Tax Flashcards
Moving expenses
Conditions:
1) must be 40 kms closer to new location
2) maximum amount of expenses to be claimed in the year of the move is the income from the new business and any unused balances may be carried forward
Eligible moving expenses
● Travelling costs
● Meals and accommodations near the old/new place of residence for up to 15 days
● Lease cancellation costs at the old residence
● Selling costs of the old residence
● Legal and other costs of new residence
● Cost of revising legal documents for address change etc.
● Cost to move household items during the moving process
● Cost to store household items during the moving process
● Up to $5k of interest, property taxes, insurance, heating/utilities on the old residence while
vacant if pending a sale.
● Utility connection and disconnection fees.
Employee vs contractor: 7
- Intent (written contracts, own business insurance, no benefits)
- Control (control over time, place, and manner in which work is done)
- Tools and equipment (whether worker owns and provides tools and equipment to accomplish work)
- Subcontract (can worker subcontract or hire assistants)
- Financial risk (has some form of OH cost)
- Responsibility for investment and management (looks at whether indiv. is required to make sig. cap. investment and if he’s free to make business decisions
- Opportunity for profit and risk of loss
(EE not a flat fee, EE insurance covered)
(C: no reimbursement, can work other jobs)
Company-run day care (Employee perspective)
This would be a taxable benefit unless all of the following are met:
* The services are provided by ASI.
* ASI manages the daycare.
* It must be provided to all employees at little or no cost.
* The daycare is available only to ASI employees.
A company-run daycare would also reduce the amount that an employee could deduct for childcare expenses on their tax return, as they would not be incurring the costs.
RRSP contribution by company to match employee contributions (Employee perspective)
Contributions that company makes to an employee’s RRSP are a taxable benefit. The amount of contribution will be added to the employee’s employment income for the year, but they will be able to deduct the contribution made on their income tax return.
Spouses at the convention
The amount that we pay for the spouse’s airfare, hotel, meals and entertainment, and so on, would be considered a taxable benefit to the employee.
Non-eligible Dividends
- dividends received from a CCPC (paid out of income subject to SBD or from investment income)
- gross up 115%
- DTC = 9/13 of GU amount
Eligible dividends
2 types: dividends from 1) pub co and 2) CCPC paid out of income not SBD or investment income [paid out of GRIP]
- Gross up 138%
- DTC = 6/11 of GU amount
Bonus arragements (stardard bonus) paid within 180 days of employer’s business year end
employer deudcts when declared
employee includes when received
Bonus arragements (other bonus)
paid more than 180 days after YE to 3 years after
employer deducts when paid
employee includes when rec’d
salary deferral arrangement
paid more than 3 years after dec 31
employer deducts when declared
employee includes when services rendered
LPP
LPP gains taxable
losses only deductible against LLP gains
unused LPP losses carry back 3 years, forward 7 years
$1,000 rule (min. POD/ACB)
watch out for things “antique” as may not be qualifying item
PUP
Gains taxable
Losses not deductible AGAINST ANY OTHER CAPITAL GAINS
Cost = greater of ACB & $1k
Interest charges for Indiv. For investment loans
For investment loans, it can be deductbed if they relate to taxable account (e.g. non-registered)
eligible dependant tax credit
o Eligible Dependant Tax Credit
Conditions: you are single, divorced, separated, or widowed and you supported a dependant:
* who is under 18 (unless parent, grandparent, or infirm)
* living with the individual
* related by blood, marriage, or adoption
* resident of Canada (except child)
* dependent on individual for support
Tuition tax credit
If there is insufficient taxes payable to be reduced by the tuition credit which is common asmany students have limited income while they’re in school, the individual has two options:
○ Transfer the unused amounts for that specific taxation year to a parent, grandparent or spouse. The maximum amount is $5k per student. (subject to 15%)
Amounts over are eligible to be carried forward indefinitely
Purpose of gross up and FTC
ensure that integration works across different income types in Canada. Essentially, the CRA wants to make sure that a taxpayer is no better off receiving the income in a corporation vs. receiving it as an individual
CCA
UCC
+ additions
- disposals (lesser of proceeds and cost)
+ 50% of net additions (ACII)
= base amount for CCA
CCA @@@@@@@@@@2
Filing deadlines (corp.) & balance due & instalments
- 6 months after year end
Balance due: * 2 months after year end or 3 months after year end (CCPC)
monthly installments required if greater than 3k
if late, then interest on unpaid tax. file ASAP
Filing deadlines (indiv.) & balance due & instalments
- April 30
- June 15 if taxpayer or spouse carried on a business
- Deceased: later of 1) regular deadline and 2) 6 months from date of death
LCGD
may be claimed by an individual resident in Canada against taxable capital gains arising on the disposition of qualified small business corporation (QSBC) shares, and qualified farm or fishing property
lesser of: unused lifetime deduction, annual gains limit and CNIL
REMEMBER THAT IT IS 50% deductible against taxable capital gains.
