Personal Tax Flashcards
Business income included in what form for individuals
Details on Form T2125, then add to T1
Division C Deductions individual
Employee stock options Lifetime capital gains deduction Net capital loss carryovers Non-capital loss carryovers Soical assisstance or WCB pmts Northern resident
Employment income calculation
Salaries, wages, bonuses, gratuities
+ Taxable benefits and other payments (allowances, gifts and rewards, club dues, life insurance)
+ Taxable allowances (standby, employee loans, stock option benefit)
- Allowed deductions (sales person expenses, travel, vehicle, CCA, home, professional dues)
= Employment income
Common Taxable Benefits
Allowances B of D payments Gifts and rewards Recreational facilities - personal use Severance package Life insurance
Common deductions to employment income
sales person expenses Travel expenses Motor vehicle expenses CCA workspace from home Employee RPP Professional dues Legal expenses
Salary deferral arrangement - tax consequences
When a bonus is paid more than three years after the year end in which it is declared, the employee includes the bonus in income in the year that it is declared.
if salary is deferred more than 180 day then taxed in the year it is declared
When motor vehicle allowances are not a taxable benefit
When the allowance is within the limit set by CRA. If the per-KM rates are greater than the amounts below, the entire amount becomes taxable, not just the incremental difference.
2020: $0.59 per KM for the first 5,000 KM, and $0.53 per KM over 5,000.
When motor vehicle allowances are a taxable benefit
Deemed not to be reasonable if any of the following apply:
- The allowance is not based on KM (with employee log)
- The employee receives both an allowance and reimbursement for KM
- The employee is reimbursed a greater amount than CRA per KM limits
Travelling expenses other than vehicle - Taxable benefit rules
If reasonable, then exempt from tax.
If unreasonably high or low, then include in income
Board of Directors Payments - Taxable benefit rules
Must be included in income
Counselling services
Employer payments for counselling services in respect of mental or physical health and re-employment or retirement of an employee are not taxable.
Financial counselling and income tax return preparation is taxable
Merchandise Discounts - taxable benefit rules
Price paid by employee < FV, but similar discounts are available to general public, are not taxable.
Price paid by employee < FV then taxable benefit =
FV - price paid
Gifts and awards - when are not taxable benefit
When:
They are non-cash, up to an aggregate of $500 per year.
They are immaterial (such as coffee, tea, mugs, or T-shirts).
Gifts and awards - when are taxable benefit
Non-cash in excess of $500 in a year in aggregate.
They are cash or near cash (such as gift certificates)
They are given for performance, such as an award for meeting a sales target.
They are given to non-arm’s length employees, such as relatives, shareholders, or people related to them.
Include value of GST/HST
Gifts and awards: Length of service - taxable benefit rules
Not taxable if all of the following criteria apply:
It is given for at least five years of service (and after that, in increments of five years).
Non-cash, up to a value of $500.
It is paid to an arm’s length employee.
Health care - taxable benefit rules
Employer premiums paid for a public health-care plan are taxable.
Employer premiums paid for a private health-care plan are not taxable.
Insurance plans: Life insurance - taxable benefit rules
Employer premiums paid for life insurance on an employee’s life are a taxable benefit to the employee if the employee is the beneficiary under the plan.
Employer premiums paid for life insurance on an employee’s life are not a taxable benefit to the employee if the employer is the beneficiary under the plan.
Meals - taxable benefit rules
Subsidized meals offered < cost are taxable.
Subsidized meals offered => cost are not taxable.
Recreational facilities or club dues - taxable benefit rules
Use of employer recreational facilities and club dues incurred for the benefit of the employee are taxable.
Use of employer recreational facilities and club dues incurred primarily (50%)for the benefit of the employer are not taxable.
Relocation payments - Taxable benefit when
An employer requires a current or potential employee to relocate for employment purposes, the employer may provide the employee with a moving allowance or may reimburse the employee for moving expenses which is taxable
Relocation payments - Not taxable benefit if
The employer reimburses the employee for moving expenses, the amount of the reimbursement is not a taxable benefit.
