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TAX PLANNING Flashcards

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1
Q

Allowable capital losses ACL are only deductible against taxable capital gains
TCG (stocks, LPP, PUP)

TCG 1/2 Capital loss
ACL 1/2 Capital loss

***Any amount of loss in excess of ACL is “net” capital loss. PERSONAL carried back 3 years and carried forward indefinitely.

For BUSINESS: called a non-Capital loss carried back 3 years and carried forward 20 years.

NOTE; in year of death and preceding… can use ACL and net capital losses against ANY Income!!!

A

CG $20K
CL $12K
Income = $10K-$6K = $4K

CG $4K
CL $12K
Income NIL

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2
Q

Who pays tax in Canada?

Residents of Canada pay worldwide income

A
  • factual residents
  • deemed residents: 183 days or more
    Note: citizens do not

Non-residents pay certain types of income

  • employment in Canada
  • business carried on in Canada
  • disposition of taxable property in Canada
  • with holding taxes on certain incomes (interest, rent, royalties)
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3
Q

Calculation of income tax

Income for tax purposes (Net Income)
⬇️ Miscellaneous deductions (loss carryover)
Taxable Income
⬇️ taxable income x federal tax rates/tax credits

A

= Federal tax payable

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4
Q

Attribution Rules - Transfer to spouse

  • no attribution after living apart/divorce
A

1) Transfer to spouse at ACB = Attribution when sold; no tax implications on transfer
2) Transfer to spouse (sell at FMV) = no attribution period!
3) Transfer to spouse (Gift) = Attribution when sold
4) Sell < FMV = Attribution

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5
Q

How to avoid attribution

A

1) Not to transfer at cost

2) Must receive FMV from cash or debt @ prescribed loan rate paid within 1 year or 30 days after year-end.

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6
Q

Attribution to Minors

Apply only to income, dividends, NOT CG; but CG upon transfer.

A

1) Sell/Gift to child (even sibling/niece/nephew) with low income and < 18 at year end = Attribution
2) At FMV to trigger capital gain/loss
3) Income earned after becomes to minor (secondary income)
4) property income (interest/dividend/royalties = Attribution

5) No attribution if FMV from prescribed loan Jan 30 next year attribution in year turns 18.

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7
Q

Transfer of Farm/Fishing company (Intergenerational Transfer)

A
  • rollover tax free at FMV or ACB
  • must be farming/fishing
  • must be resident of Canada
  • if below FMV = Attribution
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8
Q

KIDDIE TAX
= Is specialized tax to discourage income splitting with children.
No attribution but
Specialized tax rates at highest 33% on split income
- minors
- post secondary
- DTC

A

Types of corporations

-Public

  • Small business
  • Canadian controlled private corporation
  • Private
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9
Q

TOSI - corporation

A

Applies when an adult Receive “dividends or interest” from a “private”corporation, or realizes a capital gain, and related individual is actively engaged in the corporations business or significant equity greater than 10% in the corporation.

  • Applies to a spouse children => 18 grandparents and children who are a resident in Canada at the end of the year.
  • Does not apply to salary or second generation income.
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10
Q

TOSI Exempt/Exclusions

A
  • excluded “business” = adult family members older than 18 “working” in the business with average of 20 hours per week in the current or any previous five years.
  • Excluded “shares” = adults older than 25 who “owns” more than 10% of the shares of the corporation provide the corporation earns less than 90% of his business income from providing services and it’s not a professional corporation such as doctors, dentists ,lawyers.
  • spouse of contributor where spouse of any age of business owner older than 65 who made significant contributions to business.
  • Capital gains that qualify for LCGE
  • Capital gains arising from death.
  • income or gains from property received as settlement of marriage breakdown
  • inherited property (<25 at year end)
  • Reasonable return test
    
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11
Q

Taxes on Trusts

1) intervivos (living) / testamentary
2) spousal
3) Discretionary/non-discretionary

A

Intervivos

  • Income retained is taxed at the highest rate of tax (33% federal plus top provincial rate)
  • income tax interest is paid out on tax free basis to beneficiaries (income splitting)
  • Trust cannot claim “personal tax” credits but can claim dividend tax credit, foreign tax credit and donation tax credit
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12
Q

