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Tax Planning Flashcards

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1
Q

What are the types of Investment Income?

A

It is Passive Income, such as:

  • interest income
  • rental income
  • capital gains
  • dividends
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2
Q

What are three distinct types of dividends?

A
  1. Eligible Dividends - paid by CDN publicly traded companies like RBC, manuife - they are grossed up by 38% and then a tax credit is applied of 15.02%
    EG. person gets a $20 dividend. On their tax return it is shown as $27.60 (20 x .38)… then they would receive a tax credit of $37.60 x .1502 = $4.15 - this is done to maintain some equilibrium between dividend and earned income
  2. Ineligible Dividends - paid by privately owned companies, in this case they are grossed up 15% and credited 9%

Both styles of dividends tend to be more favorable overall than regular income.

  1. Foreign Dividends: no beneficial tax treatment $100 is $100.
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3
Q

What is the primary benefit of taking a dividend over salary?

A

Allows business owner to not have to pay CPP premiums and there can be some income splitting benefits. Dividends are the only way for shareholders to take income out of a corporation.

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4
Q

What is the calculation of ACB?

A

ACB = Purchase Price + Sales Charges + Acquisition Costs

De Minimus Rules means the ACB for Personal Use Property (PUP) such as car, furniture etc unless value is less than $1000… where the ACB is assumed to be $1000 that is the De M rules

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5
Q

What is Alternative Minimum Tax?

A
  • used to target high income earners
  • one common scenario is related to the lifetime capital gains exemption (LCGE)
  • AMT calculation is ALWAYS based on lowest MTR, no matter how much the income is
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6
Q

If you are a PR of Canada and citizen of another where would you file Employment Income in Canada and Investment Income (from your home country) in home country?

A

You would file in Canada your employment and investment income from your home country

You would file in home country just your investment income from her home country

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7
Q

These items can roll over to a spouse TAX FREE

A
  1. RRIF
  2. Jointly owned principle residence
  3. Shares in a small business corporation (even with a ACB)
  4. GIC
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8
Q

Are foreign dividends grossed up?

A

No - they would be reported as their actual value on a tax return (READ WORDING!!!)

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9
Q

ACB

A
  • think of as a tax base for a piece of property
  • includes PP and any acquisition costs
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10
Q

Who are non-arm’s length people? Aka persons who are related to each other

A

Spouse or common law (except in divorce or sep)

Child - includes step child

Siblings - does not include nieces or nephews

Corp - if not at arms length with tax payer

Partnership - only if non arms lenght eg spouse

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11
Q

What is arms length?

A

transaction occurring between two or more unrelated and unaffiliated agreeing to do business, acting independently and in their self interest

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12
Q

When must self employed people file?

A

June 15

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13
Q

What range might you owe tax installments?

A

Greater than $3k

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14
Q

Tax Deduction (reduces your taxable income amount so you pay less on your marginal tax rate)

A

Any legitimate expense that can be deducted from your taxable income:
- Some medical
- Childcare
- Union Dues
- Attendant fees
- Investment counseling fees
- some employment related expenses
- Spousal support, alimony etc

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15
Q

Commission Employees tax deductions go further for what type of expenses? (In addition to regular employee paid tax deductions)

A
  • advertising
  • meals
  • promotion
  • home costs if work is in home
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16
Q

What is a “tax Credit”?

A
  • dollar for dollar reduction in amount to be paid to CRA of your tax owing
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17
Q

What are non-refundable tax credits? Money back to you on the amount of tax dollars you owe to CRA can go down to zero.

A

THEY ARE APPLIED AGAINST MONEY OWED FOR TAXES…

Only can be used to reduce federal / provincial taxes payable to zero

EG: Age credit, disability credit, caregiver credit, pension credit, charitable credit

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18
Q

How to calc Taxable Capital Gain?

A

(Capital Gain - Exemption) x 50%

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19
Q

What will trigger a Deemed Disposition?

A
  1. Personal income becoming income property
  2. transfers to a personal trust
  3. transfer of principal residence to a spouse
  4. No longer a resident of Canada
  5. Death of a Taxpayer
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20
Q

What is the Home Accessibility Tax Credit?

A

The HATC is a non-refundable tax credit for eligible home renovation or alteration expenses that allow a qualifying individual to gain access to, or to be mobile or functional within the eligible dwelling

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21
Q

What is the Disability Tax Credit?

