Chapter 9.2 Flashcards
TAX-FREE SAVINGS ACCOUNTS AND OTHER PLANS USED FOR NON-RETIREMENT GOALS
What year did the TFSA contribution limit go to $10,000 for that one year?
2015
A TFSA is an ideal source of __________ funds because the money contributed grows untaxed, and the money withdrawn is not taxed in any manner
emergency
Explain how the TFSA can be used for income spliting
A higher-income earning can give money to a lower-income earner to contribute to their own TFSA without affecting the contribution room of the giver. Because income is not taxed in the TFSA, no income will be attributed to the higher-income earner.
Furthermore, the money contributed to a TFSA can come from ________, not just from earned income
anywhere
TFSA Contribution Limits:
2009 - 2012 = $5,000 per year 2013 - 2014 = $5,500 per year 2015 = $10,000 2016 - 2018 = $5,500 2019 - 2021 = $6,000
Total (not including 2022) = $75,500
What is the penalty for overcontributing to your TFSA?
1% per month tax
EX: if you were $4000 over from Nov & Dec 2021, then you would be charged $80 overcontribution fee
On what type of account is there a $2,000 excess permitted overcontribution?
RRSP
No permitted over-contributions with TFSA
Individuals are deemed to have sold the investments at fair market value when they transfer them into their ______.
TFSA
Clients may not claim a _______ ______ on a contribution in kind to a TFSA.
capital loss
What should you do prior to transferring over an investment in-kind to your TFSA that is in a capital loss position?
You should sell the shares prior to moving over the funds, that way you can claim the capital loss against any current, or future capital gains. If you do sell the investment prior to moving it over to the TFSA, remember you have to wait 30 days before buying it back or it will be considered a superficial loss
What is a qualifying transfer for a TFSA
When a marriage or common-law relationship breaks down, and there is a division of property as a result, a transfer may be made directly from the TFSA of one spouse (or former spouse) to the TFSA of the other spouse as part of the settlement.
If the named beneficiary is a person other than a ___________ the account ceases to be a TFSA when the holder dies. In effect, the TFSA account is treated as if it were deregistered and you cannot transfer the TFSA into your existing TFSA unless you have enough contribution room.
Spouse or Common-law partner
Theodore dies, leaving a TFSA valued at $25,000 to his daughter Anne. The TFSA’s value has increased by $2,000 between the time of Theodore’s death and the time of transfer, eight months later. who pays the tax and how much will they be taxed on?
Anne pays tax on $2,000
Regarding RESP’s, the maximum lifetime contribution limit is
$50,000
What is the penalty tax on excess contributions in an RESP?
1% per month, same as the TFSA
If no carry-forward room is available, what is the maximum CESG that you could be granted in one year per beneficiary?
$500
What is the lifetime CESG limit per beneficiary?
$7,200
If the beneficiary has sufficient carryforward room, the maximum annual CESG is….
$1,000
Contributions cannot be made to a resp plan at any time after the end of the year that includes the _____ anniversary of the plan, except if the beneficiary is eligible for the…
31st
Disability tax credit.
An RESP must be closed by the end of the the year of its ____ anniversary.
35th
For family plans established after 1998, each beneficiary must be less than ____ years of age at the time they are named as a beneficiary.
21 years of age
The contribution age limit for family plan beneficiaries is
31
If no RRSP contribution room remains, the investment income from the RESP must be withdrawn at the contributor’s marginal tax rate, and a _____% tax penalty must be paid. The contribution portion can be withdrawn tax-free, given that it was not tax deductible when it was contributed.
20%
For families earning in the first bracket of income, the CESG matching rate is ____% on the first $500 and _____% on the next $2,000 contributed per beneficiary per year. A total of $600 per year, per child.
40%
20%
For families earning in the second bracket of income, the CESG matching rate is _____% on the first $500 and ____% on the next $2,000 contributed per child per year. The maximum government contribution is $550 per year per beneficiary.
30%
20%
Explain how the Canadian Learning Bond works
A $500 CLB is available to families who are in the lower tax bracket.This assistance usually applies to families whose net family income is $49,020 or less in 2021 (adjusted yearly).
Additional $100 CLB instalments are deposited each year in which the child’s family is in the lower tax bracket, up to the year the child turns 15. The initial $500 CLB, plus the $100 annual instalments, provide a child with up to
$2,000.
What is the benefit of an individual RESP rather than a family RESP
The benefit of an individual plan is that the beneficiary can be a non-relative, which may suit clients in certain situations.
