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CFP Canada Oct 2022 > Tax Planning > Flashcards

Tax Planning Flashcards

1
Q

How is income splitting achieved via a RRSP?

A
  1. Spousal RRSP - higher bracket taxpayer contributes to lower’s RRSP, deduction goes to higher income earner, withdrawals within 3 years taxed in hands of contributor.
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2
Q

When does a deceased taxpayer have to file taxes by?

A
  1. If death is between:
    - Jan 1 - Oct 31 - April 30 of following year.
    - Nov 1 - Dec 31 - 6 months after DOD.
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3
Q

What’s the deadline for tax returns?

A
  1. Taxes are due April 30 of year following tax year.
  2. Self-Employed - tax return due June 15, but amount owing due April 30.
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4
Q

How is calculate taxable income?

A
  1. Total Income = Employment, net business income, investment (interest, dividends, rent, royalties), taxable capital gains.
  2. Taxable Income = Total Income - Allowable deductions (RRSP con’t, union dues, child care expenses, support payments, interest charges).
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5
Q

What are some tax deductions and credits?

A
  1. Personal, spousal and dependent (e.g. basic federal credit).
  2. Tuition fees - 15% up to $5,000.
  3. DTC - non-refundable amount of $8,235 (worth $1,235 or 15%).
  4. HBP - $35,000 from RSP.
  5. CPP con’t - 15% credit on EE con’t only.
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6
Q

What qualifies spousal support as a tax deduction?

A
  1. Deductive to payer and taxable to recipient if:
    - payment is an allowance based on written agreement.
    - payment is made on a periodic basis.
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7
Q

Is there a tax deduction for child support payments?

A
  1. No - they are not deductible to the payer, and are not taxable to the recipient.
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8
Q

What is the standby charge for personal use of company cars?

A
  1. Taxable benefits it to EE when ER’s car is used for their personal use.
  2. Benefit arises from:
    - Ownership = 2% of original cost of car for each month it’s available.
    - Leasing = 2/3 of the lease payment.
  3. Reduced charge = (basic standby charge) x (avg. personal use KM/month) / 1,667.
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9
Q

What are examples of Listed Personal Property?

A
  1. Works of art (e.g. paintings, sculptures, etc.)
  2. Jewelry.
  3. Coins.
  4. Stamps.
  5. Manuscripts, books.
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10
Q

What is the $1,000 rule pertaining to Personal Use Property (includes Listed PP)?

A
  1. Exempt from capital gains on disposal of PUP if amount received < $1,000.
  2. Amount > $1,000 is treated as capital gain.
  3. Capital losses for LPP are deductible only against taxable capital gains from LPP.
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11
Q

What is Capital Cost Allowance?

A
  1. Tax deduction for the depreciation of your business or property.
  2. Prescribed CCA rate = 30%.
  3. Can only depreciate 50% in first year.
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12
Q

What are the 2 types of dividend income?

A
  1. Eligible - received from public companies and CCPCs that pay high corporate tax rate (38% gross up).
  2. Non-eligible - received from CCPCs that pay tax at small business rate (15% gross up).
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13
Q

How much is the special refundable tax for dividends from CCPCs?

A
  1. 38%.
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14
Q

What are some examples of non-taxable income?

A
  1. Gift/inheritance.
  2. Life insurance proceeds.
  3. Profits from gambling.
  4. Capital dividends.
  5. Scholarships.
  6. Proceeds from accident, disability, sickness.
  7. Payments received from child support.
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15
Q

What is a superficial loss?

A
  1. Occurs when you dispose of capital property for a loss and you, or a person affiliated with you, buys the same property 30 days before or after disposition.
  2. This is done to prevent tax avoidance and deduction of artificial losses.
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16
Q

What are the income attribution rules for the transfer of gifts, sales and loans to a spouse or child over/under 18?

A
  1. Gift:
    - Spouse: All sources attributed to giver.
    - Child u18: Interest income and dividends attributed to giver.
    - Child o18: No attribution.
  2. Sale:
    - Spouse: Must be at FMV, otherwise all attributed to seller.
    - Child u18: Must be at FMV, otherwise interest income and dividends attributed to seller.
    - Child o18: No attribution.
  3. Loan:
    - Spouse: Must bear interest at prescribed rate, otherwise all attributed to lender.
    - Child u18: Must bear interest at prescribed rate, interest income and dividends attributed to lender.
    - Child o18: If loan bears interest at prescribed rate, no attribution.
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17
Q

When can you split retirement income?

