Tax planning

Question 1

What are the attribution rules regarding gifts to spouses or common law partners?

Answer 1

If someone gifts money to a spouse or common law partner and the money is invested, all property income is attributable back to the transferor. This includes interest, dividends, rents and royalties.

Capital gains/losses on eventual disposition is also attributed.

Attributed income is taxed at the transferor’s MTR.

Question 2

What is the value at which property automatically transfers when done between spouses or common law partners?

Answer 2

The property is automatically transferred at the transferor’s ACB unless an election is made to opt out of the spousal rollover

Question 3

When does a transfer of property result in potential double taxation when done between spouses and partners?

Answer 3

Transfers below or over the FMV (when opted out of spousal rollover provisions) can result in double taxation.

Question 4

What are the attribution rules regarding gifts given to a minor child?

Answer 4

If money is given to a minor child and invested then:

All income or losses earned by the investment is attributed back to the transferor

All capital gains/losses are NOT attributed to the transferor.

Question 5

What occurs when a property is transferred to a minor child?

Answer 5

The transfer results in a deemed disposition where any gains or losses are taxable to the transferor.

Subsequent income/losses earned by the investment are NOT attributed to the transferor in this case.

Question 6

What are the liabilities of a sole proprietorship?

Answer 6

The sole proprietor is legally liable for any claims against the proprietorship to the extent of their personal assets. Unlimited liability

The sole proprietor also assumes any income or losses

Question 7

Name 3 reasons why someone would establish a sole proprietorship.

Answer 7

1. Low cost
2. Simple to establish - no need for sophisticated management
3. Owner retains full control of the business and is entitled to all the benefits of the business

Most individuals cannot incorporate so this is their next best choice

Question 8

How is income taxed to a sole proprietor?

Answer 8

The net income earned by the business operated as a sole proprietorship is taxable to the proprietor in the year it is earned.

The proprietor may choose to let money accumulate in the business and not withdraw any cash but all net income is taxable when earned.

If proprietor withdraws cash from business, it is treated as a withdrawal and does not necessarily attract income tax.

Question 9

What is the year end for a sole proprietor?

Answer 9

Usually December 31st but they may select a fiscal year other than Dec 31.

Restriction associated with a business year end is a disadvantage for sole proprietorship because there is no tax planning opportunity to defer taxes.

Question 10

What are the liabilities of a general partnership?

Answer 10

All general partners are jointly and severally liable for the debts of the partnership to the full extent of personal assets.

Question 11

How is the ACB of the partnership interest calculated?

Answer 11

Additions to the ACB:

• capital contributions (excluding loans)
• partner’s share of profits
• partner’s share of capital dividends received
• partner’s share of government grants (for Canadian resource property) in excess amounts repaid
• partner’s share of life insurance proceeds received due to a partner’s death.

Deductions

• partner’s share of drawings or capital distributions
• partner’s share of losses
• partner’s share of investment tax credits
• partner’s share of charitable gifts or political contributions

Question 12

What is section 97 (2) rollover?

Answer 12

Section 97 (2) rollover allows a partner to rollover assets to a partnership tax free.

Eligibility for rollover:

• has to be a Canadian partnership with all partners as Canadian residents
• must be a capital property that is being transferred or a Canadian of foreign resource property, an eligible capital property or inventory

Partnership is deemed to have acquired the asset at the elected amount and partner is deemed to have disposed the property at the elected amount. Partnership takes over position of partner in respect to future CCA or capital gain upon disposition.

Question 13

How are general partners taxed?

Answer 13

The partners themselves are taxed but there is a separate calculation of partnership income that must be completed as if the partnership were an entity. The resulting income them flows through to be taxed at the partner’s hands.

Question 14

Is the capital cost allowance (CCA) calculated for the partnership or for each partner separately?

Answer 14

Calculated for the partnership.

Question 15

What is a capital account in a general partnership?

Answer 15

A capital account in a general partnership is where a partner tracks his or her contributions, income allocations and draws. It represents the partner’s equity in the partnership.

Question 16

What is the year end for a general partnership?

Answer 16

Dec 31st but a partnership may select a fiscal year end other than that date.

There is also an elimination got potential tax deferral like sole proprietorship.

Question 17

What is a limited partner?

Answer 17

A limited partner is generally a passive investor in a limited partnership.

A limited partnership usually consists of at least one general partner and one limited partner.

