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Law 345 - Tax > Midterm 1 - Intro > Flashcards

Midterm 1 - Intro Flashcards

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1
Q

What is Tax: Provide two general definitions of a tax

Provide a general definition of tax

A

“A compusorytransfer of money from private individuals or organizations to the government not paid in exchange for some specific good or benefit”

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2
Q

What is Tax: Provide two general definitions of a tax

How does Hogg, Magee and Lidefine tax?

A

“a levy, enforceable by law imposed under the authority of a legislature, imposed by a public body and levied for a public purpose” from Kempe v R (2000)(TCC).

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3
Q

What is Tax: Provide two general definitions of a tax

What are the two common features of the general definitions?

A

Common features are:

1) “compulsory” and “enforceable by law”
2) “transfer of money” and “levy”

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4
Q

What is Tax: Show the difficulty in identifying a “tax” by reference to an example.

A

Fines: some things are more akin to penalties or fines intended to deter, as opposed to revenue-raising like taxes –> the definitions don’t separate fines and penalties; although the money-making function is SECONDARY

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5
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Income Tax

A

Income Tax: a tax on the INCOME of a TAX UNIT

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6
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Excise Tax (Excise Tax Act)

A

Generally: tax on the QUANTITY or VALUE of output of production

Sales tax: tax on SALE to the consumer

Value-added tax: tax on VALUE ADDED at particular stage of production (designed to tax OVERALL VALUE ADDED) e.g. GST

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7
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Wealth Tax

A

tax on the WEALTH of a particular taxation unit (e.g. capital gains, estate tax)

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8
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Tariffs (Customs Tariff Act)

A

tax levied on IMPORT of goods

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9
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Head Tax

A

tax at SET AMOUNT typically applied to INDIVIDUALS (e.g. Chinese Head Tax)

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10
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Property Tax

A

tax on REGULAR BASIS on the REAL PROPERTY owned by the taxpayer

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11
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

Transfer Tax

A

tax on PARTICULAR TRANSACTIONS such as a property transfer tax

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12
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

User Tax/Use Fees

A

Tax on individual USERS OF PARTICULAR SERVICES or FACILITIES (e.g. highway/bridge toll, incorporation fee, filing fee)

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13
Q

Classification of Taxes: Identify and briefly describe ten different types of taxes

List the 10 types of taxes

A

1) Income Tax
2) Excise Tax (Sales Tax, Value-added tax)
3) Tariffs
4) Head Tax
5) Property Tax
6) Transfer Tax
7) User Tax

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14
Q

**Roles of the Income Tax: IDENTIFY AND DESCRIBE THREE MAIN ROLES OF INCOME TAXES.

A

1) REVENUE- raise revenue; by far most important source of income (63%) for fed gov
2) REDISTRIBUTE- tax collected from higher income (high income -> high tax) and returned through social programs
3) REGULATION of Private Activity - i.e. use deductions to encourage certain activities or tax more for other activities

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15
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

List 7 primary sources

A
  1. Income Tax Act***** - primary source
  2. Income Tax Application Rules (ITARs)
    3 Income Tax Regulations
    4 Tax Treaties
    5 Case Law
    6 Provincial Income Tax Acts (NOT ON EXAM)
    7 Private Law
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16
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Describe Income Tax Act

A

current version is the Income Tax Act - enacted in December 23, 1971 and came into force on January 1, 1972

SEE OTHER FLASHCARDS FOR MORE DETAIL

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17
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

ITARs

A

Income Tax Application Rules

  • enacted with 1971 Act
  • Rules to help TRANSITION from OLD act to NEW act (still relevant for dispositions of property from before 1972)
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18
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Income Tax Regulations

A

Income Tax Regulations made under authority given to GOVERNOR IN COUNCIL under SECTION 221 of the Act

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19
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Tax Treaties

A

80+ Treaties

Primarily to AVOID DOUBLE TAXATION

OVERRIDES THE INCOME TAX ACT

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20
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Case Law

A

Set out in CANADIAN TAX CASES (C.T.C.) and Dominion Tax Cases (D.T.C.) - cited AHEAD of official report

Common issues include: 
RESIDENCE, 
income, 
business vs capital gain, 
EXPENSES, 
accounting principles
WHETHER LOSSES ARE FULLY DEDUCTIBLE
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21
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Provincial Income Tax Acts