Spousal Trust
(Intervivos or Testamentary)

Advantages

  • credit proofing
  • management
  • provides income for spouse lifetime
  • As it can be transferred to the children at spouse’s death
A
  • spouse receives all income of trust that arises before spouse’s death
    - property transfers to trust at a “tax cost”
  • income in trust is taxed at top MTR
  • Deemed disposition of trust properties at FMV when spouse dies
  • “tainted” Testamentary spousal trust is others outside of spouse using asset.
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13
Q

1) Intervivos - Alter Ego Trust
- 65 years old
- sole/self is entitled to all trust’s income and entitled to receive capital before death
- asset acquistion into trust at tax cost
- income is taxed at top MTR
- deemed disposition on death
- Income distributed on death are taxed to beneficiaries at MTRs but attribution/TOSI/Kiddie Tax applies

A

Used for

  • management/liquidity/continuity
  • creditor protection
  • will subtitute/litigation protection
  • avoids probate
  • privacy
  • replaces POA
  • does not achieve income splitting
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14
Q

2) Intervivos - Joint Partner Trust
- 65 years old
- transferor and spouse are entitled to all of trust’s income and receive capital gains
- property transferred in at tax rate
- income in trust taxed at top MTR
- deemed disposition on second death

A

Used for:

  • management, creditor proofing, will substitute, avoids probate, privacy
  • “does not stop attribution”
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15
Q

Disadvantages of “Intervivos”

A
  • Income retained in trust taxed at top rate
  • Deemed disposition/reacquisition of capital property at FMV every 21 years to prevent indefinite deferral of tax on accrued gains.
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16
Q

Testamentary Trust (Result of death)

  • 3 Types
    a) Graduated rate estate (GRE)
    b) Qualified Disabilty Trust (QDT)
    c) Other (OTT)
A

Graduated Rate Estate GRE

  • after death, sole owner assets become part of estate; which is treated as a TT and can be designated as GRE.
  • up to 36 months; not required to be calendar year end
  • ** TTs created by Will cannot be designated as GRE
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17
Q

QDT

  • created by provisions in will
  • eligible for graduated rates indefinitely; income splitting with disabled individuals splitting income with trust
A

OTT (e.g Spousal Trust)

  • created by will
  • not GRE as TT not arise from death
  • taxed at hightest MTR
  • used for management, creditor proofing , income sprinkling (trustee can allocate income to low income beneficiaries), control of assets after death (delay dist’n to beneficiaries)
  • avoid double probate
  • avoid second marriage concerns
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18
Q

Income Splitting Techniques

A
  • spousal RSP/split CPP/eligible pension income
  • spousal property swaps
  • high income pays bills; low income invests
  • transfers and loans for FMV
  • second generations income is exempt from attribution/TOSI
  • trusts
  • TFSA/RESPs for family members
  • pay reasonable salary t family members
  • transfer assets to minors that generates CGs (do not attribute back)
  • Canda child benefit
  • transfer assets to children equal to or > 18; watch TOSI
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19
Q

Employment Income

A
  • salary, tips, bonus
  • housing
  • travel
  • employer premiums for group life ins.
  • interest free/low interest loans
  • car benefits
  • stock option benfits
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20
Q

Employment Income - Tax Free benefits

A
  • employer contributions to RPP/DPSP
  • employer premiums for group sickness, accident insurance and health plans
  • counselling services
  • discounts on clothes, meals
  • professional membership fees
  • daycare
  • loyalty points
  • club membership fees
  • in-house recreational
  • education assistance/scholarships
  • ** Gifts < $500
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21
Q

Interest Free/Low interest loans provided by employer = Taxable benefit (employment income)

  • ceiling rate set every 5 years
  • home purchase (use lowest prescribed rate for year)!!!
A

Amount: $100K
Prescribed rate @ 6%
Interest charged @ 2%
Outstanding 115 days

Then: $100K x (6%-2%) x 115/365 = $1260 taxable Income

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22
Q

Car Taxable Benefits = Employment Income

Standby charge + Operating expense (lesser of 28 cents x personal kms OR 50% of standby charge)

A

Employer owns
Standby charge = 2% x original cost of car x months available for use

