General Flashcards
Basic federal tax formula
NIFTP (Div B) - Div C deductions = Taxable Income x tax rates = Federal tax before tax credits - Tax credits = Basic federal tax
Net Income for tax purposes consists of
Employment Income
Business Income/Loss
Property Income/ Loss (interest, dividend, rental, royalty)
Other Income (pension, support, assistance etc)
Add 1/2 capital gains net of cap losses
Deduct other deductions (support, moving, RRSP, child-care, etc)
If > 0 then = NI
If <0 then NI = 0
Straight-line method for CCA is used for 2 classes
Class 13 - leasehold interest, and
Class 14 - patents, franchises, licences
UCC Balance formula
UCC Balance, beginning \+ additions -disposals (lesser of disposal or orig cost) \+ 50% of net additions (accelerated investment incentive on first year) = Base amount for CCA -CCA claimed in the year - 50% of net additions = UCC balance, end
Property types excluded from accelerated investment incentive
Property acquired on a rollover basis (Section 85 rollover)
Property acquired through Section 87, amalgamation
Property that was previously owned or acquired that was not at arm’s length
Recapture calculation for CCA class
Recapture arises if, after adding the cost of all additions and deducting all disposals, the UCC balance is negative. A negative UCC balance means the taxpayer has previously claimed too much CCA.
Add to NIFTP
Terminal Loss calculation for CCA class
If cost of all additions less all disposals is > 0 then Terminal Loss if no other assets in class
This means the taxpayer did not claim enough CCA
Deduct from NIFTP
Income Tax rule for Capital Losses on depreciable ppty
The ITA specifically prohibits capital losses on the disposal of depreciable property
Property income includes
Interest Dividends Rental income Foreign-source property income Royalties
What are non-eligible dividends
Dividends paid by Canadian-controlled private corps out of after-tax business income eligible for SBD OR from after-tax aggregate investment income
2020 gross-up and federal dividend tax credit rates
ELIGIBLE DIVIDENDS
Dividend gross up: 38%
Dividend tax credit: 6/11
Div gross up x DTC: 20.727%
2020 gross-up and federal dividend tax credit rates
NON- ELIGIBLE DIVIDENDS
Dividend gross up: 15%
Dividend tax credit: 9/13
Div gross up x DTC: 10.385%
Rental property building CCA rules
- Each rental building costing 50K or more must be included in a separate class
- A taxpayer may not create or increase a net rental loss by claiming CCA on a property or group of properties
income classification on Royalties
If the taxpayer is the author or inventor, the royalty pmts are business income.
If the taxpayer purchased or inherited the right to the royalties, the pmts are property income
Deductions from property Income: Carrying charges on vacant land
Property taxes and interest on vacant land are only deductible to the extent that there is income from the land.
Property taxes and interest that are in excess of income earned on land are added to the cost base of the land
Deductions from property Income: Carrying charges on vacant land
Property taxes and interest on vacant land are only deductible to the extent that there is income from the land.
Property taxes and interest that are in excess of income earned on land are added to the cost case of the land
Deductions from property Income: Soft Costs
Soft costs include interest, legal, and accounting fees, insurance, and property taxes on the building or related land.
These soft costs are not deductible during the period of construction, renovation, or alteration of the building and are added to the cost base of the building.
Canadian Securities election
Can elect to treat the disposition of Canadian securities as a capital transaction, regardless of the nature.
Not available to:
Trader or dealer of securities
Financial institution
Principal business is lending money or purchasing debt
net capital loss carryforward/back rules
Carryforward: Indefinitely
Carried back: 3 years
Lifetime capital gains exemption
An eligible individual is entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains realized on the disposition of qualified property
Eligibility
You were a resident of Canada for at least part of the tax year
You were a resident of Canada throughout the years preceding or proceeding the tax year.
Qualified Property
Dispositions of QSBC shares
Depositions of qualified farm or fishing property
Eligible up to 883,384 LCGE or cumulative capital gains deduction of 441,692
Can claim any amount, up to the maximum
When can taxpayers start claiming CCA on depreciable assets
The earlier of the time it is put in use or the second taxation year following the acquisition.