A

NOT ON EXAM

- Provincial taxes COLLECTED by FEDERAL government (EXCEPT Quebec)

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22
Q

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Private Law

A

General law for issues such as WHEN A PERSON IS ENTITLED TO INCOME –> e.g. business law, employment law, contract law, partnership law

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23
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

List secondary sources

A

Administrative Publications FROM THE CANADA REVENUE AGENCY (CRA)
1. Forms 2. Guides 3. Information Circulars 4. Interpretation Bulletins 5. Income Tax Folios 6. Advance Income Tax Rulings 7 Private Publications

Private Publications (e.g. McCarthy’s)

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24
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Forms

A

e.g. T4, T1 tax forms

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25
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Guides

A

E.g. General Income Tax and Benefit Guide

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26
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Information Circulars

A
  • began in 1970
  • provide tax info to GENERAL PUBLIC
  • available from CRA offices and website
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27
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Interpretation Bulletins

A
  • began in 1970
  • for ACCOUNTANTS AND LAWYERS
  • assessments conducted BASED ON INTERPRETATION BULLETINS
  • usually safe in relying on these;
  • PERSUASIVE but don’t have force of law
  • NO ESTOPPEL for CRA (Stickel v MNR)
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28
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Income Tax Folios

A
  • began to REPLACE Interpretation Bulletins in 2013

- NOT binding on CRA; NOT the law itself (but persuasive)

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29
Q

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Advance Income Tax Rulings

A
  • began formally in 1979 - advance tax rulings AT REQUEST OF TAXPAYER; allows taxpayer to better plan for transaction - NOT binding on CRA (Woon v MNR)
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30
Q

Interpretation: Approaches

List the three approaches (and which is current)

A

1) Strict interpretation approach (OLD approach)
2) Modern Rule (CURRENT approach)
3) Textual, Contextual and Purposive Approach (EXPANSION on Modern Rule)

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31
Q

Interpretation: Approaches

Describe the two approaches

A

1) STRICT interpretation
- words imposing tax construed STRICTLY
- exemptions resolved AGAINST taxpayer
- ambiguities on tax IN FAVOR of taxpayer

2) MODERN Rule
- interpret statute IN ENTIRE CONTEXT and harmoniously with the SCHEME and OBJECT of the Act and INTENTION of Parliament

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32
Q

Interpretation: Approaches

Describe the Textual, Contextual and Purposive Approach and the Case it originates from

A

3) TEXTUAL, CONTEXTUAL and PURPOSIVE approach (Canada Trustco, 2005 SCC)
- interpretation according to meaning HARMONIOUS with Act as a whole (PRECISE language = general meaning relied on - AMBIGUOUS = less emphasis on general meaning)

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33
Q

Interpretation: DIFFICULTIES

List the 7 difficulties in interpreting the Income Tax Act

A
  1. SIZE of the Act 2. Lack of STATUTORY DEFINITIONS 3. COMPLEXITY of the Real World 4. Doctrine of SUPREMACY of the LEGISLATURE 5. Elusive LEGISLATIVE INTENT
  2. PRECISION of Language 7. SINGLE Sentence
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34
Q

Interpretation: MEANING of the Words

How do you ascertain the meaning?

A
  1. STATUTORY Definition
  2. ORDINARY, Technical or Legal Meaning
  3. CONTEXT
  4. PURPOSE and INTENT
    Tips: Look for MAIN CLAUSE –> “AND” and “OR” —> WORD PATTERNS (i.e. mathematical operations)
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35
Q

Structure: Intro

List the 5 Basic Question of Tax

A

1) WHO is the tax unit?
2) WHAT is the Tax Base?
3) WHEN is the tax to be paid?
4) HOW MUCH is taxed? (i.e. tax rates)
5) HOW are the taxes collected?

36
Q

Structure: WHO - the Tax Unit

What section of the Income Tax Act defines the Tax Unit?

A

s. 2(1)

37
Q

Structure: WHO - the Tax Unit

Who is taxed?

A

Every PERSON RESIDENT in Canada at ANY TIME in the TAXATION YEAR

38
Q

Structure: WHO - the Tax Unit

How is a PERSON defined?

