Tax Planning Flashcards
How is income splitting achieved via a RRSP?
- 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.
When does a deceased taxpayer have to file taxes by?
- If death is between:
- Jan 1 - Oct 31 - April 30 of following year.
- Nov 1 - Dec 31 - 6 months after DOD.
What’s the deadline for tax returns?
- Taxes are due April 30 of year following tax year.
- Self-Employed - tax return due June 15, but amount owing due April 30.
How is calculate taxable income?
- Total Income = Employment, net business income, investment (interest, dividends, rent, royalties), taxable capital gains.
- Taxable Income = Total Income - Allowable deductions (RRSP con’t, union dues, child care expenses, support payments, interest charges).
What are some tax deductions and credits?
- Personal, spousal and dependent (e.g. basic federal credit).
- Tuition fees - 15% up to $5,000.
- DTC - non-refundable amount of $8,235 (worth $1,235 or 15%).
- HBP - $35,000 from RSP.
- CPP con’t - 15% credit on EE con’t only.
What qualifies spousal support as a tax deduction?
- Deductive to payer and taxable to recipient if:
- payment is an allowance based on written agreement.
- payment is made on a periodic basis.
Is there a tax deduction for child support payments?
- No - they are not deductible to the payer, and are not taxable to the recipient.
What is the standby charge for personal use of company cars?
- Taxable benefits it to EE when ER’s car is used for their personal use.
- Benefit arises from:
- Ownership = 2% of original cost of car for each month it’s available.
- Leasing = 2/3 of the lease payment. - Reduced charge = (basic standby charge) x (avg. personal use KM/month) / 1,667.
What are examples of Listed Personal Property?
- Works of art (e.g. paintings, sculptures, etc.)
- Jewelry.
- Coins.
- Stamps.
- Manuscripts, books.
What is the $1,000 rule pertaining to Personal Use Property (includes Listed PP)?
- Exempt from capital gains on disposal of PUP if amount received < $1,000.
- Amount > $1,000 is treated as capital gain.
- Capital losses for LPP are deductible only against taxable capital gains from LPP.
What is Capital Cost Allowance?
- Tax deduction for the depreciation of your business or property.
- Prescribed CCA rate = 30%.
- Can only depreciate 50% in first year.
What are the 2 types of dividend income?
- Eligible - received from public companies and CCPCs that pay high corporate tax rate (38% gross up).
- Non-eligible - received from CCPCs that pay tax at small business rate (15% gross up).
How much is the special refundable tax for dividends from CCPCs?
- 38%.
What are some examples of non-taxable income?
- Gift/inheritance.
- Life insurance proceeds.
- Profits from gambling.
- Capital dividends.
- Scholarships.
- Proceeds from accident, disability, sickness.
- Payments received from child support.
What is a superficial loss?
- 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.
- This is done to prevent tax avoidance and deduction of artificial losses.
What are the income attribution rules for the transfer of gifts, sales and loans to a spouse or child over/under 18?
- Gift:
- Spouse: All sources attributed to giver.
- Child u18: Interest income and dividends attributed to giver.
- Child o18: No attribution. - 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. - 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.
When can you split retirement income?
- If clients over 65, can split RPP, RRIF, RRSP annuity payments.
- If clients under 65, can split RPP payments only.
How is the tax credit for charitable donations calculated?
- 15% on first $200 of donation, 33% on balance.
What is the Principal Residence Exemption?
- An owner is exempt from the tax if the residential property is their principal residence.
- Can only claim on property as the principal residence exemption.
- Strategy would be to designate the property that has the highest capital gain/year as PR to shield as much growth from taxes.
What is the difference between tax avoidance, evasion and planning?
- Avoidance - actions taken to minimize tax within law.
- Evasion - ignores law and willfully evades taxes.
- Planning - carefully reduce tax liability via planning.
What are CCPC tax rates?
- 11% tax rate up to $500,000.
- 15% tax rate for $500,000 and over.
What 5 criteria must a Personal Services Business (PSB) meet to be considered a corporation by the CRA?
- Provides a service.
- Individual performing tasks would be regarded as employee if corporation didn’t exist.
- Incorporated employee/shareholder owns more than 10% of shares.
- Employs fewer than 6 full-time employees.
- Fees for service aren’t received from associate company.
- What are 6 reasons to take a salary/wage as income from your business?
- Creates RRSP contribution room.
- Qualify for income tax credits, including medical expenses and child care benefits..
- Contribute to and earn CPP.
- Good when applying for a mortgage (banks like steady predictable income).
- Creates fewer surprise tax bills.
- Reduces company expenses and help qualify for SBD.
What is a Capital Dividend Account (CDA)?
- 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).
What is an Allowable Business Investment Loss (ABIL)?
- Capital loss realized on disposition of debt/equity of CCPC.
- ABIL = BIL x capital gains inclusion rate (50%)
- Excess can be carried back 3 year and forward 10 years as non-capital loss.
- Against capital gains, can be carried forward indefinitely.
What is the Lifetime Capital Gains Exemption (LCGE)?
