Tax Planning

Question 1

What is the tax treatment of DCPPs?

Answer 1

Employer contributions are tax deductible to employer and not considered taxable income for the employee.
Employee contributions are tax deductible to the employee.

Question 2

How long is the attribution period for Spousal RRSPs? What are some exceptions?

Answer 2

Withdrawals will be taxed in the hands of the annuitant (not the contributor) if withdrawn after 2 full calendar years since the last contribution to the Spousal RRSP. This applies even if the Spl RRSP is converted to a Spl RRIF.

Exceptions:
- Living separate and apart due to a breakdown of their relationship
- Taxpayer and spouse were non-residents
- The withdrawal was a commutation payment that was directly transferred, in the name of the spouse, to another RRSP or RRIF or to purchase an eligible annuity that cannot be commuted for at least three years.
- The contributor has died

Question 3

What is the First-Time Home Buyer’s Tax Credit?

Answer 3

The First-Time Home Buyer’s Tax Credit is a $5,000 non-refundable credit given to eligible first time home buyers.
One per couple is allowed - any unused portion may be transferred to spouse.

Effective credit is $5,000 x 15% (federal conversion rate) = $750.

Question 4

What are some non-refundable tax credits transferrable to the taxpayer’s spouse/common-law partner?

Answer 4

• Tuition credits (max $5,000)
• Age credit (received if you will be 65yo at Dec 31st; clawed back from ~$39k-$90k)
• Pension income credit (not the tax credit for CPP contributions)
• Disability credit

Question 5

How do you calculate the medical expense tax credit?

Answer 5

Eligible medical expenses that is ABOVE the yearly threshold or 3% of the net income of the taxpayer, whichever is less.
Expenses incurred by the taxpayer, spouse, or specified dependent relatives may be claimed by the taxpayer.

Premiums paid to a private health services plan also qualify as medical expenses.

Medical Expense Credit = [Medical Expenses - lesser of {Net income x 3%, Threshold}] x 15%

Question 6

What is the charitable donation tax credit?

Answer 6

The tax credit is calculated as 15% of your donations up to $200 ($30 in credit), then 29% of donations over $200.

You can also receive 33% of credit for, if your income is above the highest MTR, the lesser of your donations above $221,708 (the highest MTR ON) and the amount donated above $200:

15% of donations up to $200 = credit1
[($Donation - $200) - ($Income - $221,708)] x 29% = credit2
Lesser of {($Donation - $200), ($Income - $221,708)} x 33% = credit3

Question 7

Can charitable donations be carried back?

Answer 7

Yes, at the year of death, it can be be carried back 1 year.
Normally, unclaimed donations in any year that exceeds net income limit for that year can be carried 5 years.

Question 8

How are capital gains treated in a charitable donation?

Answer 8

Capital gains realized by a donation of appreciated capital property will increase the net income limit of the donation.
The limit increases by the amount of the taxable CG, and then further increases the limit by 25% of the taxable CG.

So, new limit is
[(net income + taxable CG) x 75%] + (taxable CG x 25%) = new donation limit

Question 9

What is the net income limit for charitable donations?

Answer 9

For charitable and crown gifts - 75% of net income, 100% year of death
For cultural gifts - 100% of net income
For ecological gifts - no net income limits

Question 10

What are the options for paying tax by installments?

Answer 10

1) No Calculation Option - CRA estimates for you; no penalty if numbers are incorrect
2) Prior-year Option - Pay 1/4 of the previous year’s balance; could have penalty if you are wrong on amount owing
3) Current-year Option - Pay an estimated amount based on current-year income

Payment deadlines are:

Individual - Apr30
Self-employed - Jun15 (Apr30 if you owe tax)
Trusts - 90 days after trust fiscal year-end
Corporations - 180 days after fiscal year-end
Deceased - Jan1-Oct31 = Apr30, Nov1-Dec31 = 6 months after date of death

Question 11

What are penalties for late filing of tax? Late to pay overdue taxes?