A

-is a non-refundable tax credit that helps people with impairments, or their supporting family member, reduce the amount of income tax they may have to pay
-If you have a severe and prolonged impairment,

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22
Q

Non-Refundable Tax Credits

A
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23
Q

What is a Tax Deduction?

A
  • It comes from the TOP down
    “Spend Money To Make Money”

What are some examples (there are not many…)
- RRSP contribution (being the biggest one)
- Business expenses
- Childcare expenses
- Interest on investment loans (non-reg and expected source of income)

Example: $100,000/income, 26% tax bracket, $10,000 deduction.

-10,000 x .26 = $2,600 + provincial MTR

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24
Q

What is a Tax Credit?

A
  • Incentivize or Encourage a certain Behavior

Only at the lowest Tax Bracket (lowest Federal rate: 15% plus lowest rate for your Province)

Common Credits:
- Basic personal amount and indexed to inflation (prob roughly $15K)

4 exemptions to the lowest bracket amount:
-Charitable contributions
- Foreign investment tax
- Donations to political party

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25
Q

What is a Non- Refundable Tax Credit?

A

Reduces amount of tax you pay on your taxable income but you will NOT get money back, you use it to offset how much you pay.

If your tax credit is greater than your tax owing it is “lost” you do not get a “refund”… it’s “non-refundable”

Non-refundable tax credits are designed to reduce your federal tax payable but they don’t create a tax refund
- Childcare Credit
-Lifetime Learning

For example on your 2022 tax return, if the only credit you’re eligible for is a $500 Child and Dependent Care Credit, and the tax you owe is only $200—the $300 excess is nonrefundable. This means that the credit will eliminate the entire $200 of tax, but you don’t receive a tax refund for the remaining $300.

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26
Q

What is a Refundable Tax Credit?

A

You will get the money back as a “refund” even if lowers your tax owing to $0 - think GST Harmonized Tax Credit

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27
Q

What is CCA?

A

Capital Cost Allowance - method for allocating costs of using a physical asset over a long period of time (aka depreciation of an asset, say a building)

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28
Q

What is the capital cost?

A

initial cost of acquiring an asset (eg building)

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29
Q

How much of a CCA claim can be made?

A

Max 50%, if the asset is sold at a later date you may be able to recapture some CCA

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30
Q

UCC is?

A

Underappreciated Capital Costs - amount left after deducting CCA, the more CCA claimed the less value of the UCC of the property

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31
Q

Recapture of CCA example

A

Buy asset for $50K, UCC of 30K

eg 1: Sell asset for $20K
= 30 - 20 = 10K on terminal loss (no capital gain)

eg 2: sell asset for 40K
= 30 - 40 = 10+ UCC (RECAPTURE CCA 10K on tax return income and no capital gain)

eg: sell for 60K
= 60 - 50K = 10K cap gain

then 30k - 50K (lesser of proceeds or disposition) = 20K Recapture of CCA on business income

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32
Q

Capital Loss Rules

A

Carryforward: Back 3 years, forward forever

Superficial Loss: deny deduction if you sell and reacquire within 30 days

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33
Q

Under the Income Tax Act how much of meals and expenses are tax deductible?

A

50%

34
Q

What is the only expense that is deductible for a salaried or contract employee?

A

Professional Dues

35
Q

Why would you not want to use CCA on your home office?

A

It can hinder your principal residence exemption

36
Q

How much of your office from home space is deductible?

A

Say your house is 1,600 square feet… that means 400/1600 = 25% … you can deduct 25% of all your expenses.

37
Q

Do you deduct CPP expenses

A

One portion if you are

38
Q

AMT

A

Determine your typical annual tax in comparison to the AMT rate and pay the higher of the two

39
Q

How is AMT calculated?

A
  1. Start with regular taxable income and interest income
  2. Add back any deductions
  3. …………
40
Q

What is the Principal Gains Exemption calculation?

A

PRE = capital gains x (years as PR + 1) / number of years owned

41
Q

Do you need to report the sale of your principal residence on your tax return?

A

Yes, even if their is no gain. you are required to report it

42
Q

What is required for a home to be considered a principal residence?

A
  • family must live in it for some point of the year it is deemed PR
  • owned, jointly owned
  • house, apartment etc
43
Q

What are some things to mention regarding PRE

A

The client needs to be made aware that….

