cumulative Flashcards
Who is subjected to tax
Individuals → income tax
Businesses → corporation tax
Trust → Fund w/ a beneficiary (paid time decided by holder)
Types of tax
- Goods & Services (HST, GST)
- Income tax (Dividends, capital gains)
- Property tax
- Tariffs (Carbon tax, Alcohol & tobacco, Imports & exports > To protect the local economy)
- Foreign taxes (When working in foreign countries)
Why are personal income taxes way higher than corporate tax in Canada?
More individuals than corporations in Canada
3 Types of Tax Rates
- Personal Income Tax (Progressive tax system > marginal)
- Corporation Income Tax (Proportional tax system)
- Value-Added Tax (GST/HST) (Regressive tax system)
Marginal vs Effective Tax Rate
Marginal Tax Rate: Tax rate imposed on your next dollar income
Effective Tax Rate: Average rate you pay on all income
Tax / Total Income
What is the relation between Proportional & Progressive to Marginal & Effective tax rates?
Proportional is when both M&E are the same
Progressive will always produce a marginal higher or equal to effective
What is the Legislation: Income Tax Act?
- Doesn’t offer choices like ASPE & IFRS
- Ensure comparability across taxpayers
What are the 3 main calculations for Personal Income Tax?
- Taxable Income
- Taxes Payable
Calculation for Taxable Income
Income (Net)
Less: General Deductions
= Net Income for Tax Purposes
Less: Division C Deductions (beyond scope of course)
= Taxable Income
Calculation for Taxes Payable
Taxable Income * Tax Rate Schedule
= Gross Taxes Payable
Less: Non-Refundable Tax Credits
= Net Taxes Payable
Less: Refundable Tax Credits
= Balance Owing/(Refund)
What does deductibles do?
Reduce taxable income
What does credits do?
Reduce tax payable
What is the deductions-credit relation with High Net-worth Individuals?
Deductions > Credit
What does non-refundable credits do?
Beings net tax payable down, but not to below zero
What is GST
Goods & Services Tax
What is HST
Harmonized Sales Tax (GST & PST)
What does provinces with HSTs require individuals to do with tax returns?
Requires citizens to file 2 separate income tax
What is GST/HST?
A transaction-based consumption tax
Purpose is to tax value added from supply chain → value added tax
Who must pay GST/HST?
Purchasers of “taxable supplies”
Who charges & pays GST/HST to gov’t?
GST/HST Registrants of taxable supplies → Businesses who added value to goods/services they sell
What is a Registrant?
A person registered or required to register for GST/HST
Businesses that makes/sell taxable supplies
Exemptions of registrants include:
Small suppliers → businesses that make $30,000 or less in taxable sales in 4 consecutive quarters (don’t need to collect GST/HST on sales)
Types of Supplies
- Fully taxable
- Zero-rated
- Exempt
What are Fully Taxable Supplies?
Registrants must charge GST/HST on sales
Entitled to input tax credits on purchases
Examples of Fully Taxable Supplies
Retail items → cars, toys
Services → haircuts, lawyers
Commercial rent
What are Zero-Rated Taxable Supplies?
Registrant’s GST/HST rate is 0%
Entitled to input tax credit on purchases (deductible)
Examples of Zero-Rated Taxable Supplies
Basic groceries (vegetables)
Farm livestock
Prescription drugs
What are Exempt Supplies?
Not subject to GST/HST
Not entitled to input tax credits
Sunk cost
Examples of Exempt Supplies
Residential rent
Childcare
Most medical services
Public sector goods & services
What Rate of GST/HST to Charge for In-store & Online?
