Personal Tax Flashcards
How are dividends received by individuals from Canadian corporations taxed?
There are two types of dividends, “eligible dividends” and “non-eligible dividends”:
-
eligible dividends: received by public corporations or CCPC not subject to SBD and not investment income
- grossed up 38%
- federal tax credit: 6/11 x gross up
-
non-eligible dividends: received by CCPC subject to CBC (after tax investment income/business income)
- grossed up 15%
- federal tax credit: 9/13 x gross-up
Main takeaway: Integration, dividend tax credit is deducted from the individual tax payable to reduce individual credit for corporate tax already paid in the corporation.
** Note that it must be a Canadian resident corporation.
How are shareholder loans treated for tax purposes?
The principal amount of the loan will be included in the shareholders income in the year the loan is made with the exception:
- Loan is repaid within one year from the end of the company’s fiscal year in which the debt arose (must not be part of a series of loans/repayments)
- e.g. loan taken out in April 1, 2021 and YE of December 31; must be repaid in December 31,2022 - two column test
- ESPB Test ( (other slides)
- The imputed interest benefit on loans not included in income
What are the exceptions to the general shareholder** loan rules for a shareholder that is **also an employee?
ESPB Test: The loan principle does NOT have to be included in income if all three of the following are met:
- Employment reasons: If it is reasonable to conclude that the loan is received because of employment (does other employees of a similar rank be eligible for similar loans)
-
Specified employee Purpose test: If Test 1 met, the loan must meet one of three purpose tests.
- to acquire a dwelling
- to acquire treasury shares of employer/related companies
- to acquire motor vehicle for employment use
- Bonafide repayment arrangements made for payment within a reasonable timeframe.
* if all met, imputed interest benefit will apply but loan principal is not included (similar to employee)
**Specified employee: together with related persons owns at least 10% of shares or is not at arms length with employer
How are low-interest or interest-free employee loans treated?
It would be considered a taxable benefit to the employee. To calculate the interest benefit:
- Interest savings based on the difference of CRA quarterly prescribed rates prorated for the number of days the loan was o/s
- can be found in the tax information sheet at the back of the exam paper.
- Actual interest paid + interest benefit can be deductible if it was incurred to earn income
What are the exceptions to the general employee loan treatment when the loan is to purchase a dwelling?
Special rules apply for loans to purchase a dwelling:
- Home Relocation Loan: If it was used to move an employee closer to the employees workplace (at least 40KM), the employee can claim a Division C deduction for the amount of the interest benefit on an amount of loan up to $25,000 (essentially no interest benefit on the first $25,000)
- Interest benefit is the lessor of the rate calculated based on prescribed quarterly rate and the rate calculated using the prescribed rate in effect when the loan was granted (rate is re-set every 5 years)
*Main takeaway: lock in during low prescribed rates;
What is personal use property (PUP) and what are the special rules relating to dispositions of PUP?
PUP are property used for personal reasons (>50% for personal use; as opposed to earning income):
- Capital losses on PUP are denied
- Capital gains (which are rare on PUP) are taxable
- Dispositions of PUP both POD and ACB are deemed to be the greater of $1,000
LPP are a specific types (subset - Coin JARS) of PUP:
- Includes: Coins, Jewelry, works of Art, Rare books/manuscripts/flips, and Stamps
- can use the term “antique” to trick you but only items listed above are considered LPP
- Losses are deductible against LPP gains (3-year carry back and 7-year carry forward)
*Main takeaway: determine LPP and PUP. LPP can claim losses on LPP losses.
How are gifts between taxpayers treated for tax purposes?
The gift giver is deemed to have received proceeds equal to FMV and the gift receiver is deemed to have acquired the property at FMV.
Mainly involves related parties so consideration for attribution.
- Ensure reporting the transaction FMV otherwise double taxation.
For Principal Residence Exemption: When a tax payer owns more than one residence at a time, how should they apply the exemption and how would the taxable capital gain be calculated?
Principal residence exemption: the taxpayer can shelter the entire capital gain arising from the sale of a personal residence if designated as a principal residence for the years in question. Tax payer can only designate one principal residence per taxation year.
Ideally, want to designate as many years as possible to the residence with the higher per year gain (provides 1 free year). The calculation for the gain/year on each residence includes:
- PRE = (1 + # years of designation / # of years owned) * gain
What is the election on disposition of Canadian Securities and what is the purpose?
Purpose of the election is to avoid having to determine whether the securities were bought for the purpose of earning income (dividends) or resale.
- once election is made, it cannot be revoked and it applies to all future dispositions of Canadian securities by taxpayer.