Employer leases
Standby charge = 2/3 lease pmts x #months

Operating expense = 28 cents X # personal Km

Use Standby charge reduction IF;
>50% driven for employment duties:
personal km/ (1,667 x #months) x standby charge

Add all standby + operating expense (all is taxable benefit)

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23
Q

Employee Stock Option - Public Corporation

  • no benefit to employee when option granted
  • no deduction for employer
A

Public Corporation

a) Option granted: no benefit
b) Option exercised: Employment Income (FMV at date option is exercised minus option exercise price
include on income when shares are acquired)
c) When shares are sold: CG (FMV-exercised)
d) TCG = 1/2 CG

*** For public corporations, employment income is reported in year to option exercised using number of shares exercised and CG on year of shares sold.

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24
Q

Employee Stock Option - Private Corporation

A
  • Canadian Controlled Private Corporation:

a) Option granted: no benefit
b) Option exercise: no benefit
c) Shares sold:
i) Employment income (FMV “exercised minus option price)
ii) CG = Sale price minus FMV option price
iii) TCG = 1/2 CG

*** For CCPCs; employment income is deferred until the year of sale and on number of shares sold.

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25
Q

Special Rules - 50% Employment benefit deducted to calculate taxable Income. Reduced Employment Income by 50%

A

Special rules if:
- Option price is > or = FMV shares when option is “granted”; not in the money

OR
- shares of CCPc are held for at least 24 months after the acquisition; also deduct 50% of employment Income

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26
Q

Home office

A

> 50% performing work duties
- regular employees: rent, maintenance, (heat, electricity, water, repairs, portion utilities, condo fees, internet

Salesperson: rent, maintenance plus portion of property taxes and insurance

Independent contractors: can deduct portion of rent, maintenance, property tax, insurance + CCA and mtg interest

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27
Q

Home office - COVID

A

2 options:

1) Flat rate/simplified method: work >50% at home; 4 days a week -> maximum $400
2) Detailed method: i) work >50% at home; 4 days/wk or ii) work space is used only to work

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28
Q

Property Income/Interest deductibility

A

Deductible

1) Interest
2) Rent - Rental income can be offset by CCA
3) Dividends: gross up dividends receive a DTC
4) Royalties

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29
Q

Residential and Commercial Real Estate

A
  • income stream = Rental income + Capital appreciation

- deduct expenses, including CCA (cannot create loss to shelter income)

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30
Q

Example of income for rental property

A

Revenue: $100,000
Expenses (including CCA): $80,000

Income = $20,000
capital cost/UCC: $700,000

Maximum CCA $700,000 x 4% = $28,000
➡️* Maximum CCA limited to $20,000*

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31
Q

Dividend Gross up/DTC

Individual

A

Eligible Dividend (Public Corp):
38% gross up
Federal DTC: 15% x Total income

Non-eligible Dividend (CCPC - Private)
15% gross up
Federal DTC: 9% x Dividend gross up income

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32
Q

Foreign Investment Income

A

1) convert to cdn dollars
2) Add back with holding tax
3) “Cannot” receive dividend gross up/DTC
4) Foreign tax credit to prevent double taxation

E,g $1000 Dividend Income from USD corporation
Federal 29%
Provincial 16%
15% with holding tax US government

Dividend Cdn $1000
Federal tax *0.29 = $290
FTC *0.15 = -$150
Net federal taxes = $140

Provincial tax *0.16 = $160
Total Cdn tax ($440+$160) = $300

US tax with held = $150
Net total taxes = $450

Income after tax = $1000-$450= $550

33
Q

Interest Deductibility

A

1) Bonds
2) preferred shares
3) stocks/common shares
4) rental

34
Q

Capital Gains and Losses: Dispositions

Disposition is:

A
  • any transaction where taxpayer to proceeds of disposing investment
  • includes sales of property, redemptions and deemed disposition (transfers which do not result in actual proceeds.
35
Q

Proceeds of Disposition:

- includes :

A
  • sales price and FMV of property received in exchange
  • compensation for involuntary ( e.g. property stolen, destroyed or taken by order … special rules to defer capital gain.