QSBC shares
● SBC Test: CCPC with 90% of FMV of assets principally used in active business in Canada
● Throughout the past 24 months, at least 50% of the assets were used in active business in Canada
● Throughout the past 24 months, the shares have not been owned by an unrelated party.
QSBC test: assets excluded in calculation of ABI
Short-term investments
Health care premiums
EE: taxable if government plan. non-T if private
ER: deductible from taxable income (purpose of gaining or producing income from the business)
service gifts
EE: 1) cash and near cash gifts = taxable. 2) non-cash gifts/awards are not taxable up to $500.
[For gifts and awards to be non-taxable, they cannot be cash or near-cash or performance related.]
ER: gifts and awards deductible assuming they are reasonable
training
EE: 1) NT if employer main beneficiary. T if training is personal interest
ER: deductible as its form of employee compensation
Subsidized cafeteria meals
EE: subsidized meals are NT provided employee pays reasonable amount (if free, taxable)
ER: cafe rev taxable (if free, loss would be dedutible)
Recreational facilities
EE: NT if inhouse available to all employees
ER: not deductible as prohibited
Tax planning - shareholder loan
- Implication to Brokers
o Any amount lent from Brokers is not deductible to Brokers. - Implication for owners
o As long as the loan is not outstanding for two consecutive balance sheet dates, the owners will just have to report the imputed interest benefit on their personal tax returns. Otherwise, the owners will have to report the entire amount as income in the year the funds are borrowed with a corresponding deduction in the year the funds are paid back.
Tax planning - Salaries
- Implication to Brokers
o Brokers would claim an expense (deduction) for the salary paid, as well as for its share of any payroll taxes [ITA 18(1)(a)].
also withhold CPP from pay - Implications to owners
o personally taxed on their salaries at their marginal personal tax rates [ITA 5(1)].
creates RRSP room and contributing to CPP
Tax planning - bonus
- Implications to Brokers
o Bonuses are treated in the same way as a salary for the company and the employees. However, a corporation can record a bonus expense and a corresponding liability, and pay the bonus out later [ITA 78(4)]. - Implications to owners
o The bonus would be included in your income when you receive it [ITA 5(1)]. (increases taxable income and TP, same as salary)
Tax planning - dividends
- Implications to Brokers
o Dividends are not a deductible expense to the company, as they are paid out of equity/retained earnings. - Implications to owners
o Dividends have a lower effective tax rate for the owners. They are grossed up when included in the individual’s net income for tax purposes, but they generate a tax credit that more than makes up for the tax effect of the gross-up; this is intended to reflect the fact that the corporation has already paid income tax on the income earned inside the corporation.
Tax treatment of equipment
If equipment is purchased, the assets will go into various CCA pools and would qualify for immediate expensing (up to $1,500,000) in the first year.
Tax treatment of loan for corps
Interest paid on the loan will be deductible from income, as the assets purchased were used for income-earning purposes
Tax treatment of capital lease
lease payments will be deducted when they are paid, regardless of how the lease is accounted for under financial reporting standard
RRSP/TFSA/bonus
- Implication to HSE — deductible
- Implication to employee
o RRSP — deductible
o Bonus — taxable
o TFSA — taxable
Counselling
- Implication to HSE — deductible
- Implication to employee — not taxable
Parking permits / public transit pass
- Implication to HSE— deductible
- Implication to employee — taxable versus not taxable
Club membership
- Club dues are not deductible to an employer, regardless of whether the employer is the primary beneficiary.
- Implication to HSE — not deductible
- Implication to employee — taxable versus not taxable differences
Sale of shares: process
First determine if QSBC (SBC, 24 month holding, 50% assets in ABI) to be eligible for LCGD.
Proceeds of Disposition - Adjusted Cost Base of Shares = Capital Gain
Taxable cap. gain (50% of cap. gain) - LCGD = taxable income from sale
RRSP deduction limit calc:
unused RRSP from prior year - contributions for 2022 + (lower of: 18% earned income PY or annual limit for 2023)
Contributions up to 60 days of next year are included in 2022.
where: earned income DOES NOT include investment income
NTS: the contribution limit = unused PY + (LOWER OF: 18% earned income in PY or annual limit). If go over contribution in next year, then the amount will just be CF.
RRSPs discussion
RRSPs are a type of tax-sheltered account rather than a type of investment.
* Contributions are deductible from your income in the year in which they are made, or in the prior year for contributions made in the first 60 days of the year.