A 
A person includes:
- Individuals
-  a CORPORATION 
- a TRUST (s. 104(2))
DOES NOT include a partnership
39
Q

Structure: WHO - the Tax Unit

What section includes a TRUST as a taxpayer?

A

s. 104(2) DEEMS a Trust as an “individual” and therefore a “person” and taxpayer

40
Q

Structure: WHO - the Tax Unit

Do Residents pay only income from IN CANADA or OUTSIDE of Canada as well?

A

Residents pay income on WORLDWIDE INCOME (subject to Tax Treaties)

41
Q

Structure: WHO - the Tax Unit

Can NON-RESIDENTS be taxed? Cite the SECTIONS

A

Yes
s. 2(3) requires non-residents PAY TAX where person was EMPLOYED in Canada, CARRIED ON BUSINESS in Canada or DISPOSED of taxable Canadian property AT ANY TIME IN THE YEAR
Part XIII is geared towards catching taxes on non-residents BEFORE the money leaves the country –> b/c hard to enforce otherwise

42
Q

Structure: WHO - the Tax Unit

Does the Act tax FAMILIES as a Tax Unit?

A

NO

But it DOES account for it through:

  • ATTRIBUTION Rules
  • Kiddie Tax
  • ROLLOVER of Capital Gains
  • Tax CREDITS for dependents
  • Transfers of credits between spouses
  • RRSP
  • MEANS-tested credits
43
Q

Structure: WHAT - the Tax BASE

- what sections set out the tax base?

A

SECTION 3

S. 2(1) provides for tax on TAXABLE INCOME

s. 3 lays out WHAT IS INCLUDED IN INCOME

44
Q

Structure: The TAX BASE

Is MEASUREMENT or definition of Income simple? Why or Why not?

A

NO - hence focus of the course

Different methods to decide
No simple formula
MEASUREMENT isn’t simple either -> different methods possible (all acceptable to accountants; not all acceptable to CRA)

45
Q

Structure: WHEN? Taxation Year

What section sets out the taxation year?
What is the taxation year defined as?

A

SECTION 249(1)

s. 2(1) says tax shall be paid for each TAXATION YEAR

s. 249(1) of the Act defines “taxation year” as the:
- CALENDAR year for an individual
- FISCAL year for a corporation (which the corporation can choose when to start/end)

46
Q

Structure: WHEN? The Taxation Year
How DID the Act deal with the ARBITRARINESS of the Yearly Calculation/potential unfairness?

How DOES the Act currently deal with the unfairness?

A
  • Income does not fall neatly into taxation year –> can lead to UNFAIRNESS (class example of varied income vs. fixed income)
  • Act USED TO deal with this with an AVERAGING FORMULA –> this was REMOVED in 1988 with flattening tax rates
  • Act allows for LOSS CARRY-FORWARDS
47
Q

Structure: HOW MUCH?

FEDERAL Tax Rates (don’t need to fully memorize)

A 
FEDERAL Tax Rate - the federal tax rates for individuals for 2016 are:
0 to 45,282 		15% 
45,283 to 90,563 	20.5% 
90,564 to 140,388	26% 
140,389 to 200,000	29% 
>200,000		33%
48
Q

Structure: HOW MUCH?

PROVINCIAL Tax Rate

A 
PROVINCIAL Tax Rate - the B.C. individual tax rates are [see Income tax Act, R.S.B.C. 1996, c. 215, s. 4.1] (as of Jan 11, 2016):
•	0 to 38,210		5.06%
•	38,211 to 76,422 	7.70%
•	76,423 to 87,741 	10.50%
•	87,742 to 106,544 	12.29%
•	106,545 and up 	14.07%
49
Q

Structure: HOW MUCH?

Describe CORPORATE Tax Rates in BC (and policy concerns)

A

FEDERAL starts at 38% but gives 10% ABATEMENT (s. 124(1)) to account for 10% PROVINCIAL tax

Has ADDITIONAL REDUCTIONS (overall corporate tax rate in BC is 26%)

POLICY CONCERNS: COMPETITIVENESS tax rate vs. distribution of wealth

50
Q

Structure: HOW MUCH?

What is the Small Business Deduction and the policy reason behind it?

