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CFE Prep > Taxation > Flashcards

Taxation Flashcards

1
Q

What are the tax implications of investing in a GIC (now and in the future), and what is the federal income rate?

A

Tax implications:

  • generates interest income
  • fully taxable at the ordinary rate
  • taxable in year accrued, even if not yet paid
  • no CG/ CL on maturity

Federal tax rate:
* interest income taxed at highest federal marginal tax rate (or 33%)

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2
Q

What are the tax implications of investing in shares from dividend paying Canadian PC (now and in the future), and what is the federal income rate?

A

Tax implications:

  • generates dividend income
  • eligible dividends, as PC
  • gross up and claim dividend tax credit
  • return of capital not immediately taxable

Federal income tax rate:
* taxed at lower rate compared to interest, because of dividend tax credit

Future implications:

  • CL if ACB > proceeds, CG if ACB < proceeds
  • Treated as disposition of capital (rather than income), 50% inclusion rate
  • ACL only deducted against TCG
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3
Q

How do you calculate Net Income for Tax Purposes (Individual)?

A

ADD:

  • Employment income (wages + taxable benefits - deductions)
  • Business income
  • Property income (remember to add dividend gross up if necessary)
  • Other income
  • Net TCG (in excess of allowable CL for the year)

Deduct:

  • Other deductions (ex. RRSP, childcare, spousal support, carrying charges)
  • Losses for year from employment, business, property
  • ABILs

= Net income for tax purposes

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4
Q

How is enhanced CPP deduction calculated?

A

Employee CPP contribution for 2021: 5.95%
* 0.5% of this is eligible for deduction (to arrive at NI for tax purposes)

To calculate: employment income * 0.5%

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5
Q

What are the criteria for deducting childcare expenses?

A
  • May only be claimed by parent with lower net income
  • Deduction is lower of:
    1. Actual paid
    2. Sum of childcare expenses:
  • Disabled child: 11k
  • Under 7: $8k
  • 7 to 16: 5k
    3. 2/3 taxpayer’s earned income
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6
Q

Eligible vs. Non-eligible Dividends (tax treatment)

A

Eligible:

  • 38% gross up added to property income (in addition to value of dividend)
  • Dividend tax credit: 15.02% of the gross up amount

Non-eligible:

  • 15% gross up added to property income (in addition to value of dividend)
  • Dividend tax credit: 9.03% of the gross up amount
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7
Q

Criteria to deduct moving expenses: `

A
  • Deductible if new residence is at least 40km closer to new work/ study location
  • Deduction limited to income earned at new work location (excess can be carried forward)
  • May include:
  • traveling costs (incl. meals and traveling costs en-route)
  • transportation/ storage of household effects
  • 15 days meals/ lodging near old/ new residence
  • lease cancellation costs of old residence
  • selling costs of old residence
  • legal and other costs of new residence acquisition (only if old residence sold)
  • up to $5k in: interest, property taxes, insurance, heating/ utilities on old residence whilst vacant pending sale
  • costs of revising legal documents for new address
  • utility connection and disconnection fees
  • Can choose the simplified method (flat-rate meals, per km driven)
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8
Q

Administrative to know for filing personal taxes:

A
  • Filing deadline: April 30th (June 15th if self-employed)
  • Payment of taxes due: April 30th
  • Late filing penalty: 5% of tax due at filing date plus 1% for each complete month outstanding (maximum of 12 months)
  • Interest at base rate of 4% is assessed on unpaid taxes
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9
Q

What is principle residence exemption, and how is it calculated?

A

PRE: Can eliminate or reduce (for income tax purposes) a capital gain on the disposition of a taxpayer’s principle residence.