Public companies can deem property other than buildings available for use in the year that deprecation is first recorded
Short taxation year rule
All classes except for class 14 must calculate a short year when applicable. Accelerated investment incentive must be prorated as well
Non-arms length and the half year rule
Depreciable property sold or transferred in a non-arm’s length transaction is not considered an accelerated investment incentive property. Therefore, the half year rule applies, unless the depreciable ppty was owned for more than one year and was used to earn income and stays in the same class when transferred.
Non-Arm’s length new UCC beginning balance formula
Original cost from transferor plus the TCG of transferor.
This rule restricts the amount of future recapture for the transferee
Non-Arm’s Length disposal credit to UCC
Does not use the lesser of cost and sold price. Instead uses lesser of sold and UCC balance. By not using the actual cost recapture is limited to the amount added to UCC.
Non-arm’s length deemed CCA formula
When a seller sells the depreciable asset for a price less than the orig cost, the difference between the price the purchaser paid and the orig cost is to be the purchaser’s deemed CCA.
Non-arm’s length deemed Capital Cost
When a seller sells the depreciable asset for a price less than the orig cost, the purchaser’s capital cost is deemed to be the org cost to the seller
Capital gains reserve formula
The reserve is calculated as the lesser of two amounts:
- Capital gain × (Proceeds not due / Total proceeds)
- 20% of the capital gain × (4 – Number of preceding years ending after the disposition); this ensures the entire amount of the taxable capital gain is brought into income by the end of the fifth year
Limitation of deducting leasing costs passenger vehicle
$800 + tax
Interest on money borrowed for certain vehicles
The lesser of:
- Actual Amount paid
- $10 x the number of days in the period in respect of which the interest was paid or payable, as the case may be.
Donation carryforward rules
5 years
Allowable Business Loss (ABIL) carryforward/back rules
Carryforward: 10 years, then added to net capital loss balance
Carryback: 3 years
non-capital loss carryforward/back rules
Carryforward: 20 years
Carryback: 3 years
Farm loss carryforward/back rules
Can apply to any income
Carryforward: 20 years
Carryback: 3 years
Restricted Farm loss carryforward/back rules
Apply to farm income only
Carryforward: 20 years
Carryback: 3 years
Replacement property rules apply when
- An involuntary disposition of property where the ppty is lost, stolen, destroyed, or confiscated (any kind of ppty except vacant land), new ppty must be acquired within 24 months of the end of taxation year
- A voluntary disposition where the taxpayer sells real property used in a business (only land or building), new ppty must be acquired with in 12 months of the end of taxation year
Can defer capital gains and recapture
- New ppty must have been acquired for similar use
CCA - Available for use
the earlier of the time the depreciable
asset is put into use or the second
taxation year following the year of
acquisition.
CCA - Assets that must be put into separate classes
Class 10.1 - Luxury personal vehicles with cost over 30K - limited to 30K
Class 1 - Rental Property costing more than 50K
Replacement ppty - max capital gain deferral allowed
Lesser of:
- Proceeds less original cost
- Cost of replacement less original cost
Replacement ppty - max recapture deferral allowed
Lesser of:
- Capital gain less UCC of replacement ppty
- Cost of the replacement ppty
Replacement ppty - Election of additional deferral of capital gains
Available when replacement ppty is acquired within the required time periods.
Allows taxpayer to reallocate proceeds of disposition between land and building.
Deferral of capital gains on disposition of small business investments - Conditions
Capital gains from a disposal of CCPC may be deferred to the extent that the proceeds are reinvested in replacement shares of another CCPC.
Conditions that must be met:
- The individual must have owned the common shares throughout the 185-day period immediately preceding the sale
- Replacement shares must be acquired within 120 days of the end of the year in which the orig shares were sold.