In store: Charge the rate based on where the goods are sold or where services are provided
Online: Retailer charges rate based on shipping address
6 Key Concepts in Canadian Income Tax (first 5)
- While tax laws in Canada may appear arbitrary, their development is guided by economic policy & political/social goals
- Taxation follows the legal structure of a transaction, not necessarily its economics
- There is a continuous tension b/w the gov’t & taxpayers
- “Income” is a net concept much like accounting, though tempered significantly by #3, leading to considerably less judgement or discretion than in accounting
- “Income” is different from capital appreciation (sale of a tree is different from sale of the fruit)
Describe the example for 1. While tax laws in Canada may appear arbitrary, their development is guided by economic policy & political/social goals: Canadian Digital News Subscription Credit
New tax credit in 2020 → individuals can claim 15% federal tax credit on up to $500 in fees paid for eligible digital news subscription
Political/social goal: to support Canadian digital news media organizations in achieving a more financially sustainable business model
- Social → make sure Canadians are getting accurate news
- Increase in sales = increase in income tax revenue for gov’t
Describe 2. Taxation follows the legal structure of a transaction, not necessarily its economics
Tax return has 3 sections: income, credits, deductions
Examples: CPP & EI Contributions
- Economics: payroll tax
- Legal structure: tax credits → decrease income tax payable
Describe 3. There is a continuous tension b/w the gov’t & taxpayers
Taxpayers want to pay as little tax as allowed within the law
Gov’t wants to collect as much tax as possible within the spirit or letter of the law
Describe 4. “Income” is a net concept much like accounting, though tempered significantly by #3, leading to considerably less judgement or discretion than in accounting & provide the example for Book Depreciation vs Capital Cost Allowance
Income subject to tax is based on net taxable income → (income - deductions)
Example: Book Depreciation vs Capital Cost Allowance
- GAAP: choice w/ depreciation method, as long as it accurately reflects the use of the asset
- Tax (ITA): must calculate CCA; does not offer a choice in how it is calculated
Describe 5. “Income” is different from capital appreciation (sale of a tree is different from sale of the fruit) & example of House Flipping
Business income → taxed at marginal tax rate
Capital gains → taxed at lower rate → only a portion is subject to tax
Taxpayers incentivized to categorize transactions as capital transactions opposed to operating transaction
Example: House Flipping
- If buy home & sell it in under 1 year = business income
- If buy home & stay in it for more than 1 year = capital gain
What is the 6th concept?
- Basic structure of the tax payable calculation for all taxpayers under Part I:
(add all sources of income [net employment income] less general deductions [moving, enhanced CPP]) x tax rate schedule [progressive tax system] - tax credits [basic, employment, education, donation credits] = taxes payable
What is Employment Income
Only for individuals
Income received from an employment contract by providing services to another party (aka employer)
Net Employment Income Formula
(A + B + C ) - D
A: salary, wages, commissions, gratuities, & other forms of remuneration received
B: taxable benefits received
C: taxable allowances received
D: deductions specifically permitted against employment income
Describe Allowances
Flat, specified amt to cover expenses
No receipts required
Taxable unless exception applies
Describe Reimbursements
Reimburse employee for specific expense
Must be substantiated by voucher/receipt
Non-taxable provided it is a true business expense
How is taxable treated differently for Employed vs Self-Employed?
Employed:
- Income earned = employment income
- Deductions are heavily restricted
- Employer is required to withhold income taxes, EI & CPP
- Lower risk vs reward
Self-Employed:
- Income earned = business income
- Deductions have a wider range
- Must withhold & remit income taxes & CPP on your own
- Not eligible for EI
Higher risk vs reward
What is Employed vs Self-Employed tied to?
2nd Key Concept: Taxation follows legal structure
Fundamental Principles of Employment Income
- Employment income is taxable when received
- Any income or benefit paid/enjoyed is taxable, unless an exception applies
- Any expense paid/incurred is disallowed, unless specifically allowed within the Income Tax Act
- Income taxes withheld, CPP & EI contributions are taken as tax credits
Principles of Taxable Benefits
- Generally, items received are taxed; cash or near-cash are always taxable
- Who is the ultimate beneficiary?
a) Employee → taxable benefit (personal enjoyment or net worth)
b) Employer → not a taxable benefit - CRA wants to administer the system realistically so doesn’t tax small non-cash items, but limited
- Tax system supports gov’ts social goals of health care & retirement savings → not taxable
Common Benefits that are Taxable
- Cash or near-cash gifts or awards
- Value of board & lodging (include meals)
- Only 50% of meals deductible
- Interest-free/low interest loans
- Auto benefits - complex rules (W2)
- Rent free & low-rent housing
- Holiday trips, prizes & incentive awards
- Spouse travel, if no business reason for s
- Tax return preparation fees
- Fitness, gym or health club memberships
- Transit passes
Common Benefits that are Not Taxable
- Non-cash gifts or awards (total $500 or less)
- Nominal items (eg. coffee, mugs, t-shirt w/ employer logo)
- Overtime meals
- Group sickness or accident insurance plan (e’er contributions)
- Private health plan premiums (e’er)
- Registered Pension Plan (RPP) (e’er) > Only employee can contribute
What is the general rule for the dollar amount (value) of a benefit being recorded at?