Answer 11

The late filing penalty is:
5% of tax owing at time return was due PLUS
1% of tax owing (multiplied by #of months the return is not filed, max of 12 months)

Late consistently:
10% of tax owing at the time return was due PLUS
2% of tax owing (multiplied by #of months the return is not filed, max of 20 months)

If you owe money on your tax return and you mail the cheque on Apr30, there is a prescribed nominal rate on overdue taxes per day.

Question 12

What are some civil penalties for misrepresenting while filing tax?

Answer 12

Planner Penalty - (Ringleader) penalty for making, or causing another person to make, a false statement
Penalty is the greater of $1,000 and the total of the gross entitlements (aka. commission) from the statement

Preparer Penalty - (“Should know better”) work was performed by a taxpayer or group
Penalty is the greater of $1,000 and the [lesser of {planner’s penalty from other party, $100k plus compensation}]

Question 13

What is the section 73 rollover?

Answer 13

Spousal rollover - rollovers at cost (remember: attribution rules still apply).
May opt out to stop attribution and/or to take advantage of capital losses in the moment

Question 14

What is the carry-forward (back) on non-capital losses?

Answer 14

Can deduct non-capital losses on any sources of income (from, eg. losses from sole proprietorship business).
Can carry back 3 years or forward 20 years

Question 15

What is the carry-forward (back) on net capital losses?

Answer 15

When you sell an investment at a loss - must deduct loss against gains in the current year and any excess losses become net capital losses.

Can deduct against capital gains ONLY, and can carry back 3 years or forward INDEFINITELY.

In DEATH, the representative can carry the NCL back and deduct it from taxable CGs realized in the 3 PRECEDING years OR the final net capital losses (after all capital gains) can be deducted from any taxable income in the year of death or year preceding death.

Question 16

What are Allowable Business Investment Losses (ABILs)?

Answer 16

ABILS are losses resulting from business investments from a limited partnership or small business (CCPCs) NOT yours.
Effective ABIL is 50% of the business investment loss, deductible against any source of income.

Can be carried back 3 years or forward 10 years. In the 11th year, becomes a net capital loss.

Question 17

What is the Alternative Minimum Tax (AMT)?

Answer 17

AMT prevents high-income earners and trusts from paying little to no tax as a result of certain tax incentives.
You calculate tax in 2 methods - regular and AMT, then pay the higher of the 2 amounts. The AMT liability is based on your “adjusted taxable income”.

The adjusted taxable income takes your taxable income, adds back certain tax preference items (eg. tax shelter deductions, interest expenses, employee stock option deductions, LCGE, Canadian dividends and realized CGs), adds back 30% of CGs, deduct the dividend gross-up,

Question 18

How do you calculate a recapture or terminal loss in a CCA class?

Answer 18

Formula:
UCC - lesser of {ACB, Selling Price}

(-) RECAPTURE - depreciated too quickly
(+) TERMINAL LOSS - did not depreciate enough.

To avoid recapture or terminal loss, you can bump up the class by buying an item of that class before the end of the year.

Question 19

What are Eligible Capital Expenditures (ECE)?

Answer 19

ECE are intangible assets that are depreciable (eg. cost of franchise/right/license for an indefinite period, goodwill, customer lists, certain legal expenses such as incorporation costs, incorporation/reorganization/amalgamation costs).

They have a 75% inclusion rate (instead of the 50% for regular CCA) and are amortized at 7% CCA rate.
Eg. if incorporation costs $900, EC Account = $675, CCA that can be claimed year 1 is $47.25 and year 2 is $43.94.

Question 20

What are capital gains reserves?

Answer 20

When a taxpayer sells capital property but does not receive all the proceeds immediately, the gain can be spread out over several years.

CG Reserve (CGr) is the lesser of:
(Outstanding proceeds/Total proceeds) x CG AND
1/5 CG x (4 - N) where N = # of years since property sold

CG1 = CG (Total) - CGr1
CG2 = CG1 - CGr2
…

NOT taxable CG, but TOTAL CG

So, max you can spread out CGr is 5 years
10 for farm/fishing to children: formula is 1/10 CG x (9-N)

Question 21

What are the tax consequences of a change in property from income-producing to non-income producing?