  • only one property can be designated as the PR
  • ## maximizing PRE exemption can lower your overall taxes
44
Q

What is the “kiddie income tax”

A

TOSI rules under 18 when a corp pays a child a salary, they will be taxed at highest MTR

45
Q

To be paid a salary from a private corporation, what does the employee need to meet?

A

A reasonableness test, meaning they work at least 20 hours per week and are actively engaged in the business - at least in the past year or 5 years.

46
Q

How is trust income taxed?

A

In the beneficiaries hands

47
Q

What dividends are given tax credits?

A

Eligible and ineligible dividends from Canadian corporations ONLY

  • if from US or foriegn, taxed as regular income (like interest)
  • Eligible dividends are given less tax relief so they have a higher gross up and tax credit, smaller canadian corps have been given some tax relief and therefore get a lower gross up and credit
48
Q

Do you ever get dividend tax credits in an RRSP

A

No, never…when it does come out its taxed as income

49
Q

Where are dividends reported?

A

On a T5

50
Q

What is a Superficial Loss

A

Occurs when you dispose of shares and buy them back again, negating any losses you could have realized.

  • youc annot deduct a superficial loss from your income
51
Q

How to avoid a Superficial Loss?

A
  1. Repurchase the same security after 30 days of settlement (do not own security on 30th day)
  2. Sell shares and then buy shares of similar corp providing same exposure
  3. Purchase a derivative contract
52
Q

What are 3 exceptions to the Superficial Loss Rules?

A
  • sold because cease to be a resident of Canada
  • owner died
  • expiry of option
53
Q

What is standby charge?

A

When a vehicle is available to you for personal use

2% of car cost when owned x months… so
2% x 20,000 x 12 months

54
Q

CCA claiming

A
  1. you can only claim CCA on the BUILDING portion of the property eg $712,500 of $900K

FORMULA for CCA:
CCA = (OG Cost - CCA claimed in previous years) x CCA rate

55
Q

What is the remaining amount to be depreciated in CCA called?

A

The UCC Under appreciated Capital costs

56
Q

When Claiming CCA you can only…

A

Claim the portion of the building x CCA rate per year. If you generate rental or property income you can only claim the amount of the income. When you sell, if for more you will have to recapture the CCA you claimed as regular taxable income.

57
Q

What is Marginal Tax Rate?

A

It is the amount of tax paid on any additional dollars earned.

Remember - you use MTR to calculate after tax values for investment income, dividend income, interest income etc

58
Q

To calculate Average Tax Payable

A
  1. calculate total income, remember if you have eligible or ineligible dividends from Canada you must gross those up
  2. take each tax bracket and multiple the amount of tax paid in that bracket in the graudated amounts - add all those up
  3. AVG TAX RATE = TOTAL TAX PAYABLE / TOTAL INCOME … this gives you the AVERAGE total tax rate…
59
Q

How to calculate ANNUAL EXPECTED RETURN on a portfolio of mixed asset returns

A

(3.9% ROR)(percentage of portfolio assets, say 75% would be .75) + (6.3%)(.25) = 4.5%

You take the expected ROR for that asset class and multiple it by the percentage of that asset in the whole portfolio… and then add all the other to it to get the AVERAGE.

60
Q

How does dividend gross up work!?

A
  1. calculate the dividend income
  2. calculate the dividend gross up (eligible 1.38, ineligible 1.15)
  3. now with the grossed up amount calculate the tax credit amount (15 or 9%)
  4. take the GROSSED UP amount and multiply it by the tax rate (say 26%)
  5. Now with the tax payable amount with grossed up numbers MINUS the tax credit amount portion from 3. to remove some tax owing and this will be YOUR FINAL TAX OWING

**The tax credit always come off the final tax payable amount at the end.

61
Q

When are Long Bond maturities good?

A

Good in a portfolio if rates are expected to fall and investors will still be receiving high coupons

LONG = GOOD if rates FALLING

62
Q

Long bonds are good for

A
  • when interest rates are falling
  • when an investor has a long time horizon
  • usually during recessions
63
Q

When are Short Bond maturities good?

A
  • lower risk investors
  • conservative and nearing retirement
  • nearing financials goals requiring liquidity
64
Q

What do bonds with staggering maturities achieve?

A
  • reduces reinvestment risk
  • short term bonds reinvest in long term bonds
  • when flexibility is required
65
Q

How to calculate average tax rate?

A

taxes paid / gross income

63,000 / 180,000 = 35.5%

66
Q

Common Shares represent what?