***Partial Disposition
ACB / #portions, then calculate

*** Identical properties (type of investments)
ACB = weighted average

36
Q

Deemed Dispositionss

A

1) Change in use
- e.g. personal use to rental (income producing); rental to personal use

2) Gifts/death
- (exception: transfer to spouse/spousal trust or transfer of farm/fishing property to child)

3) Emigration (departure tax)
- (exceptions: RSPs, real estate located in Canada)

*** 21 year rule

37
Q

Personal Enjoyment Property

1) PUP (Personal Use Property)

A

PUP (Personal Use property)

  • cottage, boat, cars, antiques, vintage wine
  • principal residence
38
Q

2) LPP (Listed Personal Property)

A

LPP

  • “Coin JARS” ; Jewellery, Art, Rare books, Stamps
  • Special rules
    i) $1,000 minimum (“floor” for proceeds/cost for PUP/LPP
  • If cost is
39
Q

Principal Residence Exemption (PRE)

A
  • housing unit owned by taxpayer (house, cottage, mobile home, trailer, condo)
  • lived in by taxpayer, spouse, former spouse, child at “any time in year”. (vacation home)
40
Q

Exempt portion of gain (PRE)

A

1 + # of years designated
————————————- x gain
# of years owned

  • must be resident of Canada
  • only 1 designation/family unit
  • designation at time of actual or deemed disposition
  • no capital loss available (PUP)
  • if residence changed often PRE may be denied
41
Q

Lifetime Capital Gains Exemption (LCGE)

A
  • only for Canadian residents
  • deduction to calculate “taxable income”
  • Qualifying property
    i) QSBCS (qualified small business corp shares)
    ii) QFFP (qualified farming and fish property)
  • LCGE for QSBC and QFFP is reduced by any amount claimed under the individual CG exemption
42
Q

LCGE

restricted by:

A

1) capital losses only (no employment income!)
2) CNIL (cumulative net income loss)

for 2021:
LCGE = $892,218
LCGD = $446,109

43
Q

To use LCGE - Tests for QSBCS

A

1) must be shares of CCPC (private)

2) Small Business/ 90% TEST
SBC => 90% of corporate assets (based on FMV); used in “active” business carried primarily in Canada
Example: long term government bond; calculate % of assets to see if below/above 90%

2 tests for LCGE
1) Basic Asset Test / 50% TEST
>50% of corporations assets (FMV) are used in active assets in Canada 24 months

2) OWNERSHIP TEST / Holding period test
- shares are owned only by taxper or relative 24 months prior to sale

44
Q

EXEMPTION LCGE - QFFP
$1,000,000

FMV - ACB - LCGE; then calculate CG

A
  • land, buidlings, fishing vessels
  • shares of QFFC owned by taxpayer or spouse
  • “interest” in family farm/fishing owned by taxpayer or spouse

*** MUST BE used in Farming/fishing or combo by individual, spouse, children, parent

45
Q

CALCULATION OF LCGD (DEDUCTION)

*** lesser of net Taxable CG on all assets minus ACL vs net taxable CG of qualified (QSBC) asset

A

Unused lifetime deduction
1/2 LGCE MINUS all previous LDGDs claimed

2) Annual gains limit (A-B)
A - lesser of net taxable CG on all asset dispositions and net taxable CG on dispositions of qualfied property
B - net capital lossess deducted in year ABILs realized in year

3) Cumulative gains limit
Sum of “annual gains limit” for all yrs
a) CG deductions claimed in preceding years
b) CNIL at the end of the current year

46
Q

Example of LCGE/LCGE
Business income = $120K
Capital Gain QSBC = $700K
Capital loss public shares = -$200K

A

Business Income = $120K

TCG = $700K/2 = $350K
ACL = $200K/2 = -$100K
TCG = $250K

LCGD = Since net TCGs of $350K < Net TCG $250K (ACL-$100K) have to use $250K

Therefore $120K + $250K = $370K
- $250K LCGD
= $120K taxable incme

47
Q

CUMULATIVE NET INVESTMENT LOSS (CNIL) : when expenses > gains

A
  • rules to prevent individuals access to LCGE AND inv. lossses
  • restricts LCGE when qualifying assets are sold (QSBCS or QFFP)
  • CNIL = investment expenses > investment income
  • investment expenses (interest, rental losses)
  • Investment income (int, div, rental income recapture, annuity income)
48
Q