A
  1. If clients over 65, can split RPP, RRIF, RRSP annuity payments.
  2. If clients under 65, can split RPP payments only.
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18
Q

How is the tax credit for charitable donations calculated?

A
  1. 15% on first $200 of donation, 33% on balance.
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19
Q

What is the Principal Residence Exemption?

A
  1. An owner is exempt from the tax if the residential property is their principal residence.
  2. Can only claim on property as the principal residence exemption.
  3. Strategy would be to designate the property that has the highest capital gain/year as PR to shield as much growth from taxes.
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20
Q

What is the difference between tax avoidance, evasion and planning?

A
  1. Avoidance - actions taken to minimize tax within law.
  2. Evasion - ignores law and willfully evades taxes.
  3. Planning - carefully reduce tax liability via planning.
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21
Q

What are CCPC tax rates?

A
  1. 11% tax rate up to $500,000.
  2. 15% tax rate for $500,000 and over.
22
Q

What 5 criteria must a Personal Services Business (PSB) meet to be considered a corporation by the CRA?

A
  1. Provides a service.
  2. Individual performing tasks would be regarded as employee if corporation didn’t exist.
  3. Incorporated employee/shareholder owns more than 10% of shares.
  4. Employs fewer than 6 full-time employees.
  5. Fees for service aren’t received from associate company.
23
Q
  1. What are 6 reasons to take a salary/wage as income from your business?
A
  1. Creates RRSP contribution room.
  2. Qualify for income tax credits, including medical expenses and child care benefits..
  3. Contribute to and earn CPP.
  4. Good when applying for a mortgage (banks like steady predictable income).
  5. Creates fewer surprise tax bills.
  6. Reduces company expenses and help qualify for SBD.
24
Q

What is a Capital Dividend Account (CDA)?

A
  1. Allows for funds to be received personally, tax free (e.g. if a corp. has a capital gain, the non-taxable portion can be added).
25
Q

What is an Allowable Business Investment Loss (ABIL)?

A
  1. Capital loss realized on disposition of debt/equity of CCPC.
  2. ABIL = BIL x capital gains inclusion rate (50%)
  3. Excess can be carried back 3 year and forward 10 years as non-capital loss.
  4. Against capital gains, can be carried forward indefinitely.
26
Q

What is the Lifetime Capital Gains Exemption (LCGE)?

A
  1. Applies to a qualified small business corp. (QSBC) when:
    - A CCPC, 90% of assets valued at FMV are used in active business in Canada.
  2. To qualify, CCPC shares must be held by taxpayer or person related for 24 months after disposition.
  3. Farm property and fishing business also qualify.
  4. At death, taxpayer can use unclaimed CGE and opt out of spousal rollover, transferring assets to spouse at higher ACB.
27
Q
  1. What is the test for US residency?
A
  1. 31 days in current year or 183 days during 3-year period.
  2. # of days in US current year + 1/3 of # of days in US last year + 1/6 # of days in US year before last.
  3. If snowbird spends < 121 days in the US any tax year, they will never be considered a US resident.
28
Q

How are US source dividends and capital gains taxed?

A
  1. US source dividends - 15% withholding tax
  2. US source capital gains - not taxed in US, only in Canada.
29
Q

What is the estate tax threshold for US assets and worldwide estate?

A
  1. US assets - no estate tax if amount < 60K.
  2. Worldwide estate - no estate tax if amount < 5.49M.
30
Q

How is a RRSP, TFSA and RESP taxed when an individual becomes a non-resident of Canada?

A
  1. No disposition at time of departure.
  2. No taxation on growth in TFSA, RSP/RESP is deferred.
  3. Withdrawals:
    - RSP: 25% withholding tax
    - TFSA: tax-free
    - RESP: taxed in bene’s hands
31
Q

What are 3 advantages of filing a tax return?

A
  1. Take advantage of RSP con’t room arising from earned income.
  2. Receive tax credits.
  3. Potentially receive a refund..
32
Q

What is the penalty for filing your taxes late?

A
  1. 5% on outstanding tax balance +1% for each full month your return is late.
33
Q

What are 7 income splitting techniques?

A
  1. Pay salary to a spouse (must be within reason).
  2. Generate capital gains in hands of children (gift/lend).
  3. Give money to adult child (no attribution).
  4. Set up inter-vivos trust.
  5. Split retirement/CPP income
  6. Higher income earning spouse pay expenses while lower invests.
  7. Loan money to spouse at prescribed rate.
34
Q

How is the Principal Residence Exemption calculated?