Fair market value
What does Common Taxable Benefits tie to?
Key Concept #1: Taw laws appear arbitrary but is guided by economic & social goals
Decision Tree for Employment Items
Received
> Included (added to taxable income)
> Not included (ignore)
Paid
> Deductible (subtract from taxable income)
> Not deductible (ignore)
What is the T4 Slip?
Used by employer to report employment income & other relevant tax info to employee & CRA
Not always the complete computation of employment income
- Some items are not known to employers (cash tips)
- Some deductions are not tracked by employer (home office expense)
Who gets the T4 Slip?
1 each to employee & gov’t
Automobile Benefits on Employer-Provided Vehicle
Standby charge
Operating expense benefit
> Not always a packaged deal
Automobile Benefits on Employee Vehicle Used for Employment Purposes
Allowances (taxable) → don’t need receipts proof
Reimbursements (not taxable)
What is Standby Charge
- Benefit related to access to a vehicle you did not pay for
- Only arise when vehicle is also used for personal purposes
- No taxable benefit if only used for work → personal enjoyment = 0
Standby Charge formula for owned vehicles
A/B * [ 2% * (C*D) ]
Standby Charge formula for leased vehicles
A/B * [ 2/3 * (E - F) ]
Standby Charge Formula components
A
Lesser of:
i) total personal-use KMs
ii) 1,667 km * # months used in year
B
1,667 km * # months used in year
C
Cost of employer-owned automobiles + GST/HST
D
# months used in year
E
Lease payments + GST/HST made by employer
F
Portion of lease payments related to insurance for loss damages & liability in using the automobile
When does A/B apply in the Standby Charge formula?
A/B only applies when vehicle is used > 50% for employment related purposes (ratio can never go above 1)
- A/B not applied when used < 50% for personal
- Reduced tax benefits when A/B is applied
What is Operating Cost Benefit?
When employer pays for operating expenses related to employer provided vehicle
Home → work: personal
- Subtract any reimbursements employee makes
- Can’t be negative → any extra reimbursement results in sunk cost for employee
Two possible calculations for Operating Cost Benefit & which one do you choose?
- OCB = # of personal kms * prescribed rate (2023: $0.33)
- If vehicle is used > 50% for work, can choose OCB = 50% of SBC if less than original OCB
Automobile Employee Reimbursements
- If reimbursement related to both benefits → can reduce both OB & SB
- Pay up to the cost
> Overall personal use = both
> Operating expenses = just OB
> Access to vehicle = just SB
> Can have SB w/o OB if employee pay for OB
What is the requirement for reimbursements to reduce SBC?
Reimbursement paid within year or 45 days after year-end
Criteria for Employee-Owned/Leased Vehicle Allowances
Default Rule: allowances provided for employee use of personal vehicles for work duties is a taxable benefit, unless it can be proved that…
- Allowance must relate to vehicle expenses related to travelling for employment duties
AND - Allowance is reasonable (Allowance per km → 68 cents for the 1st 5k employment kms & 62 cents thereafter)
> Unreasonable: Flat amount (can cover unrelated to work hours driving), Rate is too low/high, Entirety of allowance is taxable employment income
Pro-Rated Employment Use on Automobile
Employment/(Employment + Personal)
% amount used for employment purposes
Requirements to claim automobile expenses:
- Employee ordinarily require to carry employment duties away from employer’s place of business
- Employee is required to pay for the automobile expenses
- Employee has not received a non-taxable allowance to cover such costs (If allowance is taxable → qualified) AND
- Required to have Form T2200 certifying the conditions above (Employer certifies, CRA can deny a claim if proper documentation was not provided)
> Logbook of employment related travel & receipts
What is T2200
Declaration of Conditions of Employment (automobile)
Required to be signed by employer
Since in the receipt of a non-taxable allowance → not eligible to claim automobile expenses… however, you can still deduct them from your motor expenses if:
- You can show that the employment-related motor vehicle expenses > allowance
- You voluntarily include the amount of the allowance in income AND
- All other conditions to meet regarding automobile expenses were met
Vehicle Costs Not Deductible
- Parking & speeding tickets
- Parking Costs (Can’t deduct parking at own work place)
- Repairing or maintenance that isn’t necessary (Car audio, Car battery)
Tires, car wash are deductible
What is T777?