Example of CNIL

A 
Year 1 - investment expense $10K
Year 2 - investment expense $10K
Year 3 - Proceeds $190K - ACB $100K 
              CG = $90K
              TCG = $45K

(LCGE/LCGD of $45K - $20K CNIL of $20K); therefore

TCG = $45K
- $25K (LCGD)
= $20K taxable income

49
Q

ABIL - ALLOWABLE BUSINESS INVESTMENT LOSS

A
  • Capital losses from non-arm’s length disposition of shares or debt of small busines due to:
    - bankruptcy/insolvency
  • ** 50% deductible against BIL
  • ** can be deducted against ANY KIND of income
50
Q

SUPERFICIAL LOSSES

A
  • inv. sold at a loss
  • repurchased within 30 days
  • owned by affiliated person (ie. spouse, corp.)
  • “capital loss denied” but added back to ACB of substituted investment re-purchased
51
Q

EXAMPLE OF SUPERFICIAL LOSS

A

Dec 10 2020 = sold 100 shares for $8500 (ACB = $11,000)

$8500-$11,000 = -$2500

Spouse bought 40 of same shares within 30 days for $4000.

  • ** (40shares/100shares) x $2500 loss = $1000 loss is denied.
    1) Therefore, the ACB of spouse’s shares is $4000+$1000 = $5000/40shares = $125 share

2) The balance of the loss ($2500-$1000) = $1500 will be treated as a capital loss to original spouse which will be an ACL where 1/2 can be deducted against TCG for curent year. If ACL>TCG; can be carried over.

52
Q

TRANSFERRING NON-REG TO RSP/TFSA

A

1) Must assume ACL and wait 30 days until re-purchasing in registered account.
2) If there is a gain; must assume CG in income when transferreing to reg. account.

53
Q

TRANSFERRING NON-REG

A

1) To ADULT child
- *** If transferring inv. ADULT child; No superficial loss rules apply!

2) To Spouse (E.g. Husband has no CG to offset loss but wife has capital gains to offset loss.)
- To avoid attribution, transfer at FMV and wife to pay with own funds.
- Amount paid will be wife’s ACB
- Wife must hold for 30 days; Superficial loss rules will deny the capital loss for husband and increase the ACB for wife
- Wife will then sell shares in open market at a loss and use the loss to offset CGs.
- Husband will need to report the sale and file an election or else it will take place at cost instead of ACB.

54
Q

CAPITAL GAINS/LOSSES

Types:

A

1) non-depreciable
- Bonds, shares, land
- no CCA (Capital cost allowance)
- CG and CL possible

2) depreciable
- buildings, equipment
- claim CCA, consider recpature and terminal loss
- CG possible but no CL

*** If courts determine that taxpayer intended use as inventory (for flipping) rather than capital asset (long-term); then sale fully taxable!

55
Q

CCA (Capital Cost Allowance)

- allows a deduction for the “full” cost of depreciating asset

A

Capital Cost Allowance Systems

UCC Undepreiciated Capital Cost = $60

  • proceeds > original cost: CG
  • proceeds (limited by original cost): >UCC: recapture (fully taxable)
  • proceeds < UCC AND last asset : terminal loss (must be deducted)
  • ** - proceeds < UCC but other assets in class: CCA may be claimed

Lesser of cost or proceeds - UCC

56
Q

SUMMARY OF TREATMENT OF LOSSES

A
  • ACLs are deductible against taxable CGs including PUP and LPP gains.
  • LPP losses are deductible agains LPP gains (Coin JARS)
  • PUP losses are not deductible
  • No capital losses on depreciable property (buildings, equipment)
  • Superficial losses are denied (bbut denied loss is added to ACB of subsituted inv.)
  • ABILS are deductible against any type of income

** In year of death (and preceding), capital lossses are deductible against any income to extendt LCGD was not claimed.

57
Q

Other Income Reminders

A
  • Death benefits
    • In recognition of employee’s service
    • included in “recipient’s” income
    • *** $10K exemption
  • Spousal support
    • “mirrors” recipient/deduction by taxpayer
  • Child support
    • not deductible and not included in income
58
Q

Other Deductions (to determine income)

A
  • moving expenses
  • RSPs
  • spousal support payments
  • child care expense (medical, clothing, transportaion are not included):
59
Q