- Applies to a qualified small business corp. (QSBC) when:
- A CCPC, 90% of assets valued at FMV are used in active business in Canada. - To qualify, CCPC shares must be held by taxpayer or person related for 24 months after disposition.
- Farm property and fishing business also qualify.
- At death, taxpayer can use unclaimed CGE and opt out of spousal rollover, transferring assets to spouse at higher ACB.
- What is the test for US residency?
- 31 days in current year or 183 days during 3-year period.
- # of days in US current year + 1/3 of # of days in US last year + 1/6 # of days in US year before last.
- If snowbird spends < 121 days in the US any tax year, they will never be considered a US resident.
How are US source dividends and capital gains taxed?
- US source dividends - 15% withholding tax
- US source capital gains - not taxed in US, only in Canada.
What is the estate tax threshold for US assets and worldwide estate?
- US assets - no estate tax if amount < 60K.
- Worldwide estate - no estate tax if amount < 5.49M.
How is a RRSP, TFSA and RESP taxed when an individual becomes a non-resident of Canada?
- No disposition at time of departure.
- No taxation on growth in TFSA, RSP/RESP is deferred.
- Withdrawals:
- RSP: 25% withholding tax
- TFSA: tax-free
- RESP: taxed in bene’s hands
What are 3 advantages of filing a tax return?
- Take advantage of RSP con’t room arising from earned income.
- Receive tax credits.
- Potentially receive a refund..
What is the penalty for filing your taxes late?
- 5% on outstanding tax balance +1% for each full month your return is late.
What are 7 income splitting techniques?
- Pay salary to a spouse (must be within reason).
- Generate capital gains in hands of children (gift/lend).
- Give money to adult child (no attribution).
- Set up inter-vivos trust.
- Split retirement/CPP income
- Higher income earning spouse pay expenses while lower invests.
- Loan money to spouse at prescribed rate.
How is the Principal Residence Exemption calculated?
- [(# of years home is PR + 1) / # of years home is owned] x capital gain = exempt amount.
- Remember that the remaining capital gain on the property after the exempt amount is deducted is still 50% taxable!
What are 5 advantages of using a holding company?
- Creditor protection.
- Estate freeze.
- Income splitting.
- Protection from legal claims against operating company.
- Tax deferral opportunities.
What are 5 disadvantages of using a holding company?
- Additional costs.
- Additional regulatory and reporting requirements.
- Ineligible for capital gains exemption.
- Difficult obtaining credit.
- Possibility of double taxation.
When does it make sense to take a dividend vs a salary (3 things)?
- 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. - 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.
What is the Alternative Minimum Tax (AMT)?
- A separate tax calculation determined in parallel with an individual’s regular income tax calculations.
- Designed to ensure that high income earners do not pay little-to-no tax but instead pay a minimum.
- Taxpayer pays higher of the two: regular income tax or AMT.
What is Undepreciated Capital Cost (UCC)?
- The amount of capital property renaming that hasn’t been depreciated (think of it as it’s new value).
What happens when the UCC is greater/less than sale price (FMV) and/or ACB?
- UCC > FMV - difference can be reported as terminal loss.
- FMV > UCC but < ACB - difference between FMV and UCC count as recapture of depreciation and declared as ordinary income.
- FMV > ACB - recapture of depreciation between ACB and UCC, as well as capital gain on FMV > ACB.
- What are some reasons to take a dividend as income from your business?
- Reduces costs (EE and ER need to contribute to CPP).
- Less filing requirements and chance of paying late penalties.
- Easier to take money out of a company than pay a salary.
What are 5 income splitting strategies to reduce taxes?
- Set up spousal RRSP.
- Higher income earner pay expenses, low income earner invests.
- TFSA and RRSP contributions, additionally higher income earning spouse can partner money to contribute to their registered plans.
- Spousal loan at prescribed CRA rate.
- If spouse owns a business, pay partner a reasonable salary for contributions to the business.
What are 3 ways that a trustee can lower taxes payable to the beneficiary of a Testamentary Trust?
- Apply for GRE - available for first 36 months of trust.
- After GRE, income is taxed at highest rate so distribute to beneficiary who will pay taxes at their lower rate.
- Target investments in trust that generate capital gains and not dividend/interest income, since they’re more favourable taxed.
When is Valuation Day?
- December 22, 1971.
- Starting point for where capital gains from publicly traded shares became taxable.
What are the income tax consequences of a spouse giving their partner money for a business that generates income/losses?
- Attribution rules do not apply for business income/losses, even if business is financed by transferred property.
How is the AMT calculated?
- 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.
Which spouse should claim any applicable medical expenses?
- 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.
What is the First-time Donor’s Super Credit (FDSC)?
- Credit for first-time donors who haven’t claimed a charitable donation in the last 5 years.
- Can receive an additional 25% on cash donations up to $1000 between 2013 and 2017.
Between two spouses, who should claim the donation tax credits?
- The higher-income spouse should claim all the donations since the credit reduces federal and provincial high-income surtaxes.
- Best to combine donations rather than having each spouse claim the credit.
What is the deadline to file a Notice of Objection to dispute a Notice of Assessment?
- The later of 1 year after filing deadline or 90 days after CRA mailed NoA/NoD.