Statement of Employer Expenses
What is Line 25 on T777
CCA: UCC * CCA Rate (30% - Declining Balance)
- Undepreciated Capital Cost
- Employee can claim CCA if they own the vehicle
What is Line 26 on T777
Interest expense: Car is financed by employee (interest payments)
- Limited to $300/month
- Doesn’t want employees purchasing crazy vehicles & expensing them
What is Line 27 on T777
Leasing cost: When car is leased by employee
- Effectively limited to $950+HST/month
- Can’t claim CCA or interest
- Don’t want employees buying porsches
What is Line 26 on T777
CCA: UCC * CCA Rate (30% - Declining Balance)
- Undepreciated Capital Cost
- Employee can claim CCA if they own the vehicle
Types of Employees
- Ordinary Employee
- Travel Employee
- Commission Employees
Describe Ordinary Employees
Earns standard salary & wage + benefits
Most restricted in deductions claim
Risks of EI being earned → salary is low risk → lower deductions
Describe Commission Employee
Earns variable remuneration for job
Greatest flexibility in deductions claim
Commission → high risk
Eligible Employment Expenses for “Ordinary”
- Annual professional & union membership dues paid (Only deductible if ^ is directly related to job)
- Office rent paid
- Salary paid to an assistant
- Cost of supplies paid (Common stationary items specifically exclude: calculators, briefcases, computers)
- Employee contribution to Registered Pension Plan (RPP) (Canadian Gov’t wants to incentive taxpayers to save for retirement)
- Legal expenses (Key Concept #4: Income is a net concept > Long as everything is related to earning EI)
Criteria must be met to claim home office expenses:
- Required to pay for home office expenses under contract of employment that are used directly in work & employer did not reimburse (CRA no longer require written proof → could be verbal)
AND
- Either
A) The workspace is where mainly ( > 50% of the time) where work is completed at OR
i) Must for periods of 4 consecutive weeks examined (for each 4 week period)
ii) Sporadic work-from-home days not eligible
B) The workspace is used only to earn employment income. Also need to use it on a regular & continuous basis for meeting clients, customers, or other people in the course of employment duties
Eligible HOE for Ordinary Employees
Yes:
Rent, repairs & maintenance, supplies, telephone, utilities
No:
Home insurance, property taxes, mortgage interest
Standard pro-ration for HOE
Standard pro-ration: square foot of workspace compared to home
Other methods: hours in a week, workdays/365
If shard space → by hour (living or dining room) > May have to use all 3
Pro-ration for telephone & supplies
Telephone & supplies are not prorated by sq ft
Phone: by hours
Supplies: by usage
Repairs & maintenance pro-ration
Repairs & maintenance can prorate by sq ft if done in multiple places
Not if only for office
What happens when HOE > EI
Rare for HOE to exceed EI
If it does happen → carry forward to next year
What is T2200 for Home Office Expense Section?
Required to be signed by employer certifying the eligibility of home office expenses
How is CPP split up?
5.95% > 1% (Enhanced CPP - deduction) & 4.95% (CPP as non-refundable tax credit)
Pensionable earnings max out @ $66,600 (amt updated for inflation each year)
- Salary & certain taxable benefits
- CRA don’t want wealthy employees to have higher pension contributions
First $3,500 of pensionable earnings → “exemption”
Max. pension earnings after exemption = $63,100
Total employee CPP contributions = $63,100 * 5.95% = $3,754.45
Portion of CPP as a tax credit = $63,100 * 4.95% = $3,123.45
Portion of CPP as a tax deduction = $63,100 * 1% = $631
Taxpayers may claim moving expenses if moved:
- To earn business or employment income (new job/location)
- To go to school (taxable scholarship income)
- Distance requirement 40km closer to new work/school location
Eligible Moving Expenses: Travel while Moving Only
Actual moving costs for you, family & stuff
Transportation & storage costs
Accommodations
Vehicle expenses*
Meals*
- Choice of Detailed or Simplified Method
Eligible Moving Expenses: Temporary Living Expenses
Move to new location but home not ready yet
Costs to cancel lease from old home
Costs to maintain old home when vacant ($5k max)
Incidental costs related to move
15 day max
- Accommodations
- Meals*
- Time past (sunk cost)
- Choice of Detailed or Simplified Method
Eligible Moving Expenses: Costs of Selling Old Home
Real Estate Commissions
Legal fees
Advertising
Special restrictions can apply
Eligible Moving Expenses: Costs of Buying New Home
Only deductible if old home sold
- Legal fees
- Land transfer tax
Can’t deduct if you used to rent
Heavily restricted
All listed on T1M
- Need to be filed in original year in order to claim the carry forward amount
- Amend previous year return
Special restrictions can apply
What is moving expenses limited to?
