Taxes Flashcards
1
Q
common goals of tax planning
A
• Knowing the current tax laws and regulations that affect you.
- Maintaining complete and appropriate tax records.
- Making employment, purchase, and investment decisions that leave you with the greatest after-tax cash flows and net wealth.
2
Q
what are the 4 major categories to pay taxes
A
- purchases, property, wealth and earnings
3
Q
What is HST
A
- harmonizes sales tax: federal and provincial tax
GST - government sales tax and is 5%, rest is provincial
- in ontario HST = 15%
*most food items and prescription drugs are exempt from sales tax, low income individuals may laso be eligable for a refund of a portion of the HST/GST and porvincial sales tax they have paid
4
Q
what is an excise tax
A
- addition to sales tax
- imposed by federal and provincial gov on specific goods/services: gas, cigs, alc, tired, air travel, telephone service
5
Q
explain taxes on property
A
- real estate tax is a mjor source of revenue for local governments
- based on assesed value of land and buildings
- increasing real estate tax major concern for home owners- esp retired poeple on fixed income
6
Q
explain taxes on wealth
A
- currently federal and provincial governments impose a tax on the increase in an individuals wealth (captial gains tax)
- increase in value of any captial asset that is realized at time of sale or transfer is subject to captial gains tax
- 50% of captial gains, net of capital losses are taxable in the year the incurred
- ex: sale of stock/bond, transferring ownerhsip of asset through gift or inheritance
7
Q
describe taxes on earnings
A
- income taxes are used by the federal government to support a number of social benefit programs
- empolyer withholds income tax from paycheque and may need to make income tax instalments if ou earn icnome from other sources like buiness
*these are only estimates of your income taxes payable
- may need to pay additional amount when you file or get tax refunded
8
Q
who must file for taxes
A
- all canadian residents must file for any year they have a balance of taxes owing
- also includes non-canadians present 183 days or more
- taxed on worldwide income but that can be offset by foreign tax credit
- governemnt also taxes non-residents on certain income earned from canadian sources like investments
*province of residency as of Dec 31st of taxation year determines the provincial income tax return u file
9
Q
How do you determine total income
A
- employment income: salaries, wages, comissions, tips, bonuses
- Net business income: any income from an activity carried out for profit after expenses are deducted
- Investment income: income from property, includes forms of interest, dividens and rental income expnses.
- Taxable capital gains: commonly called investment income but differen,t from the sale of captial assets like stocks, bonds, real estate. any loses are subtracted first then 50% of the resulting amount is taxable
- Other income: retirement income from RRSPs, employment insurance, old age security, spousal/child support
*income not subjected to tax = lottery winnings, gifts, inheritances, most child support, scholarships, bursaries etc.
10
Q
why is owning a home one of the best tax shelters in canada
A
- any captial gain realized upon its sale is exempt from capital gains tax as long as it is your principal residence
- value of the land up to 1/2 hectare is also included
11
Q
how are federal income taxes calculated
A
12
Q
what deductions are included when calculating ent income for taxes
A
- Contribution to deferred income plans: RPPs, IPPS, RRSPs, taxed at a later date when withdrawls are made NOTE contributions to TFSA or RESP are not tax decuctible
- Union and professional dues: usually withheld by employer,
- Child care expenses: can be deducted by the spouds with lower net income in 2 parent family (subject to limitations), single parents can deduct these from their income (babysitting, day care, day camps, boarding schools and camps). eligibilty that services allow parents to work, carry on buisness and attend school aprt/full time
- Disability supports: attendant care expenses and other disability expenses that allow individual to go to school or earn taxable icnoem
- moving expenses: move must be 40km closer to new work location by shortest normal route (does not count if moving to or from canada). moving to school deductions only taken out of scholarships,bursaries,grants that count as icnome
- other deductions: buisness investment losses, spousal/child support, interest paid on loans, exployment expenses
13
Q
How do you calculate taxable income
A
Once net income has been determined, additional deductions and losses carried forward from prior years are permitted in determining taxable income these include:
- security options deduction (1/2 of the stock option benefit included under employment income
- capital gains deduction: equals 1/ of the eligable capital gains expemption *current regulations entitle individuals to $800,000 lifetime on qualified small buisness corporation shares and eligible farm property
- net captial losses of prior years: can be carried fwds indefinitly to offset any taxable captials gains reported under total income
- other deductions: employee home relocation loan deduction
14
Q
How do you calculate your federal taxes owing?
A
– taxable income is basis for computing amount of your income tax owing
- tax rates and benefits of tax credits are final phase of tax computation
- calulation performed by canada revenue agency
- uses the TONI system
15
Q
what are the tax brackets
A
16
Q
what is marginal tax rate
A
- rate you pay on the next dollar of taxable income earned
if earn $46,721 the first $45,282 is taxes at 15% and remaining $1,439 at 22% so total $7087 before considering any tax credits
- your federal marginal tax rate is 20.5%, the rate applied to the next dollar of taxable income
17
Q
what is average tax rate
A
- based on the total ta due divided by total taxable income
- except for taxpayers in the 15% tax bracket this rate is less tahn a persons marginal tax rate
your average federal tax rate is calculated as your total tax bill of $7,087 divided by your taxable income of $46,721, resulting in an average federal tax rate of 15.16 percent.
18
Q
How do you calculate net fedral tax
A
- two types of tax credits can be used to reduce the amount of tax you owe
- first step to calculating non refundable tax credit is to determine max applicable amount, can be preset or require calculations
- once determined max amount, non refundable tax credit is calc by multiplying amount by the lowest marginal tax rate
- very few refundable tax credits at federal level, each prov is diff
(look at ex pg 91)
19
Q
what are the two types of tax credits thata can reduce the amount of tax you owe
A
20
Q
what is source withholding?