Question 18

What is the extent of liability in a limited partnership?

Answer 18

A limited partner is not liable for debts, obligations or losses of a partnership provided that they don’t participate in the management or operations of a partnership.

Question 19

What are at risk rules for limited partnership?

Answer 19

A limited partner cannot lose more than what they invest. Financial exposure is capped at their investment.

Losses that become non deductible to a limited partner because of tax rules can be carried forward indefinitely as deductions against future income from the same partnership.

Question 20

What scenario will income attribution occur with regards to a limited partnership?

Answer 20

When a taxpayer loans, gifts or transfers funds to a spouse or common law partner or related minor who uses the funds to invest in a limited partnership, the income generated from the partnership is property income (not business income) and is attributed to the transferor.

Question 21

What liabilities do partners in a limited liability partnership (LLP) assume?

Answer 21

LLPs are like general partnerships but partners are not personally liable for the negligence of another partner.

The partnership assumes the liability and the partner who was negligent is also personally liable for their negligence, but not the other partners.

In other words, the partnership assets and the negligent partner’s assets may be subject to judgement but not the other partner’s assets.

Question 22

What is a business loss?

Answer 22

A business loss is when expenses are greater than revenues in the business.

If the business loss is large enough to create a negative amount of total income, the excess loss can be used to create or increase a non capital loss.

Question 23

What are examples of non capital losses?

Answer 23

Unused losses from office, employment, business property

Unused allowable business investment losses

Unused portion of share of partnership losses

Unused portion of share of partnership ABILs

Question 24

What is the loss carry forward/back for non capital losses.

Answer 24

Non capital losses may be deducted against income from all sources in the year incurred.

They may be carried back 3 years and forward 20 years

Question 25

What is a private corporation?

Answer 25

A corporation that is not a public corporation and not controlled directly or indirectly by one or more public corporations or crown corporations.

Question 26

What is a public corporation?

Answer 26

A corporation that is: Canadian resident and has a class of shares listed on a prescribed stock exchange in Canada A Canadian resident and has elected in a prescribed manner to be a public corporation. And composed with the requirements for the number of shareholders and disbursement of ownership.

Question 27

What is a Canadian Controlled Private Corporation (CCPC)?

Answer 27

A CCPC is a private corporation that incorporated in Canada and is a resident of Canada and Is not a public corporation or not controlled directly or indirectly by one or more public or crown corporations Not controlled directly or indirectly by one or more foreign individuals, trusts, partnerships or corporations

Question 28

What is authorized share capital? Issued capital? Paid up capital?

Answer 28

Authorized share capital - maximum number of shares that a corporation may issue as prescribed in the charter Issued capital - portion of authorized shares that have been issued Paid up capital - portion of shares that have been issued and fully paid for.

Question 29

How is a corporation taxed?

Answer 29

Apply full basic tax rate +38% Determine if qualifying corporation (CCPC) or non qualifying (public) Apply general rate reduction of -13% for non qualifying And SBD -19% for qualifying Apply federal tax abatement -10% Deduct federal tax payable -15% for non qualifying or Deduct federal tax payable -9% for qualifying Apply appropriate provincial tax + = effective tax rate (total)

Question 30

What is the small business deduction (SBD)?

Answer 30

A preferential tax rate (reduces tax) used for CCPCs applied to the first $500,000 of active business income.

Question 31

What is a specified investment business (SIB)?

Answer 31

A specified investment business (SIB) is a business where the primary purpose is to derive income from property (interest, dividends, rents and royalties) unless the corporation employs more than 5 full time employees. Credit unions and non real property leasing businesses are excluded from SIB

Question 32

What is a personal service business?

Answer 32

A personal service business (PSB) is one where a person incorporates a company to provide services to an entity which he would normally have rendered as an employee of that entity. A PSB does not qualify for the SBD and is taxed at regular corporate income tax rates. It is to discourage individuals from incorporating simply to gain a tax advantage

Question 33

Do corporations qualify for the gross-up and dividend tax credit schemes to which individual taxpayers are entitled to?

Answer 33

No

Question 34

What is the part IV tax for corporations?