Deferral of capital gains on disposition of small business investments - Calculation
Capital gain x (lesser of proceeds or cost of replace shares) / proceeds of disposal
ITA 69 Sale of property to related parties
If actual proceeds are > FMV then
Deemed proceeds = Actual selling price
ACB to purchaser = FMV
Seller pays more tax (double taxation)
If actual proceeds are < FMV then
Deemed proceeds = FMV
ACB to purchaser = Actual selling price
Buyer pays more tax (double taxation)
If actual proceeds are NIL then
Deemed proceeds = FMV
ACB to purchaser = FMV
Attribution rules for not-arm’s length property transfers - ITA 73
Attribution rules apply by default for all non-arms length property transfers (to family)
If Attribution applies all income/losses/gains remain with transferor except in the case of cap gains when the transferee is a minor.
Spouse: Income and capital gains are attributed to transferor
Minor: Income is attributed to transferor, capital gains are attributed to minor
There is option to elect out of ITA 73 if FMV was paid by a spouse (transferee).
If ITA 73 is elected out and FMV was paid by a spouse (transferee) then transferor will have gain or loss on the transfer and the transferee will have a future income/gains/losses.
Eligible Dividends are paid from what income and what is the implications to shareholders?
Eligible dividends are presumed to be paid from a corporation’s active business income that’s been taxed at the general corporate rate, including from eligible portfolio dividends received by the corporation.
Shareholders who receive these dividends are entitled to the enhanced dividend tax credit
Non-Eligible Dividends are paid from what income and what is the implications to shareholders?
Non-eligible dividends are generally paid from a corporation’s active business income that was taxed at the small business tax rate, including non-eligible dividends received by the corporation, or from its passive investment income.
Shareholders who receive these dividends are entitled to the ordinary dividend tax credit
CCA rules for class 10.1
Class 10.1 at 30% with a capital cost limit of 30K
CCA at 50% of the regular rate is allowed in year of disposition of a Class 10.1 vehicle. The remaining balance of the disposed vehicle is zero’d out.
Recapture and terminal losses are not applicable to Class 10.1.
Each item should be in a separate CCA class
ACB of a partnership
ACB opening balance
Add: partner share of income, capital gains, dividends, capital dividends, capital contributions
Deduct: Losses, capital losses, charitable and political donations, drawings
= Ending ACB
Shareholder loan tax inclusion rules
Loans must be included in income unless any of the following conditions are met:
i. Shareholder is an employee of corporation and meets the exemptions for employees
ii. Loan is repaid within one taxation year after the year it was made (cannot be on two
consecutive fiscal balance sheets).
iii. Loan was made in the ordinary course of money-lending business.
iv. Loan is intercompany loan or made to non-resident.
Tax exemption for shareholder loan
Shareholder/employee may be exempt if:
Not a specified employee
(owns less than 10% of the shares)
OR
Loan to specified employee for one of three reasons:
i. to acquire a dwelling for their own occupation
ii. to acquire newly issued treasury shares
iii. to acquire a motor vehicle for employment use
AND
The following two conditions are met:
bona fide repayment terms
loan by virtue of employment (all other employees are eligible for similar loans)
Shareholder Benefits and Loans -Other considerations
- If loan is not included in income, imputed interest must be included in shareholder’s income.
- If loan is included in income, no imputed income is included in shareholder’s income.
- Repayment of loan that has been included in income is eligible for deduction in the year it is repaid.
General Anti-Avoidance Rule (GAAR)
All three must be met:
- A tax benefit must arise as a result of the transaction or series of transactions.
- The transaction or series of transactions is an avoidance transaction. It may be determined that the primary purpose is not to obtain a tax benefit. ei: business, family or investment purposes
- The transaction or series of transactions is an abusive tax-avoidance arrangement.
Determining if contract is contractor or employee
Explain what each tests is and give points for both contractor or employee and conclude at the end of all tests.
*Control - who decides the time, place and manner the work needs to be done.
*Ownership of tools - addresses who will supply the tools necessary to do the work
*Chance of profit/risk of loss - Does the individual face financial risk regarding an arrangement
*Integration - How dependent are you on the organization
Specific Results - project based on ongoing work
HST Election on sale of assets
In the case where the following criteria is met HST can be eliminated through joint election:
• Is the recipient acquiring a business?