* Invested amounts grow tax-free while in this account and are taxed only when the funds are withdrawn.
Earned income: higher income, higher RRSP room
age limitations: up until 71
increasing room: increase salary
RRSPs what to do when tax payer turns 71
Must be terminated in year taxpayer turns 71
* Deregistration – lump sum fully taxable
* Transfer to RRIF – continues the deferral
* Purchase annuity – continues the deferral
tax treatment: stocks
o 50% of realized capital gains are taxable.
o Do not qualify for the LCGE.
o Losses can be carried back up to three years or forward indefinitely, applied against taxable capital gains in other years.
o Dividends have a lower effective tax rate.
tax treatment: GIC and bonds
o Interest income is taxed at the marginal tax rate.
tax treatment: Cryptocurrency
o Increase in value will be taxed as income or capital gains, depending on intent.
o Would not qualify for the LCGE.
tax treatment: Rental property
o Rental income is taxed as incurred; rental losses are deductible from other income.
o Property can be depreciated for tax purposes using CCA, but cannot generate or create a loss by claiming CCA.
o Capital gains from the sale of property would be taxed at 50%
child care expenses
claimed by parent with lower income
ITA - deductions division B - computation of income - sub division E
least of 3 amounts:
1) actual limit
2) annual limit (by age, search ITA)
3) 2/3 earned income
Child care expenses - how to treat
they are a REDUCTION in net income, NOT, a tax credit!!!
When is amount owing due to company claiming SBD
(three months after fiscal year end
Enhanced CPP
CPP max for 2022: lower of 64,900 and total income
( - ) Exempt amount (deductions already made from employement income, so can’t dedcut again from total income)
= X
Enhanced rate is .75% so deduct that amount
CPP credit rate
4.95% of enhanced CPP (before .75% deduction). This the credit is 15%.
EI deductions from employment income
deduction as part of 15% tax credit
Deduction of $X for income tax from employment income
Deduct from net federal tax
Requirement to deduct eligible dependant amount:
1) does not have spouse
2) child is under 18 and had no income
Recapture
Last asset in the class and balance is (-)
1) Calc UCC beg of year - disposal (lesser of POD and ACB) = UCC end
3) determined that its (-) so claimed too much CCA, add to make it nil and add to NIFTP (taxed)
Terminal loss
Last asset in the class and balance is (+)
1) Calc UCC beg of year - disposal (lesser of POD and ACB) = UCC end
3) determined that its (+) so deduct from the UCC of class to arrive at nil balance then deduct in NIFTP (can claim more CCA)
Terminal loss > capital gain
Reduce the terminal loss by the amount of the capital gain and deduct the remaining terminal loss from net income for tax purposes.
Terminal loss < capital gain
Reduce the capital gain by the amount of the terminal loss and include one-half of the remaining capital gain in net income for tax purposes
ABI > annual business limit (500$k)
Basic federal 38.00%
FTA -10.00%
GRR -13.00% (general rate reduction)
=15%
ABI < annual business limit (500$k)
Basic federal 38.00%
FTA -10.00%
SBD -19.00% (general rate reduction)
=9%
AII (Aggregate Investment Income)
Passive income e.g. taxable capital gains
Basic federal 38%
Federal abatement -10%
ART + 10.67%
= 38.67%
Corp. taxes payable
1) determine accounting NI
2) Add and deduct schedule 1 adjustments
3) determine NIFTP
4) Deduct div C deductions (charitable donations, net capital loss, non-capital loss)
5) taxable income
6) corp tax payable (3 diff amounts)
7) deduct instalments paid
8) determine taxes payable
Indiv. TP: child support payments
not taxable to the recipient nor deductible to the payor
Indiv. TP: non-capital losses
non‐capital losses can be claimed against any income and
therefore, deducted in calculating taxable income (carryforward period is
limited to 20 years)
Indiv. TP: net capital losses
net capital loss carried forward does not expire and
therefore, can be used to the extent of net capital gains
Indiv. TP: CPP for 2022
if contributed max $3,500, deduct CPP from NI of $460 and then TC of the difference.