Answer 34

- Applies to only private corporations and subject corporations - Designed to preclude “parking” of dividends in a corporation to postpone tax - Imposes a tax on dividends received by the receiving corporation and then subsequently refunds it when the dividends are paid to the shareholders - passive dividends are subject to 38 1/3% tax - the tax payable is placed in a notional refundable tax account called the refundable dividend tax on hand (RDTOH) - when dividends are paid to shareholders then the tax is refunded $38.33 for every $100 (or $0.38 for every $1)

Question 35

What is a subject corporation?

Answer 35

A subject corporation is a corporation resident in Canada other than a private corporation which is controlled by or for the benefit of an individual or related group of individuals

Question 36

What is the refundable dividend tax on hand (RDTOH)?

Answer 36

A notional account where the Part IV refundable tax is kept when corporations receives dividends which is then refunded when the dividends are paid out.

Question 37

What is Part I tax?

Answer 37

CCPC investment income other than dividends (rents, royalties, interest and taxable capital gains) 38 2/3% tax paid to notional RDTOH Refunded when income is paid out (30 2/3%)

Question 38

What is the capital dividend account (CDA)?

Answer 38

It is a notional account on a private corporation that allows money to flow tax free in form of dividends to shareholders. This account usually holds life insurance proceeds or the non taxable portion of capital gains.

Question 39

What kinds of dividends are subject to the gross up and credit mechanism?

Answer 39

Canadian sourced regular or stock dividends

Question 40

What is the tax treatment for paid up capital (PUC)?

Answer 40

Paid up capital is the money received by a corporation in exchange for selling shares. It is a return of investor’s capital and so it’s tax free to shareholders

Question 41

What type of income is dividend income?

Answer 41

Property income

Question 42

For regular dividends from a taxable Canadian corporation, what is the special tax treatment that applies?

Answer 42

Dividend income gross up Dividend tax credit (DTC)

Question 43

What are the two types of dividends from a Canadian corporation?

Answer 43

Eligible dividends - dividends received from Canadian public corporations which are eligible for enhanced DTC, that is subject to the gross up and dividend tax credit Non eligible dividends - dividends received from a corporation that are taxable and not designated as an eligible dividend

Question 44

What is the dividend gross up/credit mechanism for eligible and non eligible dividends

Answer 44

Dividends have already been taxed at the corporate level so individuals get a special tax treatment through the gross up/credit mechanism. ``` Eligible dividends (paid from public corporations) - 138% gross up and 15.02% credit ``` Non eligible dividends (paid from CCPC) - 115% gross up and 9.0301% credit

Question 45

What is GRIP?

Answer 45

GRIP is the general rate income pool - reflects the accumulated income that is subject to the general corporate tax rate with no special or preferential treatment

Question 46

What is an LRIP?

Answer 46

LRIP - is the lower rate income pool which is the amount of corporation income subject to a preferential tax rate (ie is income subject to the general tax rate). A corporation that is not a CCPC can pay eligible dividends to the extent that it does not have an LRIP at the time the dividends are paid.

Question 47

What are the filing deadlines for the following: ``` Individuals Self employed Deceased individuals Corporations Trusts ```

Answer 47

Individuals - April 30th Self employed + spouse - June 15th Deceased individuals: If death was btw Jan 1 - Dec 15 - April 30 If death was btw Dec 16 - 30 - 6 months after death Corporations - 6 months after fiscal year end Trusts - 90 days after fiscal year end

Question 48

When is the tax payment due for ``` Individuals Deceased individuals Self employed Corporations Trusts ```

Answer 48

Individuals - April 30 Deceased individuals: If death occurred btw Jan 1 - Oct 31 : April 30 If death occurred btw Nov 1 - Dec 31: 6 months after death Self employed individuals - April 30 Corporation - 60 days after year end and if claiming SBD - 90 days Trusts - 90 days after year end

Question 49

What is the late filing or failure to file penalty?

Answer 49

1st occurrence: 5% of tax owing + 1% for every month it isn’t filed to a max of 12% 2nd occurrence (if occurring within 3 years of 1st)): 10% of tax owing + 2% for every month not filed to a max of 20 months

Question 50

What are the conditions in which moving expenses can be deducted?

Answer 50

If the individual moved 40km closer to work or school then the expenses can be deducted from income earned at new location.

Question 51

What are the maximum deduction limits for childcare expenses?

Answer 51

$11,000/year for each disabled child of any age $8000/year for each child under 7 $5000/year for each child ages 7 to 16 and 16+ with physical or mental impairment where DTC cannot be claimed

Question 52

Who must make the claim for the child care deduction?