Answer 21

The CRA allows 4 years of the rental property to qualify for the principal residence exemption (PRE); the remainder you would need to to pay CG/CL as it would be a deemed disposition.

This is only applicable if no CCA was claimed.

Question 22

What are the tax consequences of a change in property from non-income-producing to income producing?

Answer 22

Your principal residence will be shielded by tax, and it will now turn into a rental property with its ACB as the greater of {FMV, capital cost}

Question 23

What is the cumulative net investment loss (CNIL)?

Answer 23

CNIL rules were put in place to limit the extent to which taxpayers could use tax shelters as well as the LCGE.
The CNIL balance reduces the LCGE (CNIL can be generated from interest expense deductions from loans to invest).

When there is a CG generated, the CNIL amount is added on to the taxable CG.

Question 24

What is the small business deduction (SBD)?

Answer 24

The small business deduction is available to qualifying small business corporations, or CCPCs, as a reduction on the taxes you pay.
Applies on the first $500k of active business income (can reduce income to hit via bonuses, group benefits/RRSP, IPP).

Corporate tax rate 38%
Federal abatement (10%)
New tax rate 28%
SBD (19%) 2021
New effective rate 9%

Question 25

What is Part I and Part IV tax?

Answer 25

Part IV applies to corporate-retained dividend income, calculated as (Retained Dividends) x 38 1/3% as tax payable.
In the future, if you pay dividends to shareholders, you get a refund of 33 1/3% of the Part IV tax you’ve paid via RDTOH.

Part I applies to all other income not dividends. Pay 44 2/3% when retained, RDTOH refund of 26 2/3% when paid out.

Question 26

What are the historical capital gain inclusion rates?

Answer 26

1972 to 1987 = 50%
1988 to 1989 = 66 2/3%
1990 to Feb 27, 2000 = 75%
Feb 28, 2000 to Oct 17, 2000 = 66 2/3%
after Oct 18, 2000 = 50%

Question 27

What was important about the year 1994 regarding the LCGE?

Answer 27

The year 1994 allowed everyone to access $100,000 of LCGE to apply to their property.
Business owners who have used this in 1994 have a reduction in their current LCGE of the used amount.

Question 28

What is the Child Care Benefit (CCB)?

Answer 28

The Canada Child Benefit is a non‑taxable amount paid monthly to help eligible families with the cost of raising children under 18 years of age.

Question 29

What are some allowable business expenses?

Answer 29

• Premiums for insurance on commercial buildings, machinery, equipment
• Meals and entertainment: 50% of business meals, beverages, amounts incurred when entertaining clients
• Travel: expenses incurred to earn income including public transportation fares, hotel accommodations and meals (50%)
• Interest: on money borrowed to run the business
• Office expenses: office supplies

Question 30

What is the tax calculations for corporate tax?

Answer 30

• Basic federal rate 38%
• General Rate Deduction (13%)
• Federal Tax Abatement (10%)
  = Effective federal tax payable 15%

Eg. Business taxable income $100,000
+ Basic federal tax $38,000
- General rate deduction ($13,000)
- Federal tax abatement ($10,000)
= Federal tax payable ($38,000 - $13,000 - $10,000 = $15,000)

Question 31

What are the dividend gross-up rates and credits for CCPC and non-CCPCs?

Answer 31

CCPC:
Gross-up 115%
Dividend Tax Credit 9.0301%

Non-CCPC:
Gross-up 138%
Dividend Tax Credit 15.02%

Question 32

What is the small business deduction?

Answer 32

The SBD is available to be used by CCPCs to reduce their federal tax payable up to $500k, on active business income generated in Canada. The limit reduces $100k per million after $10M of taxable capital, with the whole reduced at $15M.

It is set at 19% of the lesser of (active business income, taxable income, SBD limit at $500k).
This reduces the net federal small business rate to

Federal rate 38%
Federal tax abatement (10%)
SBD (19%)
Net federal tax payable = 9%

Any amount of active business income above the “lesser” threshold from above is taxed at the regular CCPC rate of 15%.