A

There is a SMALL BUSINESS DEDUCTION for Canadian Controlled Private CORPORATIONS earning ACTIVE business Income

  • BC tax is 2.5% for first $500k (13.5% total prov/fed)
  • essentially acts as tax DEFERRAL
  • POLICY: to encourage investment in small businesses
51
Q

Structure: HOW MUCH?

What section of the Act provides for TAX CREDITS? Why is it used instead of deductions?

A

Tax Credits provided under SECTIONS 118 to 118.95

Reason: FAIRER than deductions (switched to credits from deductions)

52
Q

Structure: HOW MUCH?

What is the ALTERNATIVE MINIMUM TAX? What is the Policy behind it and what SECTION governs it?

A

s. 127.5 and FORM
- calculated by adding back exemptions to income, then deducting $40k (to make sure only applies to persons above $40k/yr income) then recalculate, compare and PAY HIGHER
- POLICY: concern that WEALTHY individuals could significantly reduce tax –> the AMT primarily affects fairly high-income individuals

53
Q

Structure: Describe the TAX COLLECTION PROCEDURE including tax returns, payment, assessment, examinations, audits, reassessments, objections, appeals, burden of proof and settlement.
Who Administers the Collection?

A

Canada Revenue Agency (CRA) - formerly Department of National Revenue, Revenue Canada, Canada Customs & Revenue Agency

DoJ provides legal advice and services and LITIGATES in Tax Court, Fed Court, SCC on behalf of CRA

54
Q

Structure: Describe the TAX COLLECTION PROCEDURE including tax returns, payment, assessment, examinations, audits, reassessments, objections, appeals, burden of proof and settlement.
Describe the tax assessment process

A

File tax return (s. 150) –> Assessment (s. 152(1)) -> Examinations (CRA compares filings) –> Audit (s. 231.1(1), (3); 231.2) —> Reassessment from examination/audit (s. 152(4))

Tax return and/or Above steps –> Objection by taxpayer (s. 165(1), s. 166(2)) –> Appeal (formal, informal process)

55
Q

Structure: the PROCEDURE

(a) How is tax COLLECTED?

A

Collected by CRA - procedure started by filing of tax return by taxpayer - INDIVIDUALS must file if earning enough income (but may be ordered to by the Minister) - CORPORATIONS must file regardless (unless registered charity) -

Return is on a PRESCRIBED FORM (T1 for Individuals, T2 for Corporations)

56
Q

Structure: The PROCEDURE

(b) How is tax PAID?

A
  • taxpayer to provide ESTIMATE of tax payable (and payment) when filing the return (s. 151)
    1) Employers WITHHOLD ESTIMATE from employees and REMIT to government (s. 153(1)); PENALTY under s. 227 for failing to
    2) Provisions for payment by INSTALMENT (e.g. corporation has 6 months to pay)
57
Q

Structure: the PROCEDURE

(c) Describe the ASSESSMENT process

A

ITA ss. 152, 158, 161 + IT Reg 4301
1) Minister to assess return “with all due dispatch” upon filing of return –> CRA checks the ARITHMETIC + may request more information 2) Taxpayer may then be REFUNDED 3) Notice of Assessment mailed when complete 4) INTEREST must be paid on OVERDUE taxes

58
Q

Structure: the PROCEDURE

What is the interest rate paid by the TAXPAYER and CRA for overdue taxes?

A 
CRA = treasury rate + 2%
TAXPAYER = treasury rate + 4%
59
Q

Structure the PROCEDURE

(d) What is done in the EXAMINATION stage?

A

CRA will CHECK the filings and COMPARE between parties to CORRELATE the information/look for inconsistency

60
Q

Structure: the PROCEDURE

(e) Describe the AUDIT stage

A

ss. 231.1(1), (3), 231.2
- some returns will be AUDITED (based on CRA annual focus)
- returns of SALARY and WAGE are VERY SELDOM AUDITED (corporations and trusts more often; but still less than 5% audited)
- audits done WITHOUT WARRANT at place of business; NEED WARRANT for in dwelling home —> auditor can demand information

61
Q

Structure: the PROCEDURE

(f) Describe the REASSESSMENT stage

A

ITA ss. 152(4), 162, 163

  • further examination or audit may result in reassessment; TAXPAYER may also seek reassessment
  • can only reassess WITHIN THREE YEARS (unless waived by taxpayer) - s.152(4)
  • payment on reassessment includes INTEREST
62
Q