Answer 52

The lower income parent must make the claim unless they are: Separated from the higher income parent Confined to a wheelchair or bed In prison Enrolled in a full time school

Question 53

What are the amounts associated with overnight camps or boarding schools for childcare expenses?

Answer 53

- $275/week for each child who can claim disability tax credit - $200/week for each child under age 7 - $125/week for all other children

Question 54

How is rental income taxed?

Answer 54

Rental income is fully taxable. Rental losses may be deducted from other sources or income.

Question 55

What is capital cost allowance (CCA)?

Answer 55

Capital cost allowance (CCA) is a deduction from net income that allows taxpayer to reflect in part wear and tear or declining utility on a depreciable property.

Question 56

What are the 3 types of capital property?

Answer 56

Non depreciable property Depreciable property Eligible capital property

Question 57

What is non depreciable property?

Answer 57

Non depreciable property is property that does not incur wear and tear or become depleted because of usage of property. Examples are land or investments. Exclusion to this is personal use property and listed personal property that are non depreciable properties but may experience wear and tear through usage

Question 58

What is depreciable property?

Answer 58

Depreciable property is property that is entitled to apply CCA. Disposition of a depreciable property may trigger a recapture of CCA (take back into income amounts previously deducted) if property is sold for more than its depreciated value. A disposition of depreciable property could trigger a capital gain if property is sold for more than its ACB

Question 59

What is eligible capital property?

Answer 59

Eligible capital property refers to intangibles that include items such as incorporation costs, goodwill or patents

Question 60

What is the basic formula for calculating the value of CCA deduction?

Answer 60

CCA = UCC (of the class) X prescribed rate (for the class) UCC is the undepreciated capital cost.

Question 61

How do you calculate the undepreciated capital cost (UCC)?

Answer 61

UCC = Total capital cost of all property in the CCA class ``` MINUS Total CCA claimed in that class for all previous years ``` MINUS Total of the lesser net proceeds and capital costs from disposition before that time of property included in the class It is calculated for each class of property not each property

Question 62

What is the first year rule or 50% rule or half year rule?

Answer 62

Only 50% of net additions (property acquired during the year) can be claimed to a CCA class that year Basically says in the first year you acquire something it only depreciates at 1/2 it’s rate after that there is full depreciation

Question 63

When can you claim CCA?

Answer 63

CCA can and should be only claimed when there is depreciable property.

Question 64

What is eligible capital expenditures (ECE)?

Answer 64

Eligible capital expenditures are intangible items that are neither depreciable nor capital property but have their own amortization application eg incorporation costs, goodwill, patents

Question 65

List 5 common eligible capital expenditures.