Relocation payments: Reimbursements for housing loss - taxable benefit rules
When required to move and sell house at a loss the employer may reimburse for the loss. The cap on the taxable benefit charged is: 50% of any reimbursement over $15,000
Tuition Fees - taxable benefit rules
If for the employee benefit, then taxable
If for the employer benefit, then not taxable
Standby charge
When an employee is provided with a car and can use for personal as well, as standby charge will apply when the car is not used more than 50% of the time for employment purposes:
Owns: 2% x (Orig cost include tax x total available days / 30)
Lease: 2/3 x (Lease pmts for the year include tax - lease pmts made for loss or damage)
Reduction in standby applied when
Reduced if all of the following criteria apply:
• employee is required to use the automobile for employment duties.
• automobile is used primarily (50% or more) for employment purposes.
• Personal-use KM’s for the year are less than 20,004.
If reduction applies, the standby benefit is multiplied by the following fraction:
(Personal-use KM’s) / 20,004
Operating cost benefit on employer-owned automobile - Taxable Benefit
Auto used <= 50% of time for employment purposes = personal KM x .28
Auto used > 50% of time for employment purposes = 50% of standby charge
Automobile operating costs do not include
interest, CCA, lease costs (if automobile is leased), parking costs, or highway / bridge tolls.
Automobile taxable benefits summary formula - employer owned
Standby charge + Operating cost benefit – Reimbursement(s) by employee
Automobile taxable benefits summary formula - employee owned but employer pays operating costs
Operating cost benefit – Reimbursement(s) by employee
Employee loan - not a home purchase - taxable benefit rules
(Prescribed rate for the quarter – Interest paid by the employee) × Amount of the loan outstanding
Employee loan - home purchase - taxable benefit rules
[(Lesser of prescribed rate in effect when the loan was made and the prescribed rate for the quarter ) – Interest paid by the employee] × Amount of the loan outstanding
Stock options impact when public company
Grant date: No impact
Exercise Date: Employment benefit: Exercise FV - Exercise price x shares
Selling Date: TCG: POD - FV Exercise x shares
Stock options impact when CCPC
Grant date: No impact
Exercise Date: No impact
Selling Date: Employment benefit: Exercise FV - Exercise price x shares
TCG: POD - FV Exercise x shares
Sales expenses allowed
- advertising and promo
- 50% of entertaining clients, meals while away
- Transport costs
- lodging
- Automobile
- Ppty taxes and insurance on home office
- Professional licences
- deductible expenses cannot exceed commissions for the year
Dues and other expenses claimable on employment income
- professional dues
- rent paid for maintaining work from home
- salaries for assistant
- cost of supplies
- employee contract must require these items - T2200
Tradesperson tool expenses
Maximum deduction for tools is lesser of
- $500
- Cost of tools in excess of $1,245
Lease cost for employee owned motor vehicle max deduction
Lesser of:
Lease payments made during the year
(Max lease payment of $800 + tax x number of days leased) / 30
Workspace in the home - Taxable Benefit Rules
Pro-ration may be done on the basis of either square footage or number of rooms
Regular employee: Utilities, repairs and maintenance, internet, rent
Commissioned Salesperson: Utilities, repairs and maintenance, internet, rent, home insurance, ppty tax, lease of cell phone, computer, laptop etc,
Not allowed for either:
Mortgage principal, internet connection fees, furniture, home capital expenses, decorations, lease of modem
T2200 form is required
Other income includes
RPP, DPSP, RRSP, RRIF, CPP, OAS, scholarships, death benefits > 10K, research grants, spousal support
Pension income splitting rules
Joint election to allocate up to 50% of eligible pension income
Recipient can only be under 65 for Lifetime annuity payments from an RPP
Employment Death benefit treatment
included in income of the surviving recipient(s), with a one-time maximum exemption of $10,000.
If multiple recipients; spouse allocated first with any remaining amounts split on a pro rata basis between other recipients
Amounts included in net income and deducted under Division C
- social assistance benefits (welfare)
- Workers’ Compensation
- Guaranteed Income Supplement
Eligible Dividend calculation
Gross up - To dividend income 38% (CCPC)
DTC - In net federal tax calculation after non-refundable tax credits
6/11 x 38% of gross up OR 20.727% of the dividend
The net result is in lower taxes being paid by the individual
Non-Eligible Dividend calculation
Gross up - To dividend income 15% (Public companies and CCPC income over SBD limit)
DTC - In net federal tax calculation after non-refundable tax credits
9/13 x 15% of gross up OR 10.385% of the dividend
The net result is in higher taxes being paid by the individual
Calculate taxes payable
Gross Federal tax on taxable income Less: non-refundable federal tax credits all at 15% except Donations Federal DTC Federal FTC Political contributions tax credit Other tax credits =Federal tax before clawbacks or repayments Add: OAS clawback EI repayment CPP payable on self-earnings Provincial tax and surtax if applicable = Total tax payable Less: Source deductions CPP and EI Overpayments Refundable tax credits Tax instalments = Balance of tax payable
Pros and cons to proprietorship
Advantages:
Able to deduct losses against other income. -Is commonly used in the start-up stage to offset costs
Is simple to start up, not a lot of paperwork or extra costs
Can still employ family members, if they are being paid a reasonable wage for the work they are performing
Disadvantages:
There is more personal liability
Once the business becomes more profitable, will be taxed much higher at the personal rate. Max Fed rate is 33%
No income sharing opportunities.