Indiv. TP: medical expense TC
total eligible $ - (lesser of: $2,479 or 3% of NI)
Eligible: eyeglasses, costs of gluten-free food
Indiv. TP: Donation TC
Total =
1) 15% of $200 = 30
[2] 29% for all remaining amounts = total gifts - (200) * .29
total = 30 + [2]
TFSA limit:
Unused TFSA contribution from PY
+ contribution room for 2022
- contributions in 2022
= unused TFSA room at end of 2022
Corp: bad debt
permitted to be deducted
Corp.: life insurance
only deductible if policy is assigned as collateral for loan
Corp: under paid worker
add back the difference based on FMV
Medical tax credit
e.g. laser eye surgery
Amount =
Total medical cost - lower of:
$2,479
3% net income
Charitable donation (corps)
o Eligible for deduction in computing TI (will need to be added back into NIFTP
o Limit is 75% of company’s NIFTP
Corp has enough income to cover the 50k donation
Spousal tax credit
You can claim the spouse or common-law amount if you supported your spouse or common-law partner at any time during the year and their net income was less than their basic personal amount
Canada caregiver
eligible to claim this credit if you are providing support for one or more of the following people, because they have a physical or mental impairment: dependant spouse or common-law partner,
same as on sheet
EI deductions from employment income
can be deducted FULLY as a tax credit
SBD lesser of what amounts?
Lesser of:
1) ABI in Canada (deduct for AII)
2) TI =
3) ABL = 500k
Benefits and drawbacks of incorporating
o Benefits
May limit your personal liability
Provides the ability to do some additional tax planning
* Can pay less tax overall by planning the timing of when you withdraw funds from your company to defer taxation to years when you have lower income
Enhanced CCA
* CCPCs are eligible to immediately expense up to $1.5 million of asset purchases per year rather than treating them as capital and claiming CCA over time
Lifetime capital gains exemption
* Available when incorporated business is sold
o Drawbacks
Added costs
* Includes cost to file corporate taxes on annual basis and completing personal income taxes
Potentially no benefit to incorporation if reduced withdrawal plan is not followed
* Tax system is integrated such that income earned through corporation and fully paid out immediately will be same amount of tax if earned directly
Losses not deductible
* Losses can only be applied against corporation’s income for other years
o Determining factor of incorporating:
If you do not take money out of the business each year allows individual to use the tax-deferral benefit of incorporating
Penalties paid to the Canada Revenue Agency (corps).
Non-deductible - so add back in determining net income for tax purposes
Accounting gains
Deducted in determining net income for tax purposes
Accounting losses
Added back in determining net income for TP
Replament property rules (voluntary)
Conditions that must be met:
* Property was acquired to replace the old property
o Met – voluntary disposition to sell old and replace with larger space
* New property to be used in same or similar use
o Met – property still used to conduct HDC’s normal operations
* Old property was taxable Canadian property
o Met – in alberta
* Replacement property must be acquired within 12 months following end of taxation year
o Disposed of it in April 2020. Then bought new within few months. Met.
Replament property rules (involuntary)
Involuntary disposition (including
theft, fire, expropriation)
* Property must be replaced
within two years from end of
taxation year the proceeds
became receivable
* Property includes land, building,
and equipment used to produce
income from business or
property
LPP loss carry overs
Only against LPP gains
PUP loss carry overs
Lossess not deductible (makes sense since usually there won’t be a loss anyways)
Non-Arm’s Length
Recurring topics
* Inadequate consideration
* Spousal transfers
* Transfers of depreciable property
* Attribution
* Tax on split income (TOSI)
Spousal supprt payments
Taxable to recipient
Deductible to payor
Residence Status
Primary ties
* Dwelling
* Spouse or common-law partner
* Dependants
Secondary ties
* Personal property in Canada
* Social ties with Canada (e.g., golf club, church)
* Economic ties with Canada (e.g., Canadian employer, active involvement in a Canadian
business, Canadian bank accounts, RRSPs, credit cards, securities accounts)
* Landed immigrant status or appropriate work permits in Canada
* Hospitalization and medical insurance coverage from a province or territory of Canada
* Driver’s license from a province or territory of Canada
* Vehicle registered in a province or territory of Canada
* Seasonal dwelling in Canada
* Canadian passport
* Memberships in Canadian unions or professional organizations
Home office expneses
Deductible if either criteria met:
1. The home office is where the individual primarily performs their work duties (think greater
than 50% of the time)
2. The home office is used exclusively for work purposes AND the employee regularly meets
customers at the home office.
Can claim:
Rent, utilities, property taxes, home insurance, mortgage, repairing expense, telephone charges, supplies, CCA for house
Home office expenses cannot create a loss or increase a loss from employment income. This
is a common trap that could be tested in an exam setting.
Types of losses
Non-capital (loss from income other than capital gains or losses
net capital loss (from capital transactions)
ABIL - losses from sale of CSBC
Small supplier & GST registration
If you are a small business in Canada and meet the definition of a small supplier, you do not need to
collect and remit GST on sales. Note that you can register to collect and remit GST if you are a small
supplier if you expect to grow out of the small supplier definition and you don’t want to deal with the
administrative work at a later date or if you simply choose to in order to fully deduct GST on your
inputs.