• Is the recipient acquiring all or substantially all (90%) of the assets that are necessary to running the business?
• Is the recipient a GST/HST registrant?
Partnerships - Negative ACB rules
If a partner withdraw reduces the ACB to negative in first year, 1/2 of the negative is included as a TCG.
Otherwise at-risk rules apply and ACB cannot be reduced below 0
Limited partnerships and at-risk rules
The two main criteria for considering a taxpayer to be a limited partner are:
• The taxpayer’s liability for the debts of the partnership is limited to the taxpayer’s investment in the partnership.
• The taxpayer does not participate in management of the partnership.
At-risk rules restrict the limited partner’s deductions and or tax credits to the ACB value of 0.
Home office expense eligibility
Meet one of the following conditions:
It is your principal place of business
You use the space exclusively to earn business income and use it on a regular and ongoing basis to meet clients or customers
CCA Classes
Class 1 (4%): Residential buildings acquired after 1987 Class 1 (6%): Non-residential buildings acquired after 1987 Class 1 (10%): Manufacturing of processing buildings (at least 90%) after 2007 Class 3 (5%): Building acquired before 1988 Class 8 (20%): Furniture, office supplies, appliances, tools > $500, machinery, equipment that is not for processing goods Class 10 (30%): vehicles < 30k Class 10.1 (30%): Vehicles > 30K (except limited seating) Class 12 (100%): tools, instruments that cost < $500 Class 14: Intangibles: Capital Cost of each property is whichever is less: 1. Total CC of each / useful life 2. UCC as of end of tax year Class 14.1 (5%): Goodwill, Unlimited life intangibles Class 16 (40%): Taxis, car rentals, video game machines, freight trucks Class 29: Machinery and equipment processing goods in Canada acquired between 2007 - 2016: First year 25%; Second year 50%, third year 25% Class 43 (30%): Machinery and equipment processing goods in Canada that are not included in class 29 or 53 Class 43.1 (30%): Electrical charging stations for KW between 10KW-90KW, geothermal equipment Class 43.2 (50%) Electrical charging stations over 90 KW Class 46 (30%): Data network infrastructure & related software Class 50 (55%): Computer hardware and software after March 2007 Class 52 (100%): Computer hardware and software acquired between Jan 2009 - Feb 2011) Class 53 (50%): Machinery for manufacturing goods in Canada acquired between 2015-2026 Class 54 (30%): Zero-emission vehicle otherwise included in class 10 or 10.1 Class 55 (40%): Zero-emission taxi or rental vehicle
Accelerated Investment Incentive items that are 100% CCA
Class 53 Machinery and equipment for Manufacturers and Processors
Class 43.1 & 43.2 Clean Energy Investments
Taxable benefits to employees
Damaged goods
-Whole amount would be taxable
employees able to have 500 in gifts non-taxable but they have to be given on special occasions which is not applicable to damaged goods.
- Measurement is generally FMV. Damaged goods difficult to measure
- Cannot pick a standard % reduction to FMV
-CRA may insist on a tracking system and require value to be assessed before giving to employee
-May have sales tax implications
Uniforms and safety equipment
- Are not a taxable benefit if the uniform is required while the employee carries out their duties or if the items are provide for safety reasons.
- employees would not use them outside of work
Health and safety courses
Because these courses will benefit the employer they are not a taxable benefit.
Free Pizza
- If is is provided for the convenience of the employer (provided so they could have a meeting during lunch break) then it is not a taxable benefit.
- If it is provided as a social event it is excluded from taxable benefits as long as it costs less than 150 per person.
- If it was provided as a regular subsidizing of meals for employees it would be considered a taxable benefit if they are not paying a reasonable amount to cover the cost of the food.
Gift cards
-Considered a near-cash benefit which is taxable regardless of the amount
Rewards
- Considered gifts since they are for special occasions (rewards)
- Limit of $500 per year, portion over 500 is taxable
- If they are given on the basis of job well done then they are considered performance pay and are a taxable benefit regardless of the amount.