Answer 65

``` Goodwill Trademarks Incorporation and reorganization costs Government rights Farm quotas Customer lists ```

Question 66

What is the cumulative eligible capital account or the CEC pool?

Answer 66

75% of the cost of acquiring the eligible property is included in the EC pool which is amortized at 7% per year as a deduction (like CCA)

Question 67

What happens to the EC pool when disposition of an eligible property occurs?

Answer 67

The disposition of eligible property results in a reduction of the EC pool by 75%

Question 68

What is the maximum reserve allowed for disposition of capital property and specifically for qualified farm and fishing property?

Answer 68

Maximum reserve is the lesser of: Outstanding proceeds / total proceeds X capital gain AND 1/5 of capital gain X (4 - n) OR 1/10 of capital gain X (9 - n) for farm and fishing property n - # of years since property was sold The exception to the 5 year rule is when qualified farm or fishing property is sold to a child, the capital gain can be spread out over 10 years

Question 69

What is a net capital loss?

Answer 69

Nah capital loss = allowable capital loss - taxable capital gain - can be carried back 3 years and forward 20 years - cannot be deducted (?)

Question 70

What is an allowable business investment loss (ABIL)?

Answer 70

An ABIL = business investment loss X capital gains inclusion rate (50%) - business investment loss is a capital loss realized on disposition of debt or equity of a CCPC - ABIL can be deducted from ordinary income (unlike allowable capital loss)

Question 71

What is the carry forward and backward provision of ABIL?

Answer 71

After an ABIL has been used by a taxpayer to reduce net income to $0 then any remaining ABIL can be: - carried back 3 years - carried forward 10 years With the carryforward and backward feature, unused ABIL is treated as a non capital loss that can offset against income from any source

Question 72

What happens after the 10 year carryforward period of unused ABIL?

Answer 72

After the 10 year carryforward period, any unused ABIL reverts to a net capital loss which can be carried forward indefinitely to reduce taxable capital gains

Question 73

How is tax on interest income paid?

Answer 73

Paid on combined cash and accrual basis

Question 74

What are non capital losses?

Answer 74

Non capital loss is a loss from business, employment or property (including rental losses) as well as unused ABILs

Question 75

What is a superficial loss?

Answer 75

A superficial loss is when a taxpayer incurs a loss on the disposition of capital property while an identical property is acquired or rea quoted by the taxpayer or an affiliated person within the period of 30 days

Question 76

What is the de minimus rule when it comes to the use of personal property?

Answer 76

The de minimus rule is that the proceeds of disposition for personal use property and the ACB are both set at a minimum of $1000 Recall that any capital loss a taxpayer incurs on personal property is lost for tax purposes. Capital losses on personal use property are not deductible but capital gains are taxable.

Question 77

With listed personal property (CJARS which stands for coins, jewelry, art, rare books and stamps), how are gains and losses treated?

Answer 77

The de minimus rule applies to listed personal property. Any net capital losses may only be claimed as an offset against taxable capital gains on listed personal property. Net capital losses on listed property can be - carried back 3 years - carried forward 10 years

Question 78

When can the lifetime capital gains exemption (LCGE) be applied?

Answer 78

The LCGE can be applied when there is a disposition of shares of a qualified small business corporation (QSBC) or a qualified farm or fishing property (QFFP). The numbers for 2021 - QSBC LCGE - $892,218 - QFFP LCGE - $1M

Question 79

Why was the cumulative net investment loss (CNIL) rules created?

Answer 79

To prevent individuals from simultaneously claiming a capital gains deduction and a deduction of investment expenses

Question 80

When is a CNIL balance created and how is calculated?

Answer 80

CNIL is created when investment losses > investment income Calculation: 1. Calculate taxable capital gain 2. Determine the lesser of taxable capital gain and the unused taxable capital gain lifetime limit 3. Calculate the maximum exemption amount = 2 - CNIL 4. Calculate taxable income = 3 - 1

Question 81

How does the CNIL balance affect taxable capital gains deduction?

Answer 81

CNIL reduces the capital gains deduction amount

Question 82

When does CNIL matter?

Answer 82

When you’re attempting to use the LCGE.

Question 84

In terms of reducing income, what is the main difference between an ABIL and an allowable capital loss?

Answer 84

An allowable capital loss can only be used to reduce taxable capital gains An ABIL can be used to reduce all types of income in the year incurred

Question 85

What is the tax treatment for capital gains on the disposition of a principal residence?

Answer 85

Capital gains on the disposition of a principal residence are tax exempt

Question 86

What is the calculation for the amount exempt for taxes for a principal residence?

Answer 86

Principal residence exemption = capital gain X ((# of yrs as a principal residence after 1971 + 1) / # of full or partial years of ownership after 1971))

Question 87

What is the alternative minimum tax (AMT)?

Answer 87

The alternative minimum tax (AMT) is a structure that provides for the recalculation of alternative amount of tax based on the removal of certain tax preferences when compared with regular tax calculation. In other words, it focussed on removing tax shelters and credits that may allow an individual to avoid taxes. Taxpayer compares taxes payable under AMT and through regular taxes and pays the greater amount of the two.

Question 88

What are list of deductible expenses for a self employed individual?

Answer 88

- Home maintenance (including fuel, electricity, minor repairs etc) - Home insurance - Property taxes - Mortgage interest - CCA - Rent (if property is not owned personally)

Question 89

What is a common expense that is not deductible for a self employed individual, employee or employee with no commission?

Answer 89

Mortgage principal

Question 90

List expenses that are deductible and not deductible for an employee with no commission.

Answer 90

Deductible expenses: - Home maintenance (fuel, electricity, minor repairs, etc) - Rent Non deductible expenses: - Home insurance - Property taxes - Mortgage interest - Mortgage principal - CCA

Question 91

List the expenses that are deductible and not deductible for an employee with commission sales.

Answer 91

Deductible - Home maintenance (fuel, electricity, minor repairs etc) - Home insurance - Property taxes - Rent Non deductible - Mortgage interest - Mortgage principal - CCA