Equivalent to spouse
Can claim for one child if:
Are single
Other parent can also claim if they are not paying child support
Same amount as personal amount less any dependant income
CPP for self employed
CPP contribution
10.5% (employer and employee) (3,500 income exempt) to a max contribution of $5,796 (income 55,200)
Can deduct 1/2 against business income
CPP tax credit - remaining half less CPP enhancement to a max of $2,732
Donation credit
$200 x 15%
Remainder x 29%
Increased to 33% for any income exceeding the top federal bracket. (taxable income less 214,369)
Up to a max of 75% net income
Carry forward 5 years
If donate shares, will not have a taxable gain/loss if they are:
- listed on the stock exchange
- mutual funds
- interest in segregated funds
- Gov of Can bonds
Any corporate share donation gains are added to the CDA account to be used for tax free cash withdraws
Political donations credit
$400 x 75%
($750-400) x 50%
> $750 x 33.5%
Capped at max credit of $650
No carryforwards
Shareholder loan rules
Must be added to income if it is still outstanding at the end of 2 consecutive years. Prior tax return must be adjusted.
When loan is paid back it will be deducible in the year of repayment.
If amounts are included in income then there is no deemed interest. Otherwise deemed interest shareholder benefit should be recorded.
Related party matrix
Actual proceeds = FMV then seller and purchaser = actual price
Actual proceeds = gift then seller FMV, purchaser = FMV
Actual proceeds = > FMV then seller actual price, purchaser = FMV
Actual proceeds = < FMV then seller FMV, purchaser = actual price
TOSI rules
Affects dividend and interest payments on property + capital gains and losses when sold.
Taxed at the highest marginal tax rate and will not be permitted the basic personal tax credit. DTC will be allowed on dividends.
Spouse: Income and Gains attribution to recipient at the highest marginal rate
Minor : Income attribution to recipient at the highest marginal rate
Gains stay with the minor
Adult children: Exempt from attribution if they have worked at min 20 hours per week in current year or any of the 5 preceding years or owns at least 10%. Otherwise Income and Gains attribution to recipient at the highest marginal rate
Lifetime capital gains exemption (LCGE) maximum
2020 maximum exemption on disposal of qualifying small businesses is $883,384 x 50% inclusion rate.
For disposals on farm for fishing this limit is $1,000,00.
Lifetime capital gains exemption (LCGE) calculation
The least of three:
1. Unused lifetime deduction (max 441,692)
Current year deduction at the 50% inclusion less
prior years’ deductions adjusted to the current year inclusion rate
- Annual gains limit - A-B where:
A is the lesser of:
- Net TCG for the year on all asset disposals
- Net TCG from the year on disposal of QSBC shares and farm of fishing
B is the total of:
- the amount by which net cap losses deducted in the year exceed the difference between the two points in A, plus
- The ABIL realised in the year, whether claimed or not
- Cumulative gains limit - The sum of all annual gains limits in prior years reduced by:
* sum of all amounts claimed in prior years
* Cumulative net investment loss balance at the end of the year.
Qualified small business corporation requirements for LCGE
An SBC is a Canadian-controlled private corporation (CCPC) where all or substantially all (90%) of the fair market value of the assets, including unrecorded assets such as internally generated goodwill, are
a) used primarily (at least 50%) in an active business carried on in Canada by either the corporation or a related corporation; or
b) invested in shares or debt of an SBC corporation that was connected with the particular corporation.