Eligibility:

  • taxpayer must own the property
  • property must be ordinarily inhabited in the year by the taxpayer
  • only 1 property per year can be designated

Calculation:

  • calculate the CG on the sale, then calculate the average annual capital gain (using CG and # years home has been owned for)
  • select property with larger average annual CG
  • (1 + years designated)/(# of years owned) * CG = PRE

If PRE covers all gain (i.e. property designated for all years), nil gain (no tax impact); however, discuss impact on other property (when sold)

Additional:
- up to 4 years rental period can be designated as PR

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10
Q

Income tax consequences: providing automobile to employee

A

Employee: Taxable benefit (standby charge and operating cost benefit) - (R.S.C., 1985, c. 1 (5th Supp.)

Employer: Deduction, based on automobile limits for leased and purchased vehicles

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11
Q

Tax implications of: interest-free/ low-income loans

A

Employee: principal amount is not taxable, interest benefit is based on a prescribed rate (less interest paid) within 30 days of year end

Employer: interest benefit/ principal not deductible; however, if employer borrowed to provide employee with the funds, then this interest expense is deductible

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12
Q

Tax implications of providing stock options:

A

Employee:

  • when option is granted, no taxable benefit
  • when exercised (PC), benefit = FMV of shares on exercise date - option price
  • when purchased (CCPC), benefit = FMV of shares on exercise date - option price
  • when disposed of later, ACB = FMV of shares on exercise date (option price + full benefit)
  • there is a 50% deduction available: if FMV of shares on option grant date < option price OR for CCPC’s, if shares held longer than 2 years

Employer:
- Not deductible

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13
Q

Tax implications on education related benefits:

A

Employee:

  • No included in taxable income if employment-related
  • Included if personal interest training
  • Included if allowance is for taxpayer’s children, or if free/ reduced tuition is provided to family members

Employer

  • Deductible, if course is being taken in relation to their job (i.e. specific skill, leadership training, certification)
  • Non-deductible, if course is being taken for personal interests (i.e. no relation to job requirements, or impact role whatsoever)
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14
Q

Tax implications for discounts on merchandise discounts:

A

Employee: Non-taxable if discounts available to all employees, and discounted price > cost

Employer: Cost of merchandise is deductible

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15
Q

Tax implications of gifts and rewards

A

Employee:

  • cash and near cash gifts (i.e. gift cards) are taxable
  • non-cash gifts (less than $500 in aggregate for the year) are not taxable (excess is taxable)
  • non-cash long-service awards up to $500 are non-taxable, if provided in 5 year interval

Employee:
- Deductible

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16
Q

Tax implications of recreation facilities/ club dues:

A

Employee:

  • non-taxable if in-house facilities available to all employees
  • non-taxable if individual membership and employer primary beneficiary of use

Employer:

  • fitness facilities deductible
  • deduction denied for individual membership fees or dues in any club the main purpose of which is to provide dining, recreation or sporting facilities
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17
Q

Tax implications of insurance premiums

A

Employee:

  • life insurance premiums are taxable (proceeds on death non-taxable)
  • disability insurance premiums not taxable if benefits are taxable (i.e. if they are taxed on the payments they received while on disability)

Employer:
- Deductible

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18
Q

Tax implications of health care premiums:

A

Employee:

  • if government plan, taxable
  • if private plan, non-taxable

Employer:
- deductible

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19
Q

Tax implications of meals:

A

Employee:

  • overtime meals are NOT taxable
  • subsidized meals (i.e. company cafeteria) not taxable, provided employee pays a reasonable amount

Employer:

  • 50% deductible, if expense for business purposes
  • Cafeteria revenue is taxable, operating expenses are deductible
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20
Q

Tax implications of social events:

A

Employee:
- Non-taxable if event is available to all employees and cost less than $150

Employer:
- Deductible for up to 6 events if provided to all employees; otherwise, 50% deductible

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21
Q

Tax implications of spousal travel benefit:

A

Employee:
- taxable, unless the spouse is traveling at the employers request and mostly engaged in business activities during the trip

Employer:
- Deductible

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22
Q

Tax implications of cell phone and internet benefit:

A

Employee:

  • non-taxable for employer provided cell phone for employment activities
  • Reimbursement for employee-owned cell phone is taxable
  • reimbursement for cell phone plan/ internet services not taxable if for employment purposes; if for personal, taxable benefit

