Chapter 4 - Tax Flashcards
When do you have to file a tax return?
- you have to pay tax for a calendar year (you earned income in that year)
- CRA sent you a request to file a return
- you disposed of capital property or realized a taxable gain
at what levels do individuals pay tax?
federal, provincial and municipal
With respect to taxation, what is the role of the federal government? What is the role of the CRA?
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.
What are taxes paid on?
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.
What is the purpose of the TD1 form? Why is it important?
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.
what are captial assets? when are taxes paid on them?
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.
Provide four reasons why students should file a tax return.
- you may be eligible for a refundable GST/HST credit (including any related provincial credits!) and Working Income Tax Benefit (WTIB).
- 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.
- there may be other costs such as moving expenses that can be claimed as a deduction.
- 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.
When does the tax year end? By what date do taxpayers have to file their income tax returns?
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.
What is the penalty if you do not pay taxes owing by the due date?
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.)
What are the eight steps to completing a T1 General?
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
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?
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.
what is interest income?
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.
what is a t5?
A document provided to you when you receive income other than salary income.
what is a t4?
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.
capital gains vs. capital losses?
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.
what is a deduction? what are the most common types of deductions?
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
how is taxable income calculated?
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.
What is the difference between total income, net income, and taxable income?
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
What is meant by a progressive tax system? What is the difference between marginal and average tax rates?
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.
What is a non-refundable tax credit? What is a refundable tax credit?
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.
What is the difference between a tax deduction and a tax credit? Which is more valuable?
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.
List some common non-refundable tax credits.
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.
What is the difference between tax avoidance and tax evasion?
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.
What is a registered education savings plan (RESP)? How can it help to reduce tax payable?
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