Expenses are limited to income @ new location
→ Ex. move at end of year, but don’t start earning until next year
- Must report on tax return in the year of move
- Allowed to carry forward the amount for one year (to be deductible against new work income)
Detailed Method
Claim eligible expenses that are substantiated by receipts
Can only use if have receipts
- Unlimited long as there are receipts (must be family)
Simplified Method
Claim per diem rates per CRA
- Meals: $23/meal/day (max $69/day) per person moving
- Vehicle: flare rate of 59 cents/km driven from old to new home
Detailed vs Simplified Method
Must choose one or the other in totality!
→ pick higher one (more deduction & less income tax)
Employer Paid Moving Expenses
Options where employer:
- Provides an allowance (taxable) - flat
- Reimburses the expenses to employee/directly to vender for the move (generally non-taxable)
> Related to eligible reimbursement (CRA has standard list)
Difference in Non-Refundable & Refundable Tax Credits
Non-Refundable:
- Reduce taxes payable but not below zero
- Many credits available
- Applied first
Refundable:
- Can reduce taxes payable into a refund position
- Income Taxes Withheld (T4)
Not tax deduction
- Reduce taxable income
- Too beneficial for high income earners back then
Tax credit reduces taxes payable
Calculation for Non-Refundable Tax Credits
Credit Base * Credit Rate = Tax Credit
Credit Base → Amount that gets multiplied by credit rate
Credit Rate → lowest marginal tax rate (15%), unless stated otherwise (same each year)
Criteria for Basic Personal Amount
Canadian resident individual
Intent → help taxpayers earn a little bit of income tax free???
Credit Base for Basic Personal Amount
Income tested → 2nd highest marginal or higher (credit base slightly reduced) → BPA less valuable for high income earner → pay more tax
- Taxable income < $165,430 = $15,000
- Taxable income > $235,675 = $13,520
In b/w = pro-rated
Criteria for CPP & EI Credit
Made CPP & EI contributions in the taxation year
Credit Base for CPP & EI Credit
Contributions made (T4)
CPP: max of $3,123.45
EI: max of $1,002.45
Criteria for Canada Employment Amount
Earned employment income
- Buffer for some expenses incurred to earn employment income that may otherwise not be deductible
Credit Base for Canada Employment Amount
Lower of
- Gross Employment Income (Before employment expenses)
- $1,368
Criteria for Tuition Credit
Paid eligible post-secondary education tuition fees
- To incentive taxpayers to get PSE
> Better job → more income taxed collected
> Company pay more corporate tax
> Social goal of high education
Credit Base for Tuition Credit
Current year tuition fees (T2202)
Unused tuition fees carried over from previous taxation years
Special Rules for Tuition Credit
Unused tuition carries over indefinitely
- Full-time don’t make high income
Tuition can be transferred over to eligible parties at a max of $5,000
- Parents, grandparents, spouse/common-law partner
Criteria for Student Loan Interest Credit
Paid interest on eligible student loans
- Borrowed money to fund PSE from qualified lender (OSAP - Gov’t, not from private institutions)
- Not available for current full-time students (Social goal of education)
Credit Base for Student Loan Interest Credit
Current year student loan interest
Unclaimed student loan interest carried over from previous taxation years
Special Rules for Student Loan Interest Credit
Unused student loan interest can be carried forward up to 5 taxation years
Cannot be transferred
- Loan is under one name
What is the credit rate for all non-refundable credits but donations?