Employer:
- Deductible

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23
Q

What are the tax implications of company investing in shares (of different company)

A

Discuss the following items:

  1. Adjusted Cost Base (ACB)
  2. Small Business Deduction (SBD):
    - annual business limit
    - passive income grind
  3. Dividend income
    - deductibility
    - connected corporations
    - part IV tax
    - dividend refund
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24
Q

What are the tax implications of company investing in shares (of different company) - ACB

A

ACB:

  • the purchase price of the shares will become the adjusted cost base
  • when/ if company sells the investment, ACB will be used to calculate the capital gain/ loss on the sale
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25
Q

What are the tax implications of company investing in shares (of different company) - SBD (annual business limit)

A
  • if CCPC, companies have access to the SBD, wherein the first $500,000 of annual business income is taxed at the lower federal rate of 9%; excess if at the company’s regular tax rate
  • if associated (i.e. control over company is present), associated companies have to share the annual limit
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26
Q

What are the tax implications of company investing in shares (of different company) - passive income grind

A
  • if company receives $50,000 + in passive income, the annual business limit is reduced
  • if company receives $150,000 + in passive income, the annual business limit is eliminated

*final step, relate back to case facts - how much passive income will the company have? any other passive income that needs to be considered

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27
Q

What are the tax implications of company investing in shares (of different company) - dividend income (deductibility)

A
  • if shares are from CCPC, they can be deducted in calculating taxable income (remember: not net income for tax purposes)
28
Q

What are the tax implications of company investing in shares (of different company) - dividend income (connected corporations)

A
  • when looking at dividend income, important to identify if the company dividend received from is connected corporation (connected corporation: control present, more than 10% of voting power/ 10% of FMV)
29
Q

What are the tax implications of company investing in shares (of different company) - dividend income (part IV tax)

A
  • determine if it is an eligible or non-eligible dividend
  • Company will pay 38.33% part iv tax on the dividend received
  • this part iv tax will get added to company’s NERDTOH balance
  • to calculate part iv tax: # shares * dividend/ share amt * 38.33%
30
Q

What are the tax implications of company investing in shares (of different company) - dividend income (dividend refund)

A
  • part iv tax is added to NERDTOH; this balance can be recouped if company pays a taxable dividend to one of its shareholders of:
  • ex. $16,000
    ($16,000*33.83% = $6,133) or NERDTOH balance
31
Q

What is recapture?

A

Recapture arises if when cost of additions - disposals = negative UCC balance.

  • add back to income for tax purposes (increases tax you will have to pay)
32
Q

What is terminal loss?

A

Recapture arises if when cost of additions - disposals = positive UCC balance.

  • deduct from income for tax purposes (decreases tax you will have to pay)
33
Q

What is the CY LCGE, and eligibility to use?

A

2022: $913,630
* can only be used for capital gains resulting from disposal of QSBCS (qualified small business corporation shares) and qualified farm/ fishing property

34
Q

What are some examples of property income?

A
  • dividend income, interest income, royalties, rental income, foreign source property income
35
Q

What is a small business corporation? (SBC)

A
  • A small business corporation is a CCPC where at least 90% of the FMV of the assets are used in an active business assets carried on primarily in Canada or shares of another SBC.
36
Q

What are the personal tax rates for transactions?

A

Ordinary income: 52%
Eligible dividends: 38%
Non-eligible dividends: 47%

37
Q

What are the corporate tax rates for transactions?

A

Allowable business income up to SBD: 12%
Other allowance business income: 26%
Investment income: 50%

38
Q

Eligibility of deducting childcare expenses:

A
  • Can only be deducted by the lower earning spouse

Lesser of:

  • amount paid
  • amount per following criteria: $11,000 disabled child (any age), under 7: $8,000, over 7 (under 18): $5,000
  • 2/3 of taxpayers earned income
39
Q

What is classified as earned income?

A
  • income from your employment or income from self-employment
40
Q

What are the tax implications of spousal support?