Question 33

What are the requirements to become associated corporations?

Answer 33

• One corporation controls another
• Both corporations are controlled by the same person or group of persons
• The people who control each corporation were related to each other and at least one of them owns at least 25% of the shares in both corporations

Question 34

What is Part I and Part IV tax?

Answer 34

Part I tax is ordinary income tax applied to dividends received by a corporation. Generally this is in the context of intercorporate dividends, in which case dividends pass free tax-free from one taxable Canadian corporation to another and deducted from income from taxable income.
There is an additional Part I tax on certain investment income (other than dividends) of 10.667%.

Part IV tax is 38.33% of retained dividends from portfolio investments from private corporations, which funnel into the RDTOH notional account.
When the corporation pays taxable dividends to its shareholders, the tax is refunded to the corporation at 38.33%.

Question 35

What are the filing deadlines and penalties for corporations?

Answer 35

• A corporation must file a T2 return within 6 months of the end of its taxation year.
• If late, there is a penalty of 5% of the unpaid tax that is due, plus 1% for each month it is late up to a max of 12 months.
• Increased to 10% and 2% respectively if the CRA issued a demand to file the return, or was late in 3 years.

Question 36

What is a Section 85/86 Rollover?

Answer 36

In the case of a closely-held corporation, you can rollover common shares for preferred shares without recognizing a disposition or the realization of capital gains, called the Section 85/86 Rollover (ITA 85(1) and 86(1)).

As each year passes, the dividends on the preferred shares are paid to the original taxpayer and the remaining after-tax earnings and the appreciation of the corporation’s assets accumulate to the benefit of the common shareholders (aka. estate freeze).

Question 37

What is a corporation’s general rate income pool (GRIP)?

Answer 37

The GRIP is the amount of retained earnings that is taxable income to the corporation in excess of the small business deduction or other special tax rates.

CCPCs can pay eligible dividends up to the GRIP amount. Any dividends beyond the GRIP amount are deemed ineligible dividends.

Question 38

How do you calculate the deemed interest benefit for shareholder loans?

Answer 38

The greater of {$0, (A - B)}

Where
A= Interest on debt at the prescribed rate for the period in the year the debt was outstanding
B = Interest for the year paid by any party on debt within the year and 30 days after

(Loan Amount) x (Prorated average interest rates - interest paid within year and 30 days after)

Question 39

Can you report your spouse’s earned dividends on your own tax return?

Answer 39

Yes, if your spouse has little to no income, you can claim the dividends on your tax return in order to avoid a reduction in the spousal amount. You will be able to claim the dividend tax credit as well.

The spousal amount is calculated as the
(Personal amount of spouse - net income of spouse) x 15%

Question 40

How do you calculate a taxable income arising from a sale of LCGE-eligible property?

Answer 40

1) (LCGE - LCGE used) x 1/2 = LCGE Limit Available
2) Capital gain deduction = lesser of {LCGE Limit Available, taxable CG - CNIL}
3) Taxable CG - Capital gain deduction = taxable income

Question 41

What is the “income splitting tax” (aka the kiddie tax)?

Answer 41

The income splitting tax is a tax applied on property income and capital gains received by individuals under 18 year old.

The rate is at the highest tax bracket instead of graduated rates except for those arising from the death of a parent. While the property income may generate a dividend tax credit or a foreign tax credit, they may not be offset by the personal tax credit.

Question 42

When can a shareholder get a loan from the corporation?

Answer 42

1) In the course of the lender’s ordinary business (which must be lending money - NOT taxable)
2) To facilitate a home purchase by an employee
3) To facilitate the purchase of previously unissued shares of the corporation or a related corporation by an employee
4) To facilitate the purchase of a car to be used in employment duties

Under 2/3/4 the loan is taxable income and the corporation receives no tax deduction. The shareholder receives a tax deduction when they repay the loan, to the extent that the loan amount was previously included in income.