Childcare Expenses

A

LEAST OF:

1) 2/3 “earned income”
2) amount paid
3) Total of
- $5K/child ages 7-16 or >16 with infirmity but ot eligible for disabilty tax credit
- $8K/child < 7 at year end
- $11K for child eligible for DTC

60
Q

Calculation of Federal Taxes Payable

Income for Tax Purposes (Net Income); miscellaneous deductions (e.g. loss carryovers) ** minus expenses/commission before TCG!!!
->
Taxable Income (Inc x Fed taxes minus tax credits )
->Federal Tax Payable

A

Tax CREDITS for INDIVIDUALS

i) personal (e.g. basic, age, spouse (reduced by 15%) dependent, caregiver - >18)
ii) CPP/EI premiums
iii) Canada employment amount
iv) adoption exp
v) tuition (>$100; can be carried forward)
vi) interest paid on Student loans (can carry fwd)
vii) Homebuyer’s amount
viii) home accessibility exp
viii) pension income
ix) disabilty credit
x) charitable donations (can be carried forward)
xi) medical expenses
xii) amounts transferred from spouse (tuition/age/pension)
xiii) Dividend tax credit

61
Q

Charitable Donations (Tax Credits)

A
  • 15% of first $200 and 29% of balance
  • “maximum 75% of net income”

15% of first $200 and 33% if income above $216,511
1) 15% of $200
2) 33% lesser of (income - max donation) OR (donation - $200)
3) 29% * (remainder of $200 - step 2)
Total Federal credit = step 1+2+3

  • can be carried over 5 years
  • spouses can be combined

** 100% net income limit in year of DEATH and preceding year

  • ** Property donated to charity
  • transferor can elect any amount between tax cost and FMV
  • ** Gifts of qualified listed securities and ecological sensitive land (zero inclusion rates); carried over 10 years. CG or CL possible
  • ***cultural property. (carried over 5 years); DO NOT trigger CG and CL can be claimed w/o limits.
62
Q

Medical Expenses Credit

A
  • Total medical expenses minus “lesser” of 3% of income or max amount for year
    e.g.
    Amount available for tax credit =
    Medical Expenses of ($10,040) - 3% of income ($100K)

Medical tax credit = 15% of above amount

63
Q

Salary Deferral

Example: sabbatical, STI

A
  • max. 6 years deferral for up to 1/3 salary
  • leave must be consecutive 6 months
  • no later than 6 years after salary deferral begins

*** The full amount of deferral ($X x 6) plus any accrued interest will be paid no later than after 6 years and will be taxable when rec’d.

64
Q

TAXATION OF UNINCORPORATED

A

1) Sole Proprietor; T1 General Individual return
2) Partnership:

a) General Partners: fully liable for obligations
b) Limited Partners: limited by their investment in the business

Note: Joint venture: each co-venturer computes net incomes separately and deductions are independent of each other.

3) Trusts: treated as a separate taxpayer; deemed to be an individual

65
Q

Types of Canadian Corporations

A

1) Public
- listed on Cdn stock exchange
- limited tax incentives

2) Private -> CCPC -> SBC
- not public /not controlled by public corp
- Capital Dividend account (CDA)

66
Q

Capital Dividend Account (CDA)

Notional account that is non-taxable portion.

A

Computation:

Additions:

  • non-taxable portion CG > non-deductible portion of capital losses (i.e CG/2)
  • capital dividends rec’d from other private corporations (Eligible Refundable Dividend Tax on Hand RDTOH). Opportunity to payout if balance is high.
  • Life ins. proceeds on certain policies > ACB of policy

Less: Capital Dividends paid by the corporation

*** CDA is a cumulative account

67
Q

CCPC

A

a) Small business deduction : favourable tax rate on 1st $500K of active business income (ABI)
* ** Federal SBD tax rate = 9% (2021)

b) Stock options:
- employment income deferred until disposed of shares
- also has specia rule of 1/2 employment income if shares are held 24 months after exercised OR option price > or = FMV at time option granted.