Things to consider (non-capital loss vs. ABIL):
- Taxpayers (includes corporations and trusts) can elect to have all Canadian securities that they own deemed to be capital property which means that disposition will result in capital gains (50% taxable) as opposed to business income.
- If a taxpayer experiences a loss on disposition of securities, it would be considered a capital loss (50% deductible)
- Taxpayers (includes corporations and trusts) can elect to have all Canadian securities that they own deemed to be business income which means that disposition will result as income (100% taxable) as opposed to business income.
- If a taxpayer experiences a loss on disposition of securities, it would be considered a business loss (100% deductible) deductible on other income. Anything excess will become a non-capital loss.
What are the tax implications to the employee of having an employer provided automobile?
There will be two things to consider: standby charge and operating cost benefit
Standby charge:
- (A/B) × 2% [C×D] = owned by company standby charge
- (A/B) × (⅔) × [E-F] = leased by company standby charge
- B is every month you have the car (1667km x month [total days available/30])
- A is same as B unless you used more than 50% for business
- Will be personal km used but most people do not log km so A=B
- AND, employee is required by employer to use automobile
- Personal KM for year less than 20,004
- C is the price of that car purchased + applicable tax
- D is how many days did you have the car available for use divided by 30 rounded to nearest number
- E is total monthly lease payment + applicable tax
- F is the insurance payment (generally f will be zero)
Operating cost benefit:
- 28 cent * # of personal KM = Operating cost benefit
- Can be modified if used for more than 50% (election method)
- which is ½ of standby charge
What are the tax implications to an individual who receives a “automobile allowance” to cover the cost of a vehicle (rather than the employer providing them with a vehicle)?
The amount would be considered a tax free allowance if considered reasonable. To determine if it is reasonable a standard amount for 2022 would be:
- First 5,000KM at $0.55/km and $0.49/km for each additional KM driven for employment purposes.
If the amount is considered unreasonable, it would be included in the employee’s income and the employee may deduct the eligible expenses.
What are the rules for taxation on employee stock options (for both CCPC shares and Non-CCPC shares)?
CCPC
- Grant Date: no taxable benefit
- Exercise Date: no taxable benefit
-
Sale of Shares: FMV at exercise date - exercise price (income inclusion)
- Capital gain/(loss) = Proceeds - ACB (exercise price + income inclusion)
- Division C deduction = 50% of employment inclusion (option granted not in the money) or;
- shares held for at least 2 years after exercise of the option
- Capital gain/(loss) = Proceeds - ACB (exercise price + income inclusion)
Non-CCPC
- Grant Date: no taxable benefit
-
Exercise Date: FMV at exercise date - exercise price
- this would be an employment income inclusion
- Division C deduction = 50% of employment inclusion (option granted not in the money)
-
Sale of Shares: Proceeds - ACB (exercise price + income inclusion)
- Capital gain/loss
Main takeaway: CCPC has deferred tax to attract/retain employees
Under what conditions are moving expenses deductible?
An eligible moving expense deductible must be incurred for:
- moving 40km closer to new work location or post-secondary learning institution
- can be deducted against income from new work location in the year of the move and can be carried forward to the next year
- cannot be reimbursed by their new/old employer for moving expenses unless the reimbursement is included in their income tax return.
Eligible moving expenses include:
- travel costs of family to new residence
- can use simplified method that allows a flat rate deduction based on # of meals and km travelled up to 15 days
- does not require receipts
- can use simplified method that allows a flat rate deduction based on # of meals and km travelled up to 15 days
- moving costs
- cost to sell home (includes lease cancellation)
- legal costs such as address change and legal costs of new home
What are the conditions that must be met in order for employees to deduct home office expenses?
An employee can deduct home office expenses only if:
- this place is where the individually principally performs their work duties OR
- used exclusively for work purposes and the employee must regularly meet customers/others there
The home office cannot create or increase a loss from employment income
- can be carried forward 1 year for any unused amount
Eligible expenses include:
- non-capital expenses only (mortgage interest and CCA cannot be deducted):
- rent, utilities, maintenance minor repairs
- commissioned sales people can also deduct:
- property taxes and insurance
Other than motor vehicles and home office, what other deductions are available from employment income?
These deductions can include:
- Professional fees or union dues
- Contributions to a RPP
- Salary paid to an assistant
- Supplies used directly in employment
- Rent paid for an office
- Reasonable selling expenses for commissioned sales people (limited to commission income)
- cost of tools in excess of $1,161 for a tradesperson (limited to $500/year)
- Attendant care and other disability support expenses incurred to allow a disabled person to work/attend school
- disability support deduction