A

Added to income from recipient, deductible from income for the payer; however, to deduct:

  • paid on periodic basis (no lump sum)
  • paid when living apart
  • can use the $$ however they want
  • if alimony or maintenance payments
  • payments are result of court order/ written agreement
41
Q

Tax implications of child-support payments

A
  • NOT deductible for the person paying, NOT added to income for the recipient
  • only excess of agreed upon amounts are deductible/ to be added to income
42
Q

Tax implications of pension income splitting?

A
  • Taxpayer may allocate up to 50% of pension income to spouse - this $ is then deducted from the transferor’s income, and added to transferee’s income
  • pension splitting is beneficial if the transferee pays tax at a lower tax %
43
Q

What are the instalments criteria for corporations, for taxes payable?

A

If expected corporate taxes payable is to be greater than 3,000, company must make monthly instalments

Calculation of instalments:

  • 1/12 of expected taxes payable
  • 1/12 of preceding year taxes payable
  • combo of the two: 2/12 of current yr expected, 10/12 of prior year payments
44
Q

What are defined as taxable supplies?

A
  • Goods and services are subject to GST/ HST; includes property and services. Includes supplies (5%) and zero-rated supplies.
45
Q

What are zero-rated supplies?

A

Taxable supplies that are taxed at 0%; includes:

  • basic groceries
  • prescriptions
  • medical devices
  • exported goods and services
46
Q

What are exempt supplies?

A

Goods and services that are not subject to tax, including:

  • financial services
  • health and dental services
  • childcare services
  • educational services
  • sale of used residential housing
  • rentals of residential premises
47
Q

What are the mechanics of charging HST/ GST?

A

Two components to HST/ GST:

  • value-added tax (GST 5%, HST 13-15%) - no HST in BC
  • rate determined by the place of the supply (i.e. where the sale occurs/ where the sale is going)

Remittance (or refund) is sum of: value-added tax charged less ITCs claimed

48
Q

What is GST charged on?

A

Taxable supplies: yes
Exempt supplies: no
zero-rated supplies: no

49
Q

What are ITCs claimed on?

A

taxable supplies: yes
zero-rated supplies: yes
exempt supplies: no

50
Q

What are the exemptions for not needing to register for GST/HST?

A
  1. small supplier - annual sales of taxable supplies (4 consecutive quarters) less than 30,000 per year (although may choose to register, claim ITCs)
  2. only commercial activity is the sale of property, that is NOT within the normal course of operations
  3. non-resident, who does not carry on business in Canada
51
Q

What are the annual reporting and remittances requirements?

A
  • less than 1.5M: annual reporting and payments & due 3 months after reporting period
  • 1.5M to 6M: quarterly reporting and payments & due 1 month after reporting period
  • greater than 6M: monthly reporting and payments & due 1 month after reporting period
52
Q

How to determine if eligible or non-eligible dividends?

A

Eligible dividends: paid from corporations that pay tax at non-SBD rate (i.e. higher rate), non-CCPC’s, or CCPC’s paying from grip balance
*15.02% dividend credit on gross up

Non-eligible dividends: paid from CCPC’s paying tax at lower, SBD rate (generally CCPC’s, up until the ABI threshold)
* 9.03% dividend credit on gross up

53
Q

What are the two circumstances to remove funds from RRSP, without losing contribution room or paying tax?

A
  1. Home Buyer’s Plan: withdraw for a home, taxpayer cannot have owned a home in last 4 calendar years, maximum withdrawal is 35k, set repayment over 35 years
  2. Lifelong Learning Plan: withdrawal for designated education, individual OR spouse can withdraw, 10k per year (20k in total), repayment over 5 years
54
Q

What are the consequences of excessive contributions to RRSP or TFSA?

A

Monthly penalty of 1% on excess contributions; additional penalties if applicable forms not filed by deadline

55
Q

What are the characteristics of a proprietorship?

A
  • simple, low costly and easy to set up
  • individual and the business are seen as one: no legal distinction
  • losses/ profit of the proprietorship are included as business income, on the personal return of the individual
  • assumes all liability for all debts of the business
56
Q

What are the characteristics of a partnership?