A
  • Equity ownership of the company
  • “owners’ of the company
  • no guaranteed dividends
    -Class A class B
  • growth attributed to common shareholders
67
Q

What do Preferred Shares represent?

A
  • more of an investment vehicle (not ownership like CS)
  • Opportunity to earn dividends but not necessarily voting rights
  • hybrid of debt and equity
  • PS senior to CS if Co. becomes insolvent
  • unlike CS, no growth value - just income producing
  • ## PS are issued with a “par value” which means their PAID UP CAPITAL to the company - eg a PS sold for $25 would have a PUC of $25
68
Q

What is the purpose of a Holding Company?

A
  • exists to hold share in other corporations
69
Q

ABIL is?

A

Allowable Business Investment Loss - carried back 3 years and forward 20 years. On any income, not just interest income HOWEVER if not claimed in 10 years then it is only applicable against capital gains and not any income

Say you invest $100K in new business… you lose $100K, 50% inclusion rate on your loss = $50K dedcutible loss

70
Q

Be aware of the difference OF

A

Allowable capital loss and capital loss - carry loses can be carried forward indefinitely

AS WELL AS

taxable capital gain and capital gain

71
Q

Capital losses can be?

A

Carried forward indefinitely on any capital gains, however in the year of death they can be against any income on the terminal return

72
Q

Who can claim Capital Loses?

A

Sole Proprioters
Partnerships
Corporations

All three, doesnt matter

73
Q

What is the UCC? Undepreciated Capital Cost?

A

It is the amount of the asset we have not applied the depreciation to … amount left in the next year to depreciate

Year 1: UCC x

74
Q

When deducting CCA (capital cost allowance) what percentage of the depreciation rate can you do in year 1?

A

50% of depreciation rate only… so if 20%, in year 1 you use 10%

75
Q

Dividend Gross up Quick example / facts

A

Take the invested amount:
= $111,650 / Gross up: 38% / Credit: 25% / MTR: 51%

Question says: 3% of that is eligible Canadian Dividends

What is the Dividend payable?
A: 111,650 x 3% = $3,349.50

What is the Dividend Gross uP?
A: $3,349.50 x 1.38 = $4,622.31

What is the tax on Dividend?
A: 4,622.31 x 51% = $2,357,38
- use grossed up amount to get tax payable

What is the Dividend Tax Credit?
A: $4,622.51 x 25% = $1,155,58
- use grossed up amount to get tax credit-able

What is the After Tax Return?
- THIS IS WHEN YOU GO BACK TO ORIGINAL DIVIDEND AMOUNT, YOU MINUS THE TAX ON DIVIDEND FROM GROSSED UP NUMBER AND THEN ADD THE CREDIT FROM GROSSED UP NUMBER
A: $3,349.50 - $2,357.38 (tax) + $1,155.58 (credit)
After Tax Return = $2,147.70

How do you get the After-Tax Investment Return %?
A: After tax return / total investment account
= $2,147.70 / $111,650
= 1.92% After tax investment return

76
Q

Spousal Loan Quick Facts

A

Relationship Breakdown conerns:
- Repayment of loan - what is the understanding / deal
- Risk tolerance

How do you prevent income attribution back to lending Spouse?
1. With a formal loan agreement
2. Spouse B pays Spouse A interest by January 30th of each year the loan is in force (using the prescribed rate)
3. Spouse A must claim the interest as taxable income

77
Q

Things to remember with calculating return, fees and tax on a portfolio…

A
  1. to calc the GROSS RETURN you take that portfolio value (100,000 x ROR 3%)

2 to calc the FEES you take the portfolio return PLUS the OG portfolio value and multiple the fee rate:
(100,000 + 3000 ROR) x 1% fee = 1,300

  1. To calc the taxes you tax GROSS RETURN MINUS FEES and multiple that number by the client tax rate -
    REMEMBER: (ROR AMOUNT - FEES) x tax rate
    REMEMBER: TFSAs, LIRAs and RRSPs are $0 tax
  2. NET RETURN in dollars is
    =(gross return - fees - taxes (if non reg acc))) = net ROR
78
Q

Pension Buyback requires?

A

RRSP contribution room, it can be earned in the year they work

79
Q

After tax monthly income

A

Say your gross income is 80,000
your tax rate is 34%

(80000/12) x (1-.34)
= 4,400 after tax

VS $6,666.66 pre tax

80
Q
A

CFP Exam (18 decks)

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