Question 43

What can you deduct from car expenses as a self-employed individual?

Answer 43

Premiums for auto insurance + fuel + maintenance costs + CCA + leasing costs + car loan interest**

• = lesser of {actual interest paid, $10 x days interest payable/paid}

All of the above are in proportion to business-related travel.
If the taxpayer has an insurance rider, the full amount of the rider is deductible.

Question 44

What are restricted farm-loss rules (RFLs)?

Answer 44

RFLs restrict the losses able to be incurred by taxpayers whose chief source of income is not farming or a combination or farming and other sources of income.

The amount of the loss you can deduct is the lesser of
1) Actual farming loss
2) $2,500 + (1/2 (lesser of {farming loss - $2,500, $30,000})

The max losses you can claim if this is the case is $17,500.

Question 45

What are the tax payment deadlines for trusts, individuals who died, and individuals?

Answer 45

Trust: 90 days after the end of the trust’s fiscal year
Deceased: (Jan - Oct) Apr 30th, (Nov - Dec) 6 months after day of death
Other individuals: Apr 30th

Penalty is prescribed interest in proportion to days late: PV (-amount due), I (rate), N (n/365), PMT (0) Solve FV.

Question 46

What are the tax filing deadlines for trusts, individuals who died, and individuals?

Answer 46

Corporations: 6 months after fiscal year-end
Deceased: (Jan - Oct) Apr 30, (Nov - Dec) 6 months after day of death or June 15
Trusts: 90 days from trust fiscal year-end
Self-employed and spouses: June 15
Individuals: Apr 30

Penalties are 5% tax owing at the time return was due, 1% additional every month it is late to a max of 12 months

Question 47

What are rules concerning reassessments of tax returns?

Answer 47

• The CRA can reassess a return within 3 years it issued the original NOA, or even later if it can prove fraud or misrepresentation or if the taxpayer signs a waiver.
• The taxpayer can reassess returns via letter or complete form T1-ADJ (Adjustment request)

Question 48

What is the process of objections/appeals to a dispute in their tax assessment?

Answer 48

1) Initial objection - filing an objection reviewed by the Appeals Division. Can be the later of 1 year after filing deadline, or 90 days after the CRA mailed the NOA

2) Tax Court of Canada - appeal to the court formally ($250-$550) or informally ($100) within 90 days of mailed Notice of Reassessment/Confirmation. The judge can order the CRA to pay part of the legal costs if appeal is successful by more than 50% (informally), and a portion from either party (formally)

3) Federal Court of Appeal - if filed within 30 days of the date the Tax Court of Canada communicates its decision

4) Supreme Court of Canada - if permission obtained from the Supreme Court

Question 49

What is a restriction for claiming CCA for rental property?

Answer 49

A taxpayer cannot use CCA to create a sum rental loss, especially because a rental loss can be applied to other sources of income.

Question 50

What is CCA?

Answer 50

CCA is used to account for the natural depreciation on a depreciable property used to earn income. Separated into different property types (classes), the rate of CCA (depreciation) able to be claimed for a deduction differs per class. The taxpayer is not required to claim any amount. Land is not a depreciable property.

If a taxation year is less than 12 months, the CCA rate is prorated to account for the difference.

In the first year of acquisition, the taxpayer can only claim 50% of net additions to a CCA class for that year.

Question 51

How is capital cost for CCA calculated for different classes?

Answer 51

• Soft costs (renovation/construction/alteration costs) can be included in the property. The first $3,000 of incorporation expenses are deductible as a current expense, rather than added to capital cost.
• Passenger vehicles used to earn income: Lesser of {Cost, threshold} + PST + (lesser of {cost, threshold} x GST)
• Rental buildings can be added to the CCA class when available for use: earliest of {90% rent-out date, 2nd year after acquisition, time right before disposition}
• Buildings under construction/renovation: above, plus date the renovation/alteration is completed, on net rental income
• Each rental property acquired after 1971 >$50,000 needs to be recorded in a separate class for CCA purposes

Question 52

How does attribution rules change in respect to spouses living separate and apart?