15%
Criteria for Donation Credit
Made donations to registered charities
- Canadian organizations
- Exclude go-fund-me sites
- Donations of capital assets (shares of public corp.)
Credit Base for Donation Credit
Eligible donations in current year
Eligible donations carried forward from previous taxation years
Credit Rate for Donation Credit
15% on 1st $200
29% or 33% for remainder → income tested
Social goal: charitable & give back to community
Special Rules for Donation Credit
Donations are limited to 75% of “net income”
Unused or excess donations can be carried forward up to 5 taxation years
“Income Test” for Credit Rate
- If marginal rate is 33% → use this rate provided you have sufficient taxable income to cover remaining donation
- If marginal rate is not 33%, use 29%
What is the T1 form?
- Personal Income Tax & Benefit Return
- Used by CRA to gather info on all taxpayers & help CRA w/ compliance, audit & collection
> May reassess return if CRA finds info on tax return incorrect
> Have rights to communicate w/ CRA if you believe info on original is correct
Why does personal income tax use self-reporting?
- Due to all deductions & credit that CRA may not have knowledge of
- Certain income types w/ no slips attached → rental income
- Automatic reporting → Finland & Sweden
- Simplefile → automatic files for basic return → low-income individuals
Who Must File T1?
Canadian residents are subject to Canadian tax on their worldwide income
Income from another country → potential to get double taxed
Tax treaty can minimize by allowing foreign tax credits to be claim
Why should everyone file their taxes?
Required if you have a balance owing
Should file if you have a refund and/or wish to claim available credits
Who isn’t required to file T1?
Individuals w/ no income, no spouse, & do not qualify for gov’t assistance/benefits
Individuals under 18 and have little/no income
> Could be beneficial to claim benefits
What kind of relationship is living common-law?
Conjugal relationship > lived together for minimum 12 months & are financially, socially, emotionally, physically interdependent
Do you have to file tax return for deceased person?
Yes so that CRA knows to not look for future tax returns
Filed by executor
Why do we need to input our marital status?
To determine eligibility & magnitude of deductions & credits
CRA treats spouses & common-law partner the same
Why are you required to disclose identifying info of partner & net income?
Availability of deduction only allow lower income partner to claim
Why must you disclose residency status on last day of taxation year?
Determine provincial tax rate
2 ways to be considered a resident of Canada:
- Factual Resident → look at residential ties (how you live, where you live, where do you have closer ties)
- Primary ties → house, spouse & dependents
- Secondary ties → personal property, social & economic ties
> Work is not an important determinant - Deemed Resident → The Act may deem an individual to be a full-time resident if individual “sojourned” (stay temporarily) in Canada for 183 days or more
- Any part of a day counts as one day for this test
- Common exception: commuting days b/w Canada & the US
If not a Canadian resident…
You are a non-resident & only subjected to Canadian tax on Canadian sourced income
What is GST/HST Credit
Tax free payment to help offset cost of GST/HST taxpayers pay
What is Ontario Trillium Benefit
Tax free payment to help offset costs of owning/renting & sales tax
- Comprise of multiple tax credits
> ON Sales Tax within HST paid for low-income taxpayers
> Cost of owning/renting a home
What is Climate Action Incentive/Canada Carbon Rebate
Tax free payment to help offset carbon taxes paid (ex. Gas prices)
Eligibility for GST/HST Credit
19+ Canadian resident
Low/modest income earner
< $54,704 for single taxpayer
Eligibility for Ontario Trillium Benefit
- Lived in ON on Dec 31
- Pay rent/property tax on principal residence in current taxation year
- Low/modest income earner
< $55,458 for single
Eligibility for Climate Action Incentive/Canada Carbon Rebate
19+ Canadian resident
How to apply for GST/HST
New Canadian residents are required to apply separately for credit
Income tested
How to apply for Ontario Trillium Benefit
Fill out schedule in tax return
- Disclose amount of rent/property tax
- CRA will determine appropriate amount
- Monthly payment or lumpsum
How to apply for Climate Action Incentive/Canada Carbon Rebate
Must state whether reside outside CMA (Census Metropolitan Area → large densely population centre) → produce less carbon emissions
Yes → benefit = $672 for single taxpayer
No → benefit = $560 for single taxpayer