Structure: the Procedure

(g) Describe the OBJECTION stage

A

ss. 165(1), (2), 166.2(1)
- can resolve objection BY DISCUSSION (most common)
- FORMAL NOTICE of Objection - within 1 year or 90 days of notice of assessment; must include relevant facts (there’s a FORM) –> taxpayer then given chance to make representations

63
Q

Structure: the Procedure

(h) Describe the APPEAL stage

A

Taxpayer can appeal to Tax Court of Canada (must notify of appeal within 90 days of decision on Notice of Objection)

Alternative:
can go through INFORMAL procedure or FORMAL procedure

64
Q

Structure: the Procedure

- Describe the Informal Procedure for appeal

A

INFORMAL procedure

- under $12k tax, amount of loss claimed

65
Q

Structure: the Procedure

- Describe the Formal/General Procedure for appeal

A

FORMAL procedure

  • amount: over $12k, loss over $24k, or taxpayer does not elect informal procedure
  • costs CAN be awarded; CANNOT be represented by non-lawyer; no time limit on decision
  • decision CAN be appealed to FCA and SCC
66
Q

Structure: the Procedure

(i) What is the BURDEN OF PROOF in a prosecution for tax EVASION?

A

tax evasion = CCC procedure
ONUS (Johnson v MNR) = on the TAXPAYER to REBUT FACTS that the decision was based upon (BUT Minister has duty to DISCLOSE facts upon which the assessment was based)
- Basis for onus: deemed under s. 152(8) & taxpayer has BEST EVIDENCE on the facts

67
Q

Structure: the Procedure

(i) What is the EXCEPTION to the burden of proof under ITA ss 152(4), (8) and 163?

A

1) Civil penalties –> onus is on MINISTER to justify the facts on which imposition of penalty was based (163(3))
2) Reassessment outside 3 yr period for fraud or misrep –> onus on MINISTER to show misrep or fraud
3) Criminal offence under ss. 238 or 239 –> Crown to PROVE beyond reasonable doubt

68
Q

Structure: the Procedure

j) What is the SETTLEMENT procedure? Who is bound? Who is not bound? (cite cases

A

Minister/CRA is NOT bound by settlement (Cohen v the Queen) - unless CONSISTENT w/ the ACT perhaps (Galway v MNR)

Taxpayer IS BOUND (Smerchanski v MNR)

69
Q

Structure: the Procedure

(k) what is a REMISSION order under s. 23(2) of the Financial Administration Act? When is it used?

A

Remission order = order of GOVERNOR IN COUNCIL to WAIVE a tax

Rarely used; on recommendation of CRA/Treasury Board; essentially for HARDSHIP

70
Q

Structure: the Procedure

(i) What section of the ITA imposes duty of CONFIDENTIALITY? Example of EXCEPTIONS to that duty?

A

s. 241 = officials in service (or formerly) prohibited from releasing taxpayer information

EXCEPTIONS: criminal proceedings; aggregate for gov policy; enforcement of laws

71
Q

Structure: Penalties, Investigation and Prosecution
What provisions provide for CIVIL penalties? Give examples of some available, including the one most relevant for lawyers.

A

SECTIONS 162 and 163

  • Most relevant for lawyers/accountants: misrepresentation of another person’s tax matters BY A THIRD PARTY (s. 163.2)
  • IMPOSED by Minister/CRA in ASSESSMENT
  • eg late filing, failure to file, repeated failure to file tax return - failure to provide information -failure to report/false statement/omission
72
Q

Structure: Penalties, Investigation and Prosecution

What provisions provide for CRIMINAL PROSECUTIONS? What are the elements?

A

SECTIONS 238, 239

s. 238 - offence to fail to file a tax return or to fail to comply with other provisions of the act (STRICT liability offence)
s. 239 - offence to FALSIFY records or EVADE compliance or payment (MENS REA element)

73
Q

Structure: Penalties, Investigation and Prosecution

What INVESTIGATORY powers does the CRA have?