What are Accumulated income payments?
they are payments from an RESP to the subscriber in the event the beneficiary doesn’t attend post secondary education
This account is intended to help parents and others save for the long-term
financial security of a person with disabilities
Registered Disability Savings Plan (RDSP)
To qualify for an RDSP you must
be eligible for the disability tax credit
The Canada Disability Savings Grant matches contributions on a sliding scale, depending on family net income and amount contributed. The total potential grant is $_______annually, with a lifetime limit of $_______
$3,500
$70,000
The Canada Disability Savings Bond is available only to lower-income families, with eligibility depending on family net income. No contributions are required to be made to an RDSP to receive the Canada Disability Savings Bond. The potential limit is $_______annually and $_______over the beneficiary’s lifetime
$1,000
$20,000
Contributions on an RDSP are subject to a time limit. Contributions can only be made until the end of the year in which the beneficiary turns ____.
However, matching grant and bond contributions are only available until the end of the beneficiary’s _____year.
59 years old
49th year
There are no annual contribution limits on RDSPs, but there is a lifetime limit of $_________.
$200,000
Government grants and bonds must stay in the RDSP for at least ____years to avoid being clawed back.
10 years
It is a trust set up by a company. It can be for the benefit of all employees or for one or more classes of employees. It is not regulated by pension legislation but is registered with CRA.
Deferred profit-sharing plan
An employer that establishes a ______makes cash contributions to the plan out of business profits on behalf of each employee who is a member of the plan.
Deferred profit-sharing plan (DPSP)
Things you cannot hold in a Deferred profit-sharing plan are
you can not hold the employer’s debt offerings
The investment in a single year in equity shares of the contributing employer or in a corporation with whom the
employer does not deal at arm’s length is limited by a defined formula
What is the maximum vesting period with a DPSP
Two-Years
What is alternative minimum tax?
places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.
What are the tax benefits of incorporation?
Paying corporate tax rates on active business income
could provide substantial savings when compared to employment income
A Canadian controlled private corporation (CCPC) is taxed at the following federal rates:
- 9% up to $500,000 of active business income (i.e. the small business deduction limit)
- 15% for $500,000 and over
Another significant advantage of incorporating a Canadian controlled private corporation (CCPC) is that
If the value of the company appreciates, there will be a capital gain upon disposition of the shares. If tax planning is undertaken, those shares could be qualified small business corporation (QSBC) shares, which qualify for the Lifetime capital gains exemption (LCGE)of $892,218
Disadvantages of incorporation
- It can be costly, and involves lots of paperwork.
- Two tax returns must be filed each year: one personal, and one corporate.
- You must keep business records such as financial statements and other paperwork
What is a “professional corporation”
Certain professionals, including lawyers, doctors, dentists, and accountants, are permitted in most provinces to set up professional corporations and incorporate their practices.
it is beneficial to do so if the revenues they earn in a year substantially exceed their living expenses. Excess funds may be left inside the corporation
companies set up to earn passive income from property.
specified investment businesses (SIB),
The specified investment business (SIB) rules are intended to
prevent taxpayers from incorporating such a company to gain the advantage of the small business deduction
What is the small business deduction?
9% up to $500,000 of active business income tax rate
This type of business structure leads to the creation of a distinct legal identity, legally apart from the people who are its shareholders. It does not cease to exist when a shareholder dies
incorporation
This type of corporation does not benefit from the small business deduction (and is therefore not eligible for the preferential corporate tax rates).
personal services business
This is an amount that the government pays into a registered disability savings plan, matching contributions on a sliding scale, depending on family net income and amount contributed.
Canada disability savings grant
These were originally promoted by trade unions to channel investment into new small and medium-sized businesses. Investments were eligible for federal and some provincial tax credits.
labour-sponsored venture capital corporations
An individual’s balance at the end of a year is the amount by which their investment expenses for the year and all prior years exceed their investment income for those years.
cumulative net investment loss
It is a private corporation resident in Canada that has to fulfill several requirements to be designated as such. It is linked with a qualified small business corporation.
Canadian controlled private corporation
This is available only to lower-income families, with eligibility depending on family net income. No contributions are required to be made to a registered disability savings plan to receive it.
Canada disability savings bond
It refers to a company set up to earn passive income from property.
specified investment business
Are designed to encourage investment in relatively risky areas such as scientific research and oil and gas ventures.
Tax Shelters
The exemption applies to the disposition of farm property, fishing property and qualified small business corporation shares.
lifetime capital gains exemption
Available exclusively to CCPCs, this provides corporations with a reduced tax rate on up to $500,000 of active business profits. Profits qualifying for this are taxed at a federal tax rate of 9%, compared to the general rate on business profits from active businesses of 15%.
Small business deduction