Note: SBD limit reduced by $5 for every $1 of passive income > $50K

68
Q

Small Business (SBC)

  • private company; not listed on any stock exchange
  • majority of shares not owned by a public company
  • majority of shares owned by Canadian residents
  • must operate primarily in Canada
A
  • CCPC > 90% of assets on a FMV are “used” principally in active business
  • business shares carried > 50% in Canada
  • LCGE for S/H who are residents of Canada
  • business investment loss (ABIL)
  • 10-year reserves on the transfer of QSBCS to children
69
Q

Advantages of Incorporation - Business Income

Non-Tax

A

1) limited liability
2) business continuity
3) ability to obtain capital
4) Separation of management and ownership
4) easy to transfer ownership

Disadvantage: Costs

70
Q

Advantages of Incorporation - Business Income

Tax-Related

A

1) Tax deferral
- Ind tax > Corporate tax rate
- increased cash flow for funds retained in the corporation

2) Income flexibility

3) Estate Planning/income splitting
- reasonable salary for family members
- family members can own shares (TOSI/Kiddie tax applies)
- LCGE for QSBCS

Disadvantages: Loss utilization problems, tax prepayment, double tax

71
Q

Salary vs. Dividends

A

Salary:

  • subject to personal tax
  • RSP room, CPP participation

Dividend:

  • not deductible for corporation
  • subject to personal tax by DTC
  • must be distributed to all s/h
  • reduces CNIL and “preserves LCGE”
  • may attract TOSI

*** integration on taxes for shareholder/employee should be the same for both

72
Q

SHAREHOLDER LOANS

- to employee/shareholder/non-arm’s length

A

DOES NOT need to be included in income if:

  • loan is made to an employee to help buy a new home (PURPOSE TEST)
  • similar loans to other employees
  • to acquire new previously unissued shares
  • to buy automobile used for employment
    AND
  • loan is received in the employment capacity
    AND
  • bona fide arrangements made to pay back in reasonable amount of time
73
Q

CAPITAL GAINS RESERVE

- defer CG where proceeds are not due until after year-end; same gain if claim reserve or not.. just deferred.

A
  • spread gains over a maximum of 5 years
  • max. 10years for transfer to a child of QSBCS and certain QFFP

FORMULA:
Year 1: GAIN minus income (lesser of)
Lesser of i) outstanding shares/total proceeds x CG
ii) 4/5 x CG

Year 2: Income prior year minus income (lesser of)
Lesser of i) outstanding shares/total proceeds x CG
ii) 3/5 x CG

E.g. transfer cottage to child where proceeds are received over 5 years.
*** On year of death, can forgive the promissory not on death with no tax consequences to either.

74
Q

ALTERNATIVE MINIMUM TAX

*** No AMT on year of death

A

An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim. The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income.

75
Q

FILING DATES

A
  • Individuals T1: on or before April 1st
  • Corporations T2: 6 months after fiscal year
  • Trusts/Estates T3: within 90 days after year-end of trust’s taxation year. Only GRE can have non-calendar years

*** NOA objection no more than 90 days after receiving NOA or 1 year after filing (April 30th or June 15th)

76
Q

PENALTIES

A
  • Late or Deficient payments:
    50% of interest charge x
    Interest charge MINUS greater of $1000 or 25% for “installment interest”.
- Late filing is 5% of tax unpaid + 1% interest each month
For recurrence (any of 3 preceeding taxation years): 10% of unpaid tax + 2% per month
  • Failure to report income - repeat offender: lesser of 10% or 50% of tax liability
  • Understatement of income due to gross negligence: 50% of increased tax liability min. of $100. Increase by 10% year after may be imposed.
  • Failure to withhold at source or remit amounts with held: 10% of amunt not with-held. Increases to 20% next calendar year.
  • Criminal offences: 50%-200% and potential imprionsment

3rd party civil penalties, planner and preparer’s penalties: directly to accountant

77
Q

Covid

A

CERB $500/week up to 28 weeks
CRB: Canada Recovery Period $500/week up to 26 weeks; not eligible for EI
CRSB: $500/week up to 2 weeks;
do not have sick leave
CRCB: caregiving benefit $500/week up to 26 weeks
Seniors; $300 tax free; $200 additional with GIS
Disability: $300 tax free: w/OAS and GIS limit to $600

78
Q

Commission of shares

A

Add commission on and then divide per number of shares to get ACB

CFP (6 decks)

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