A

CRA has investigatory powers under SECTIONS 231.1, 231.2, 231.3, 231.4

  • s.231.4 allows INQUIRY by hearing officer appointed by Tax Court; can compel witnesses & testimony under oath
  • enter business W/O warrant (s. 231.1); home WITH warrant (231.2) - power to demand documents; judge can issue warrant if not complied with (s. 231.3)
74
Q

Terminology & Concepts: Terminology

Explain the Difference between Realization and Recognition under the Accrual Method & Cash Method

A

Gain/Loss Not RECOGNIZED (factored into tax return) until REALIZED
Realization of Profit = when taxpayer has LEGAL RIGHT to be paid (accrual method) or when a gain has been RECEIVED (cash method)
Realization of Expenses/Costs = when PAYABLE (accrual) or PAID (cash)

75
Q

Terminology & Concepts: Terminology

Explain the difference in treatment of costs and expenses.

A

Cost = money paid out; It cannot be deducted until it is an EXPENSE incurred in the tax period. –> therefore timing and purpose of the cost is key in its tax treatment/deductibility.

76
Q

Terminology & Concepts: Terminology

Explain what a CAPITAL expense is, as well as how it is deducted (if applicable).

A

Capital expense = cost incurred that will be used OVER TIME (i.e. for an asset, eg a car or rental property); value is normally deducted OVER TIME under the ITA

Reason: The asset be used over a period of time and therefore the cost has not been used up within that tax year.

77
Q

Terminology & Concepts: Terminology

Explain what a CURRENT expense is, as well as how it is deducted (if applicable)

A

Capital expense = cost incurred that will be used up IN THAT TAX PERIOD; therefore it is DEDUCTIBLE for that period (e.g. car in inventory of dealership –> value deducted as soon as sold)

Reason: cost incurred then used up within that taxation year

78
Q

Terminology & Concepts: Characterization

Explain how the CHARACTER of an amount or transaction is important to tax.

A
  • Character important to how it is taxed - Amount or transaction only taxed (under the Income Tax Act) if it can be characterized as “INCOME FROM A SOURCE” –> e.g. windfall does not count
  • Character affects how the gain/loss is treated (e.g. capital gains vs. regular income)
79
Q

Terminology and Concepts: Timing

What is generally preferred in the TIMING of inclusion in income and deduction of expenses

A

Generally, the taxpayer will want to:

  • DEFER recognition of income
  • while recognizing losses SOONER

Reason: $100 a year or two from now is different in value than $100 now

80
Q

Terminology and Concepts: Timing

What is the cash method used for under the ITA? What is the accrual method used for under the ITA?

A

Cash method: income from employment , office, property or farming
- capital gains (or losses) recognized when property disposed of

Accrual method: standard method for computing income and expenses from BUSINESS

81
Q

Terminology and Concepts: Time Value of Money/Tax Deferral

Why is it generally preferable to defer recognition of revenues and recognize expenses sooner?

A

Time value of money –> cash now = can collect interest = more valuable
Inverse is that cash in future is worth LESS than cash today (due to potential to earn interest)
Therefore: desirable to defer tax and invest (but remember; tax on interest earned)

82
Q

Terminology and Concepts: Time Value of Money

What is the meaning of the “PRESENT VALUE” of future cash flow? What is “discounting”? What is the “discount rate”?

A

Present value = amount that a future cash flow is worth today (e.g. $100 a year from now only worth $95 today)
Discounting = process of determining present value of future cash flow (present value = discount value of future cash flow)
Discount rate = interest rate used to calculate present value

83
Q

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate
What is the MARGINAL tax rate?

A

MARGINAL tax rate = tax rate on NEXT $1 of income (e.g. $1 more –> into next tax bracket –> marginal rate = rate on next tax bracket)

84
Q

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate
What is the AVERAGE tax rate? How is it calculated?

A

AVERAGE tax rate = TOTAL TAX divided by TOTAL INCOME

85
Q

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate
If you make $8000 income; and tax rate is 10% on first $5000 and 20% on next $5000, what is your MARGINAL tax rate and what is your AVERAGE tax rate?

A

MARGINAL = same bracket –> 20%

AVERAGE = (((5000 * 0.1) + (3000 *0.2)) / 8000) *100 = 13.75%

86
Q

Which tax rates will apply to the current taxation year?

A
  • The PROPOSED changes

- because, future rate changes will be RETROACTIVE

Law 345 - Tax (9 decks)

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