The following four conditions must all be met for the shares to be considered QSBCS:
a) The corporation must be an SBC (defined above).
b) The shares must be owned by the taxpayer, the taxpayer’s spouse or common-law partner, or a partnership related to the taxpayer.
c) The shares must not have been owned by anyone other than the taxpayer or a related person during the 24 months before the shares are disposed of.
d) Throughout the 24-month holding period, more than 50% of the fair value of the assets must have been used primarily in an active business carried on in Canada.
Deemed Dividend Calculation on redemption of shares
Redemption price - PUC
Calculate capital gain on redeemed shares
Redemption price less PUC = Deemed Dividend
Redemption Price - Deemed Dividend = Adjusted Proceeds
Adjusted proceeds - ACB of shares = Capital gain/loss
Death of a taxpayer - filing deadline
Terminal return or final return later of:
- Normal filing deadline
- Six months after date of death
- income included: Deemed disposition of all assets + any income earned and paid to date of death.
Rights or things return later of:
One year after date of death
90 days after assessment of the final return
-income included: income due but not paid at time of death.
Estate Return:
- Due within 90 days after each taxation year end
- income included: income earned from the date of death to date that assets are distributed.
Death of a taxpayer special rules
Capital losses in excess of capital gains may be deducted first against other income in the terminal return then against any income from the preceding year.
75% net income limitation does not apply on charitable donations
Medical expenses: can claim expenses within any 24 month period that includes the date of death.
Employer death benefit can be paid tax free up to 10,000. Any excess is taxable to recipient
Death of a taxpayer - types of returns
Terminal or final return
Must be filed for the period from Jan 1 to date of death.
Rights or things return , three options:
- include income in the terminal return
- election can be made to include rights and things in separate return. May result in lower tax rate (bracket). Tax credits can be claimed in full on each return.
- If rights and things do not auto transfer under the will can choose to include them with beneficiary that has little or no income.
Rights and things items:
• matured but unclipped bond coupons
• dividends declared before the date of death, but not received
• salaries, commissions, and vacation pay owing for a period prior to death but unpaid at the date of death
Death of a taxpayer - Tax credits can can be claimed in full on both returns
- basic personal credit
- age amount
- spouse or equivalent to spouse or eligible dependant
- infirm dependent over 17
- caregiver amount
- family caregiver amount for children under 18
Other credits can be split, but cannot exceed the max amount if only one return was filed.
Divorce tax payments
Spousal support: Tax deductible
Child support: Not tax deductible
one-time payment: Not tax deductible
Principal residence exemption
Total gain X ((1+ years designated ) / years property was owned)
Choose the residence that has the higher capital gain per year to maximize tax savings.
Must have been ordinarily inhabited at some time during the year by the taxpayer or the taxpayer’s spouse, common-law partner, former spouse, former common-law partner, or child
Exemption is limited to the building and half a hectare of land, unless the taxpayer can prove that the excess land is necessary for the taxpayer’s use and enjoyment of the property
Residency status - Primary ties
o Dwelling place in Canada is maintained for taxpayer use
o Spouse remains in Canada
o Dependents remain in Canada
Residency status - Secondary ties
o Personal property kept in Canada such as car or furniture
o Social ties are maintained
o Economic ties are maintained
o Other ties such as seasonal dwelling, driver’s license, Canadian passport or membership in a Canadian professional organization are maintained.
Residency status - CRA assessment
The secondary ties alone are not sufficient to establish Canadian residency. The CRA would consider a combination of both primary and secondary ties to determine whether an individual is a Canadian resident under common-law.
They would also consider intention, visits, and whether residential ties have been established outside of Canada
Residency status - Date of change in residency
Latest of the following:
- The date you leave Canada,
- The date your husband and children leave Canada (if applicable), or
- The date you become a resident in the United States
Implications upon becoming a non-resident
You are deemed to have disposed of your property at the fair value of the property at the time you became a non-resident.
Certain types of property are exempt from this rule:
- real property situated in Canada
- property of a business carried on in Canada through a permanent establishment
- excluded rights or interests(includes RPP and RRSP balances)
- Can defer a gain on deemed disposition until the property is sold. The property must be at least $16,500 in value and you will have to provide adequate security to the CRA.
- If the item is >50K taxable income exemption limit you will not be required to post a security.
- The election must be made before April 30th of the year following emigration.
- Only Canadian sourced income will taxed after departure at a 25% tax rate; which may be reduced or eliminated by a tax treaty.
- Final return you will be required to report your worldwide income for the time you lived in Canada and your Canada source income for the time you lived out of the country.