Answer 52

Property income will not be attributed to the donor when the couple are living separate and apart due to a breakdown of their relationship.
Capital gains, however, will still apply, unless the couple jointly elect otherwise.

Question 53

What is the Section 85 Rollover and its implications?

Answer 53

A Section 85 Rollover refers to property transferred to a corporation. They can then elect the DEEMED PROCEEDS an amount within an upper and lower limit; depending on the scenario, the tax consequences will be different.

1) Transferred for share consideration only - ACB is lower limit.
Cannot generate CL with transfer, but defer CG to the corporation.

2) Transferred for at least one share consideration plus non-share consideration (between FMV and ACB) - FMV is lower limit.
Cannot generate CL with transfer, but defer CG to the corporation. Gain/loss is recognized of FMV of the non-share consideration less the ACB.

Question 54

What are stop-loss rules?

Answer 54

The stop-loss rule states that if an individual taxpayer who has control over a private corporation that paid him or her capital dividends subsequently disposes of those shares and that disposition results in a capital loss, that loss is reduced by the lesser of:

1) The sum of all capital dividends received by the taxpayer on those shares and
2) The loss minus all taxable dividends received by the taxpayer on those shares

Question 55

What is the treatment of bad debts in regard to losses?

Answer 55

If an actual or deemed disposition of debt gives rise to a loss, that loss will be considered to be a capital loss, in either of the following situations:

1) The taxpayer made the loan for the purpose of gaining or producing income
2) The debt was consideration for disposition of capital property in an arm’s length transaction

If the taxpayer made an error in declaring a debt to be a bad debt, the fact that he or she is deemed to reacquire the debt at a cost of nil at the beginning of the next year will correct his or her oversight. Any recovery will then be a capital gain.

Question 56

What is the tax implications of forgiven debt?

Answer 56

The taxpayer will have to recognize the forgiven debt as a gain for tax purposes, first applied to non-capital loss and net capital loss carryovers. Then they can use the remaining to reduce the capital cost or UCC of certain depreciable property or the ACB of certain property.
Any remaining amounts will be included in the taxpayer’s income with a 50% inclusion.

Question 57

What are the requirements to qualify as a QSBC?

Answer 57

• At least 90% of assets used in active business in Canada
• At least 50% of assets used in active business in Canada within the past 24 month period and not owned by an unrelated person
• Owned by taxpayer, spouse, or a related partnership

Question 58

How do you calculate the reduction in capital gains via the principal residence exemption?

Answer 58

[ (N1 + 1) / N2 ] x Realized CG

N1 = # of years designated as PR after 1971
N2 = # of full or partial tax years of ownership after 1971

The # of years between 2 dates is calculated (most recent year – earliest year + 1)

A taxpayer was able to designate 2 residences as principal residences eligible for the exemption prior to 1982

Question 59

How is the treatment of CG deferred for former business properties?

Answer 59

If a taxpayer disposes of a former business property (real property), then purchases a replacement property by the end of the following tax year, the CG deferred to the extent that the proceeds of disposition are used to acquire the replacement property.

The ACB of the replacement property is reduced by the amount of the CG on the former property that would otherwise be determined, minus any CG that the taxpayer is required to report:
ACB = [Cost of new property - (total CG on old property - reported CG)]

Question 60

What is V-Day and its use?

Answer 60

V-Day is used with the tax-free zone method in determining the ACB of property owned on Dec 31, 1971. Individuals can elect to use V-Day values and corporations must use the tax-free zone method.

The deemed cost of a property disposed will be the median of {proceeds, V-Day value, average cost}. When you dispose shares, you are deemed to have sold the pre-1972 shares first.

Question 61

How do you calculate the Reduced Standby Charge?

Answer 61

The reduced standby charge is used when annual personal use of the car is <20,000km.

Reduced Standby Charge = (Basic Charge x avg. personal-use km/month) / 1667

Basic Charge = Car cost x 2%

Question 62

When are loyalty rewards benefits tax-free?

