Tax Planning and Small Business Flashcards
When is the deadline for filing tax return?
Employees: April 30
Self-employed: June 15
Estate: June 15th or 6 months later after death, whichever is later
Trusts: 90 days after fiscal year end
Corporation: 6 months after fiscal year end
What is tax credit?
A “tax credit” is a dollar-for-dollar reduction in the amount of tax that must be paid.
What is a non-refundable tax credit?
A non-refundable tax credit can only be used to reduce federal or provincial/territorial taxes payable to zero. (For example, basic personal credit, age credit, charitable donation etc.).
What is the gross up and federal tax credit for an eligible dividend?
38% gross and 15.02% dividend tax credit.
What is the gross up and federal tax credit for an ineligible dividend?
15% gross and 9.03% dividend tax credit.
What is the basic orders of calculating taxable income?
Total Income
- Allowable deductions (RRSP contributions, child care expenses etc.)
- Additional Allowable deductions (net capital losses etc.)
= Taxable Income
What are federal tax brackets?
$13,808 to $49,020 15% $49,020 to $98,040 20.5% $98,040 to $151,978 26% $151,978 to $216,511 29% Over $216,511 33%
What is capital cost?
The initial cost of acquiring the asset.
What is Undepreciated Capital Cost?
This represents the amount left after deducting CCA from the capital cost of a depreciable property. Each year, the CCA claimed reduces the UCC of the property.
What does capital cost allowance refer to?
Basically depreciation of a property.
Only 50% of original cost can be claimed CCA the year of purchase.
Maximum CCA = Net Rental Income
When would a Recapture of CCA occur?
- If an asset’s salvage value is greater than its UCC, then a recapture of CCA occurs.
- Or if UCC - the lesser of FMV or Capital Cost = negative amount
- This recapture amount is added to the net income
How long can an allowable capital loss be used to offset capital gains?
Carryforward and carryback – Back 3 years, forward forever.
What is superficial loss rule?
- Superficial loss occurs when securities, sold at a loss, are repurchased within 30 calendar days before or after the sale, and still held at the end of 30 days after the sale.
- This is not tax deductible.
- This loss, however, can be added to the new ACB, which will either decrease future CG or increase CL.
What is non capital loss?
- Losses resulted from costs exceeding revenues.
- Can be carried back 3 years and forward 20 years.
- Can offset any type of income.
What is Allowable Business Investment Loss?
- Basically it is 50% of the business investment loss
- Is a type of non-capital loss, but different in a way that it can be carried back 3 years, and 10 years forward only.
What are the tax consequences of allowable business investment losses (ABILs)?
- ABIL may be deducted from ordinary income in the year it is recognized.
- If an ABIL exceeds a taxpayer’s income for the year, any excess will be treated as a non-capital loss that may be carried forward 10 years or back 3 years.
What would trigger a deemed disposition?
- Personal residence to income producing property
- Transfer to a Personal Trust
- Transfer of a Principal Residence to a spouse
- No longer a resident of Canada
- Death of a taxpayer
When would income attribution rules apply?
Basically anytime there’s an effort in diverting income from a high tax bracket family member to a family member in a lower tax bracket.
What are the exceptions in regards with income attribution between spouses?
- If you transfer for fair market value and report the resulting gain. Transferor has also made an election to opt out of the rollover provisions.
- To avoid the attribution rule you must charge and report interest on the loan. The interest rate must be at least equal to the CRA’s prescribed interest rate at that time and paid each year.
What is the attribution rule between parents and children under 18?
Where property is transferred or loaned to a child, there will be attribution of income (or loss), but not of capital gains or losses.
What is the attribution rule between parents and adult children?
Generally, if property is gifted income is not attributed back to transferor. If property is loaned and the main reason for the loan was to achieve income splitting and thereby reduce taxes, the income will be attributed back to the lender.
What is a stock option?
Stock options provide employees with the right to acquire shares in the company at a stated price for a stated period of time.
How is benefit for stock option taxed if the company is Canadian-controlled private corporation (CCPC)?
- No income tax consequences until the employee disposes of the shares.
- The difference between FMV at the exercise time and the option price will be taxed as employment income (taxable benefit).
- The employee can claim a deduction equal to half of this amount.
- Half of the difference between the final sale price and FMV at the exercise date will be reported as a taxable capital gain or allowable capital loss, which can be qualified as capital gains deduction for shares of a qualified small business corporation.
How is stock option benefit taxed if company is a public company and not CCPC?
- Employee has to report a taxable employment benefit in the year the option is exercised (which is the difference between FMV and option price).
- A deduction equal to half the taxable benefit is allowed.
How can charitable donation benefit income tax?
Federal charitable donation tax credit is 15% on the first $200 of eligible donations, plus 29% of the amount in excess of $200 (raised to 33% depending if income is over $214,368).
Credit can be claimed up to 75% of net income, or 100% of net income in the year of death or the year prior to death.
Donations can be carried forward up to 5 years, or backward 1 year in year of death.
What are flow through shares?
- Flow-through shares are issued by exploration or mining companies, similar to common shares.
- Investor can deduct exploration and development expenses incurred by the mining company against his/her personal income from any source.
- Investors can also claim a tax deduction equal to the cost of the flow through shares.
What are three types of income trust?
- Real estate investment trust (REIT)
- Royal/energy trust
- Business trust
What is Alternative Minimum Tax?
A taxpayer would be liable for AMT if the tax that would owe under the AMT rules exceeds the tax payable under normal rules.
Is there an exempted amount under AMT?
There is a $40,000 exemption in calculating your taxable income under AMT.
A taxpayer must pay the higher of either the regular income tax or the AMT.
What would be the common adjustments to calculate AMT?
- add back the non-taxable portion of capital gains.
- add back losses claimed from tax shelters, limited partnerships, and non-active partners.
- add back depletion allowances and other expenditures related to resource property and flow-through shares.
- restrictions on claiming the federal political tax credit and the investment tax credit.
How to claim home office expenses against business income for self-employed people?
Home office expenses can only be deducted from the business carried on in the home and cannot be used to create a business loss.
Eligible expenses that you cannot use in the year they are incurred can be carried forward to subsequent years.
Can employed people claim home office expenses?
Home office expenses that you can claim are restricted as an employee. If you own your home, your deductions are limited to the maintenance of the premises. You cannot deduct mortgage interest or any depreciation on your home.
How can a commissioned salesperson claim home office expenses?
If you are a commission salesperson, your deductions may include property taxes and insurance. If you pay rent, a proportionate amount of the rent is deductible.
Basically can claim anything like self-employed but interest and CCA.
What are two components of automobile taxable benefit?
The standby charge, and the operating cost benefit.
