Module 6 Income tax planning strategy Flashcards
What are the 4 tax reducing strategies
Income Deferal
Income Spliting
Income spreading
Income Sheltering
Income Deferal
Income is tax sheltered until it can be used for consumption
What are the ways to acheive income deferal
RPP (Registered Pension Plan)
RRSP (Registered Retirement Saving Plan)
Registered Pension Plan
Established by an employer do deffer income payable to his employees to retirement income for them. The employee’s pension contributions are tax deductible and accumulate at the before tax rate of return
Registered Retirement Saving Plan
Contributions are made directly by the tax payer. Deducted from income for tax purposes up to year end + 60 days
What are the 4 contributions rules to an RRSP
- Unused contribution can be carried forward
- $ Limit (22000 in 2010)
- 18% of income
- Pension Adjustment
Earned Income
Net buisnedd income, Research grants, Royalties, Taxable spousal support, net rental income, disability pension income
Reduction to earned income
Deductible alimony, deductible employment related expenses, traveling expenses, buisness los, rental loss
Lifelong Learning Plan (LLP)
Allows to withdraw from RRSP up to 10000 a year and 20000 in total for education for you or your spouse. The “loan has to be repaid over 10 years for it to remain tax free
Home Buyers Plan (HBP)
Allows you to withdraw up to 25000 to buy the family first home
Income Splitting
Strategy to save on taxed by shifting income from the hands of the family member with higher tax bracket to a second family member with lower tax bracket
Income spliting between spouses
Contribution to a spouse RRSP and clain the deduction. No double contribution + taxed back if withdrawned within 2 years
Attribution Rule
When property (including money) is transfered directly or indirectly to a spouse, the income, loss, capital gain, capital loss, is attributed back.
Attribution Rule with childrun
Income from property transfered to childrun under 18 is attributed back except for capital gain. The attribution rule does not apply to childrun age 18 and older
Estate freezes
Freeses the value of the property in the hands of the original owner who places it is estate freeze
Registered Education Saving Plan (RESP)
Ccontributions are not tax deductible but income is not taxed until withdrawn. Max:50000 per beneficiaries
Canadian Education Saving Grant (CESG)
20% of the RESP contribution with a max of 500 per year and 7200 per child
Canada Learning Bond ( CLB)
To families that qualify, provide 500 per childrun + 100 per year up to 2000 per child
Income spreading
Technique used to smooth income over sevral years to reduce MTR. Use RESP
Tax shelters
Instrument that offer a return either holly or partialy tax exempt
Tax Free Savings Account
- Can save up to 5000 annualy
- contributions are not tax deductible but income from the account are not taxable at any time
- no limit on withdraw
- Unused contribution accumulates
- Withdraw can be replaced the next year
Income Sheltering
Reducing tax paid on income because of some special characteristic
Progressive Tax System
Higher level of taxable incomes are taxed at higher rates. The higher bracket only apply to the marginal income
Term Deposit
Money deposit at a banking institution that can not be withdrawn for a certain term or period of time