Chapter 4 - Taxation Flashcards
What are the 3 basic sources of tax revenues?
Income, consumption, wealth
Which form of taxes do federal, provincial, and municipal governments rely on?
Fed and prov rely largely on income and consumption taxes, municipalities rely heavily on wealth taxes through property tax.
What is the easiest and most common income splitting strategy?
Higher-income spouse pays for all household living expenses thus allowing the lower-income spouse to accumulate investment assets and earn income in a lower tax bracket.
When do attribution rules on inter-spousal transfers not apply?
If they are documented as loans bearing the prescribed interest rate. Interest paid is considered deductible and must be included as taxable income for the lender.
How are gifts to children under 18 that earn income taxed?
Interest and dividend income earned on gifts should be attributed back to the parent, capital gains are taxed in the child’s hand.
What constitutes total income?
Employment income + business income + investment income + taxable capital gains + other income
How do you determine taxable income from total income?
Total income - allowable deductions = net income - additional deductions = taxable income
How do you determine the net federal tax amount from taxable income?
Taxable income x tax rate (%) = tax liability - total non-refundable tax credits = net federal tax amount
What are examples of allowable deductions and additional deductions?
Allowable: contributions to RRSPs and RPPs, union dues, business losses, child care expenses tax shelter deductions.
Additional: stock option and share deductions, loss carryover, capital gains deductions
What are (3) examples of non-refundable tax credits?
Basic personal amount
CPP contributions
Tuition amount
What is the highest federal tax rate?
33% on taxable income over $214,368
What are examples of refundable tax credits?
Refundable medical expense supplement
Investment tax credit
Employee and partner GST/HST rebate
Working income tax benefit for low-income families who have earned income
What are the main tax deductions?
RRSP contributions RPP contributions Deduction for elected split-pension amount Union/professional dues Childcare expenses Disability supports deduction Business investment losses Moving expenses Eligible support payments amde Carrying charges/interest expenses Other employment expenses
What are the main non-refundable tax credits?
Basic personal amount Age amount Amount for a spouse/CL partner Canada caregiver amount Amount for infirm dependents over 18 Disability amount CPP contributions EI contributions Tuition amount Medical expenses over a specified % of net income Political contributions Pension income amount Charitable donations Amounts transferred from your spouse or CL partner Interest paid on student loans Home buyers' amount
What are (7) types of employment income?
- Wages
- Salary
- Directors’ fees
- Bonuses
- Commissions
- Gratuities
- Taxable fringe benefits and allowances
What are taxable fringe benefits?
Any personal living cost paid for or provided by an employer that is subject to taxation.
Examples include gifts or non-monetary awards, prizes, certain employer-paid tuition fees, reimbursement (such as for tools), personal use of an employer-owned vehicle, rent-free or low-rent housing (except at a remote location), stock options, employee loans, etc.
What is an employee stock option?
Permits the employee to buy a specified number of the employer company’s shares at a stated price for a stated time period, usually up to 10 years. The employee can exercise the option at any time (unless vesting restrictions are in place) until the option expires.
No taxable benefit unless the stock option is exercised.
How can stock options benefit a company?
Employees are motivated by the potential benefit to perform in a manner that increases share price.
What is the value of the taxable benefit of an employee stock option?
The difference between the FMC of the shares at the time of exercise and the exercise price (plus any fees paid for the option).
What happens when an employee disposes of a stock option?
A deduction equal to one-half of the amount of the taxable benefit can be claimed, provided the employee deals at arm’s length with the company and the option’s exercise price was not less than fair market value when the option was granted.
How do stock options of a CCPC differ from others?
Tax treatment arising from shares acquired under a stock option plan are more favourable. Shares are only taxable when the shares are sold, not at the time of exercise. Still eligible for a deduction if the employee has held the shares for 2 years.
How do you calculate the tax benefit of an employee loan?
Outstanding loan x (prescribed interest rate - interest rate on loan)
If loan is used to purchase a home, the benefit is based on the lesser of the current prescribed rate and the prescribed rate when the loan was received (with a new loan agreed to every 5 years with a new rate corresponding to the prescribed rate in effect at that time).
How are employer contributions to pension plans treated?
Contributions to RPPs or DPSPs are considered non-taxable fringe benefits, but contributions to a group RRSP on behalf of an employee is considered a taxable benefit.
How are business losses different than capital losses?
Business losses are fully deductible against any income while capital losses can only be used to offset capital gains.