Can deduct moving expenses if following is met
All must be met:
o The move is made to allow the taxpayer to carry on business or be employed at a location in Canada.
o The distance between the old residence and the new business location is not less than 40 kilometres greater than the distance between the new residence and the new business location.
o The taxpayer ordinarily resided before the relocation at a residence (the old residence) and after the relocation ordinarily resided at the new residence.
Allowable moving expenses
-Transportation and storage costs
Vehicle expenses
- detailed method: must keep all receipts
- simplified method: multiply the # of KM’s by the prescribed rate by province. Must keep track of the KM’s.
- Travel expenses
- detailed method: must keep all receipts
- simplified method: flat rate per person $23 per meal to max of $69 per day including tax, without receipts.
- Temporary living expenses up to 15 days
- detailed method: must keep all receipts
- simplified method: flat rate per person $23 per meal to max of $69 per day including tax, without receipts.
- Cost of cancelling the lease of old home
- incidental costs such as change of address, legal documents, utility hook ups and disconnection
- Cost to maintain old home when vacant (max 5K) after move. includes: Interest, ppty taxes, insurance, cost of utilities
- Cost of selling your old home
- Cost of buying new home (only if you sold your old home)
Listed Personal Property rules
LPP’s usually increase in value over time
LPP includes property such as: Prints, drawings, paintings, works of art Jewellery Rare manuscripts, books Stamps and coins
Calculate gain or loss:
If ACB or POD are less than $1,000, then bump to $1,000
One-half of gains are taxable
One-half of losses can be used against LLP gains and can be carried forward for 7 years
Commission employees can deduct expenses if they meet the following
To deduct employment expense on commission income must meet all of the following:
- Under your contract you had to pay your own expenses and were not reimbursed
- You were normally required to work away from place of business
- you were paid at least in part by commissions that were based on sales volume
- You did not receive a non-taxable allowance for travelling purposes (ex: per KM prescribed rate from CRA)
- you keep a employer signed copy of T22000
Qualified commissioned employees - allowable expenses
- Accounting and legal
- Advertising and promotion
- Vehicle expenses
- 50% of meals if you are required to be away for >=12 hours from the municipality and metro are of the employment location
- 50% of Entertainment for clients
- Lodging if you are required to travel away
- supplies if under your contract you have to pay
- Licenses
- bonding and insurance premiums
- Home office expenses (cannot deduct the cost of computer, cell phone, fax machine etc)
- assistant salaries
- Office rent
- Training costs
- Travel fare
Business use of home expenses
You can deduct expenses for the business use of a workspace in your home, as long as you meet one of the following conditions:
- it is your principal place of business
- you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
You can deduct part of your maintenance costs such as heating, home insurance, electricity, cleaning materials, property taxes, mortgage interest, and capital cost allowance (CCA)
Allowable expenses on rental net income
Mortgage payments - not deductible
Mortgage interest- Annual amount can be deducted
Mortgage insurance- Can be deducted in the year that is incurred
CCA - only on building, cannot be claimed when there is a loss. AII is only available in the year of purchase
-Will be required to recapture all previously taken CCA on rental ppty. Could be a reason not to deduct depending on income levels
Equipment related to rental income- deductible under class 8.
Landscaping costs: Deductible in the year paid - proration relating to rental ppty.
CPP Enhanced Contribution
Max CPP federal tax deduction: 2,732
Max CPP contribution with enhanced: 2,898
Difference is enhanced contribution which is .3% of pensionable earnings less 3,500 exemption.
Personal Use Property Rules
PUP tends to depreciate over time. Examples of PUP include an individual’s personal items, such as the following:
- vehicles
- boats
- furniture
- clothing
- all other personal and household items
Tax consequences of disposal of PUP:
- One-half of gains on disposal of PUP are taxed.
- Losses are denied.
For the purposes of determining the gain on the disposal of PUP:
- Adjusted cost base of the property is deemed to be the greater of the original cost of the property and $1,000.
- Proceeds of disposal of the property are deemed to be the greater of actual proceeds and $1,000.
Child care expenses
Claimed by the parent with the lower income
Deduction is least of 3:
- amount paid
- sum of annual child care expense amounts
- Child of any age eligible for disability credit - 11K
- Child aged 7 - 16 - 5K
- Child under 7 - 8K - 2/3 of taxpayer’s earned income