A
  1. [(# of years home is PR + 1) / # of years home is owned] x capital gain = exempt amount.
  2. Remember that the remaining capital gain on the property after the exempt amount is deducted is still 50% taxable!
35
Q

What are 5 advantages of using a holding company?

A
  1. Creditor protection.
  2. Estate freeze.
  3. Income splitting.
  4. Protection from legal claims against operating company.
  5. Tax deferral opportunities.
36
Q

What are 5 disadvantages of using a holding company?

A
  1. Additional costs.
  2. Additional regulatory and reporting requirements.
  3. Ineligible for capital gains exemption.
  4. Difficult obtaining credit.
  5. Possibility of double taxation.
37
Q

When does it make sense to take a dividend vs a salary (3 things)?

A
  1. Dividend:
    - Possible to receive tax-free income if personal income is non-eligible dividends.
    - Doesn’t require shareholder to be employee to receive dividend, salaries do.
    - Doesn’t require personal taxes to be remitted at source.
  2. Salary:
    - Recipient is entitled to basic personal amount.
    - If corp. taxable income exceeds SBD, salaries can reduce exposure to corp. income tax at higher corp. income tax rates.
    - Entitles business owner to fully indexed pension at retirement.
38
Q

What is the Alternative Minimum Tax (AMT)?

A
  1. A separate tax calculation determined in parallel with an individual’s regular income tax calculations.
  2. Designed to ensure that high income earners do not pay little-to-no tax but instead pay a minimum.
  3. Taxpayer pays higher of the two: regular income tax or AMT.
39
Q

What is Undepreciated Capital Cost (UCC)?

A
  1. The amount of capital property renaming that hasn’t been depreciated (think of it as it’s new value).
40
Q

What happens when the UCC is greater/less than sale price (FMV) and/or ACB?

A
  1. UCC > FMV - difference can be reported as terminal loss.
  2. FMV > UCC but < ACB - difference between FMV and UCC count as recapture of depreciation and declared as ordinary income.
  3. FMV > ACB - recapture of depreciation between ACB and UCC, as well as capital gain on FMV > ACB.
41
Q
  1. What are some reasons to take a dividend as income from your business?
A
  1. Reduces costs (EE and ER need to contribute to CPP).
  2. Less filing requirements and chance of paying late penalties.
  3. Easier to take money out of a company than pay a salary.
42
Q

What are 5 income splitting strategies to reduce taxes?

A
  1. Set up spousal RRSP.
  2. Higher income earner pay expenses, low income earner invests.
  3. TFSA and RRSP contributions, additionally higher income earning spouse can partner money to contribute to their registered plans.
  4. Spousal loan at prescribed CRA rate.
  5. If spouse owns a business, pay partner a reasonable salary for contributions to the business.
43
Q

What are 3 ways that a trustee can lower taxes payable to the beneficiary of a Testamentary Trust?

A
  1. Apply for GRE - available for first 36 months of trust.
  2. After GRE, income is taxed at highest rate so distribute to beneficiary who will pay taxes at their lower rate.
  3. Target investments in trust that generate capital gains and not dividend/interest income, since they’re more favourable taxed.
44
Q

When is Valuation Day?

A
  1. December 22, 1971.
  2. Starting point for where capital gains from publicly traded shares became taxable.
45
Q

What are the income tax consequences of a spouse giving their partner money for a business that generates income/losses?

A
  1. Attribution rules do not apply for business income/losses, even if business is financed by transferred property.
46
Q

How is the AMT calculated?

A
  1. AMT Amount = A x (B – C) – D
    A = 15%.
    B = The individual’s adjustable tax income x 30%.
    C = $40,000, the AMT exemption amount.
    D = Allowable non-refundable tax credits.
47
Q

Which spouse should claim any applicable medical expenses?

A
  1. It is usually better to claim the medical expenses on the return with the lower net income because the reduction of 3% of net income will be lower.
48
Q

What is the First-time Donor’s Super Credit (FDSC)?

A
  1. Credit for first-time donors who haven’t claimed a charitable donation in the last 5 years.
  2. Can receive an additional 25% on cash donations up to $1000 between 2013 and 2017.
49
Q

Between two spouses, who should claim the donation tax credits?

A
  1. The higher-income spouse should claim all the donations since the credit reduces federal and provincial high-income surtaxes.
  2. Best to combine donations rather than having each spouse claim the credit.
50
Q

What is the deadline to file a Notice of Objection to dispute a Notice of Assessment?

A
  1. The later of 1 year after filing deadline or 90 days after CRA mailed NoA/NoD.

CFP Canada Oct 2022 (7 decks)

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