A
  • two or more individuals or corporations contribute to the business, and share profits/ losses in accordance with written or verbal partnership agreement
  • each partner is jointly and severally liable for all debts of the partnership (including if debts result of other partners actions)
  • tax implications: net income is allocated to each partner, per the partnership agreement; then, treated similar to proprietorship (i.e. reported as business income)
57
Q

What are the characteristics of joint venture?

A
  • different from partnerships
  • revenue from JV is allocated to each venture, per the agreement; then, each venture deducts their applicable expenses to determine the net income for tax purposes. This is then reported as business income, on personal tax return
58
Q

What are some tax advantages of proprietorships and partnerships?

A
  • Start up losses may be deducted against other sources of income (as losses flow through personal tax returns)
  • Full set of FS is NOT required; instead, a form to be completed and included in T1 return
  • much less costly than tax filing for corporation
  • can pay salaries to partner/ proprietor’s spouse or children, to extend that they work in business and salary is reasonable
59
Q

What are some tax disadvantages of proprietorship/ partnerships?

A
  • no opportunity for tax deferral, as all profits must be included in CY return
  • may not be used for estate planning or estate freezes (as no separate entity from partner or proprietor
  • LCGE may NOT be used on sale of partnership/ proprietor assets
60
Q

What are some tax advantages of corporations?

A
  • salaries can be paid to spouse and or children, to the extent they work in business and wage is reasonable
  • if spouse/ children own shares in company, further income splitting ability through dividend payments
  • can defer personal taxes, if personal income tax rate is higher than corporate tax rate (i.e., beneficial for tax planning)
  • eligible to use LCGE, as long as disposal of QSBCS
  • may reduce/ limit personal liability
  • CCPC can expense up to 1.5M in capital additions, rather than treating as capital additions and claiming yearly CCA
61
Q

What are some tax disadvantages of corporations?

A
  • start-up losses are not immediately able to be claimed/ deducted (may be deducted in future, if corporation is successful)
  • corporate tax return MUST be filed, with completed FS (much more expensive than partnership/ proprietorship)
  • any losses in business (if losing money in future), you would not be able to deduct from your personal income (could only be deducted from business income)
62
Q

What is the definition of PUP, and tax implications of disposal of PUP?

A
  • primarily used for the personal use/ enjoyment of the taxpayer, and generally does depreciate over time (ie, boats, furniture, vehicles)
  • 50% inclusion of gains, ALL losses denied
  • calculation of gain:
    Proceeds (greater of actual, and $1,000)
  • ACB (greater of cost, and $1,000)
    = gain on disposal

*if item bought/ sold for less than $1,000 each, no gain reported

63
Q

What is the definition of PUP, and tax implications of disposal of PUP?

A
  • primarily used for the personal use/ enjoyment of the taxpayer, and generally does depreciate over time (ie, boats, furniture, vehicles)
  • 50% inclusion of gains, ALL losses denied
  • calculation of gain:
    Proceeds (greater of actual, and $1,000)
  • ACB (greater of cost, and $1,000)
    = gain on disposal

*if item bought/ sold for less than $1,000 each, no gain reported

64
Q

What is the definition of LPP, and tax implications of disposal of LPP?

A
  • subset of PUP; however, do NOT depreciate over time (ie, art work, jewelry, stamps, coins)
  • 50% inclusion of gains
  • 50% of losses can be deducted, ONLY against LLP gains (ie, cannot create a loss)
  • loss carry backwards 3 years, forward 7 years (deduct in reaching NITP, NOT division C deduction)

calculation of gain on disposal:
same as PUP

65
Q

What is the tax treatment of capital gains (other than PUP and LPP)?

A
  • 50% inclusion rate (gains)
  • losses: can be used to offset capital gain, carryback 3 years, infinite carry forward (but cannot deduct to create loss; only up until TCG)
  • net capital losses carried forward as Division C deduction (ie, in reaching taxable income)

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