Answer 62

When the rewards meet the following criteria:
1) The points are collected by the employee directly using their personal credit card
2) The benefits cannot be convertible to cash
3) The program is not part of a scheme of alternative remuneration
4) The plan is not a tax avoidance scheme

Question 63

When are relocation expenses paid by employer taxable?

Answer 63

• Any reimbursement >$5,000 made in respect of mortgage interest, property taxes, heat, hydro, property insurance, and grounds maintenance costs to keep up the old residence after the move, when all reasonable efforts to sell have not been successful
• Any reimbursement made in respect of financing, such as higher mortgage interest payments at the new residence, bridge financing and mortgage interest on the unsold former residence
• Any compensation made in respect of a loss on the sale of the former residence or a decrease in the value of the former residence, up to half of the amount that exceeds $15,000

Question 64

What are the automobile allowances?

Answer 64

An automobile allowance is given to an employee whose personal vehicle is used for business purposes as a non-taxable benefit.
- 61¢/km for the first 5,000km driven ($3,050)
- 55¢/km driven after that

Question 65

What are some Deductible Employment Expenses?

Answer 65

• Legal Fees - paid to collect or establish a right to salary or wages from the employer
• Motor Vehicle Expenses - if allowance not collected
• Professional or Association Dues
• Travel Expenses - if reimbursement not collected
• Workspace-in-Home - if required to work at home >50% of the time via contract. Commissioned salespersons can deduct a portion of property taxes and home insurance along with a reasonable portion of home maintenance expenses
• Sales Expenses and Commissioned Salespersons - if not reimbursed by the employer and are required to work away from place of business, can deduct the following:
  i) Advertising costs
  ii) The cost of promotional gifts
  iii) The cost of entertaining clients, subject to the 50% rule
  iv) The cost of leasing computer or other business equipment

Question 66

How are stock options treated in terms of tax?

Answer 66

Benefits from a stock option are generally included in the individual’s employment income in the year exercised, as the difference between $X - $Cost.
The ACB = (# of shares x $X) + Taxable benefit

For stock options of CCPCs, the taxable benefit is included in income the year the shares are disposed of, at an inclusion rate of 50% if the taxpayer has held the shares for at least 2 years as of the date of sale.

For stock options of public companies, the benefit inclusion is 50% as long as the acquisition occurred after Feb 7, 2000, the employee is dealing at arm’s length, and the employee is not a specified shareholder (<10% shares).

Question 67

How do you calculate the Alternative Minimum Tax (AMT)?

Answer 67

AMT is calculated by

      1) Taxable income from T1 General 
      2) PLUS 30% of total CGs added back, employee home relocation and stock option deductions
      3) LESS 27.54% of grossed-up taxable dividends
                  = Adjusted taxable income
      4) LESS Basic AMY exemption ($40k) 
                  = Net Adjusted Taxable Income
      5) Gross minimum amount: federal rate of 15% x NATI
      6) PLUS certain personal tax credits (eg. basic personal, age, spousal, disability, tuition, medical, charity)
      7) LESS transferred tax credits (pension income, disability transferred, spousal transferred, tuition transferred)
                  = Alternative Minimum Tax

Question 68

What is the carryover rule for AMT?

Answer 68

The AMT in excess of the minimum amount over the normal amount can be used to reduce taxes payable under the normal system for 7 years.
The taxpayer calculates his or her tax for each of the following years under the normal and AMT systems. If the normal amount exceeds the AMT amount, the carry-over can reduce the normal amount, but not to an amount less than the AMT.

Question 69

How do you calculate the standby charge for a vehicle when owned vs. leased?

Answer 69

Standby Charge (Owned) = 2% x (Cost of Car) x (Months available)
Standby Charge (Leased) = 2/3 x (Monthly lease cost less insurance) x (Months available)

If business use exceeds 50% of total use, prorate the standby charge.

Question 70

How do you calculate the operating costs for a vehicle?

Answer 70

Operating Costs = (Prescribed $/km) x (personal km driven)

If business use exceeds 50% of total use, operating cost = 1/2 standby charge.