Taxable income is equal to your net income minus some additional deductions, such as claiming allowable capital losses. Net income is used by the government to make adjustments to certain benefits, whereas the calculation of net federal and provincial income tax is based on your taxable income.

Question 18

What is the difference between total income, net income, and taxable income?

Answer 18

Total income consists of all reportable income from any source, such as your salary, wages, commissions, some government benefits, pension income, interest income, dividend income, and taxable capital gains received during the tax year. It also includes income from your own business, as well as from tips, prizes and awards, rental property, and various taxable benefits.

Net income represents the amount remaining after subtracting deductions from your total income.

Taxable income is equal to your net income minus some additional deductions. These deductions are more specific (such as an allowable capital loss) than the ones discussed above and often will not apply to the average taxpayer. This is the income used to calculate net federal and provincial income tax

Question 19

What is meant by a progressive tax system? What is the difference between marginal and average tax rates?

Answer 19

A progressive tax system refers to a system where the tax rate gets progressively higher as the individual’s income is higher.

A marginal tax rate represents the percentage of tax you pay on your next dollar of taxable income.

The average tax rate represents the amount of tax you pay as a percentage of your total taxable income. To determine this rate, you would divide your tax payable by your taxable income.

Question 20

What is a non-refundable tax credit? What is a refundable tax credit?

Answer 20

Non-refundable tax credits can only be used to reduce your taxes. The portion of the non-refundable tax credit that is not needed to reduce your tax liability will not be paid to you and cannot be carried forward to reduce your tax liability in the future. Most tax credits are considered non-refundable because they can be used only to reduce your taxes.

With respect to a refundable tax credit, the portion of the credit that is not needed to reduce your tax liability (because it is already zero) may be refunded to you. The GST credit for low-income individuals and the WITB are examples of refundable tax credits.

Question 21

What is the difference between a tax deduction and a tax credit? Which is more valuable?

Answer 21

A tax deduction reduces your tax owing based on your highest marginal tax bracket, whereas a tax credit reduces your tax payable based upon the lowest federal marginal tax bracket. Thus, the higher your marginal tax bracket, the greater the savings you will receive from a tax deduction relative to a tax credit. Therefore, in general, it is better to have a tax deduction than a tax credit.

Question 22

List some common non-refundable tax credits.

Answer 22

Some of the more common non-refundable tax credits include:

• basic personal amount
• age amount
• spousal or common-law partner amount
• amount for an eligible dependent
• CPP/QPP contributions
• EI premiums
• pension income amount
• caregiver amount
• disability amount
• interest paid on student loans
• tuition amount
• medical expenses amount.

Question 23

What is the difference between tax avoidance and tax evasion?

Answer 23

Tax avoidance occurs when taxpayers legally apply tax law to reduce or eliminate taxes payable in ways that the CRA considers potentially abusive of the spirit of the Income Tax Act.
Tax evasion occurs when taxpayers attempt to deceive the CRA by knowingly reporting less tax payable than what the law obligates them to pay.

Question 24

What is a registered education savings plan (RESP)? How can it help to reduce tax payable?

Answer 24

A Registered Education Savings Plan is a savings program that can be used to save money for post- secondary education. Contributors receive no tax deductions for the contributions that they make

Question 25

can anyone contribute to an RESP?

Answer 25

yes

Question 26

what is the EAP? what are the tax implications of the RESP for the student?

Answer 26

If a student enrolls in a qualifying or specified educational program, the amount paid to the student from an RESP is referred to as an Educational Assistance Payment (EAP).
EAPs consist of the contributions by the subscriber, the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB), and any growth on these amounts. Since the subscriber did not receive a tax deduction for their contributions, the student will receive this portion of the EAP tax-free. The remaining amount, composed of grants and interest, dividends, and capital gains, will be taxed at the student’s tax rate which is most often lower than that of the contributor.

Question 27

What is AIP?

Answer 27

If a student does not enrol in a qualifying or specified educational program, the amount paid to the contributor (or subscriber, usually the parent) is referred to as Accumulated Income Payments (AIPs).

AIPs consists of the investment earnings of the RESP. These amounts are subject to regular income tax and an additional tax of 20 percent (12 percent for residents of Quebec).
AIPs can be transferred to a subscriber’s RRSP up to a maximum of $50,000, assuming the subscriber has sufficient RRSP room.

Question 28

what is a RDSP? registered disability savings plan

Answer 28

A savings plan to help parents and others save for the long-term financial security of a person who is eligible for the disability tax credit.

Contributions to a RDSP are not tax deductible. There is no annual maximum contribution limit; however, the lifetime limit is $200,000. Contributions can be made until the end of the year in which the beneficiary turns 59. Note though that the beneficiary is only eligible for any government grants up to the age of 49.

Question 29

What is a tax-free savings account (TFSA)? How can it help to reduce tax payable?

Answer 29

A Tax-Free Savings Account (TFSA) is a registered investment account that allows you to purchase investments, with after-tax dollars, without attracting any tax payable on your investment growth.
These contributions are not tax deductible. When needed, the contributions and any growth can be withdrawn tax-free. If the maximum annual contribution cannot be made, then the contribution room is carried forward.

Another big advantage of this savings vehicle 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. The proceeds of a TFSA can be used for whatever purpose is needed.

Question 30

what are common types of capital property?

Answer 30

• stocks & bonds
• units/shares in a mutual fund or ETF
• cottage
• land/building/equipment used in a rental operation

Question 31

what is the capital gain/loss formula?

Answer 31

proceeds from sale - adjusted cost base (always an average) - costs to sell = capital gain/loss

take this # and multiply by 50% = taxable capital gain

Question 32

how many years can capital losses be carried back?

Answer 32

3 years. if you don’t have any taxable capital gains in the year that you incur the loss, you can “carryback” the loss to any of the previous 3 year’s tax returns (where you do have a gain) OR carry the loss forward indefinitely until you can use it in a future year.

Question 33

what is your net tax liability?

Answer 33

net tax liability = gross taxes - tax credits

Question 34

how do you calculate total tax payable?

Answer 34

net federal tax + net provincial tax (both after tax credits) = total tax payable

Question 35

what is a tax refund?

Answer 35

if the amount of total tax payable is less than the amount of total tax already paid, then you get a refund

the opposite is called tax owing

Question 36

do you pay tax on the capital gains when you sell your principal residence?

Answer 36

no you don’t

Question 37

what is the lifetime contribution limit of the RESP?

Answer 37

50,000

Question 38

T/F: anyone can contribute money to the plan (up until and including the calendar year the child turns 18)

Answer 38

no 17

Question 39

what is the CESG? (canadian education savings grant)

Answer 39

the government will match 20% of the yearly contribution up to a max of 500/year (lifetime max 7,200)

can be taken away if the student does not go to school

Question 40

what are the tax implications of RESP?

Answer 40

income earned from contributions & grant and CESG (both add up to EAP) is taxable > goes towards the students taxable income

principle is not taxed