A
- way of making tax payments
- employer and others withhold tax at source to remit it to the CRA, applied to all forms of taxable income
*generally no withholding of tax on interest, dividends, rent or royalties
- tax witheld from a payment to you is considered to have been paid by you to tax authorities even if empolyer never remits it
- T4 from employer outlines annual earnings and amounts deducted
- difference between the amount withheld and the tax owed is either the additional maount you have to pay or what you recieve
21
Q
explain reductions of source withholdings
A
a method of making tax payments
*source withholding is when the employer deducts certain amount from pay
- can reduce source withholginds if you prove that you are paying more withholding tax than necessary
- in any situation where you recieve a refund after filing your return you can request your source withholdings to be reduced
22
Q
what are instalment payments
A
- way of paying tax
- tax must be apid in instalments if the difference between payable taxes and amount you have withheld at source is more than $2000 in current year
- payments must be made quarterly and are due march, june, sept, and dec
23
Q
deadlines and penalties for taxes
A
- due april 30th
- if have buisness income or spouse have until June 15 (but balance owed still do by April 30)
- failure to file by due date results in 5% penalty on any balance owing, and 1% of unpaid balance will be added for each full month the return is late
- if you repeatedly fail youll face higher penalties
24
Q
what is tax planning, what is tax evasion?
A
- tax planning: use of legitimate methods to reduce ones taxes
tax evasion: use of illegal actions to reduce taxes
25
what are strategies to maximize aftet-tax cash flows
Are you choosing the form of remuneration that is most advantageous to you?
- taking full advantage of all deductions and credits that are available to you
- if you have a legal or common-law spouse, is the right person taking the deduction? Should amounts be accumulated and the tax credit taken only periodically?
Are you taking advantage of all possibilities to defer the payment of taxes to a later date?
Should you adopt “income-splitting” techniques that permit a lower-income member of your family to declare investment income and pay less tax on it?
Have you organized your investment portfolio so that it attracts the lightest tax liability?
26
what are some tax strategies you can try if you are on salary or commission
- on slary usually no employment deductions available
- on comission and required to travel/ pay things required fro your employment costs may be deductible
- also applies to salaried employees required to aborb certain empoloyment-related costs
- if have choice between recieving empolyment compensation in form of salary or benefits, some benefits (like those with stock otions) receive more favourable tax treatment then regualr income
27
is it better for small buisnesses to pay themselves a salary or receive remineration in form of dividends?
- for small buisness owners earning less than $500,000 of taxable income there is very little difference
notes:
* salaries form part of 'earned income' for purposes of calculating individuals RRSP contribution liit and dividens do not
* if the business is canadian controlled private corportation and meets certain criteria any captial gained earned qualifies for the $824,176 captial gains exemption, so by retaining earnings the resulting increase in value of shares of the buissness to max of $824,176 can be sheltered from captial gains tax
28
how is self empolyed income taxed
- self employed income from non incorporated buisness is reported on both a gross and net bases, and is taxed at individuals personal tax rate
- reasonable expenses are deducted from gross income to generate the net (ex: administrative support, leading, advertising, utilities)
- if have a home office can claim a portion of your home expenses as business expenses (rent, mortgage interest, utilities, maintenace, home insurance)
29
what is a TFSA
- tax-free savings account
- when 18 can contribute up to 5,500 annually with unused room carried forwards
- all amounts withdrawn are free of tax
- investments gains in a TFSA are not taken itno consideration in determining the recipients eligibility for federal income tested-benefits or credits
- withdrawls from TFSA create contribution room for future years
30
facts to remember wrt common deductions
1. generally lower-income spouse takes care of child care deduction
2. child support payments are not deductible
3. all or part of interst charged on funds invested to earn taxable investment income is tax deductible
* mean makes more sense to use cash to aquire a car but borrow money to invest - but risk if valvue of investment declines. dont do this just to get out of taxes
4. captial losses incurred in any year cna be subtracted frmo captial gains earned that same year to compute net captial gains
* 50% of net captial gains taxable, if capital losses exceed gains net loss can be carries back 3 years to offset captial gains already declared, can also be carried forwards
5. everyone entitled to $800,00 capital gains exemption on shares of small businesses (conditions apply)
31
32
what are tax credits that can be claimed?
1. single, widowed, divorced or separated and support anothre family member can claim that person as eligible dependant
2. if paid interest on student loan under *canada student loans act* or equivalent provincial program you can claim this credit for any interset paid that year & in 5 preceding years
3. tuition fees and eduction amount can be transformed into a tax credit in current year, max amount fo $5,000, can claim textbook amount of $65 per month of full time study
4. if medical expenses, can chose any 12 month period and combine expenses by you, your spouse and minor children. all amounts in excess of 3% of claimant's net income can be converted itno a tax credit
5. first time home buyers can qualify for non refundable cred up to $5000
6. disabilty claims, qualified practitioner must certify the disabilty tax credit certificate that you have prolonged impairment
7. claim monthly public transit
8. charitable donations: first $200 conv into tax credit at 15% and over $200 that do not exceed 75% of net income converted at rate of 29%
33
what are example of tax- deferral techniques
RRSPs, RPPS, IPPs, and DPDPs
34
what is an RRSP
- you agree to put some salary away and not have immediate acces to it, the tax system will tax that income and all proceeds from its investment when tis withdrawn rather than when you earn it
- contributions to RRSP are deductible- contribution you can make depends on: max contribution limit/year ($26,010), can only contribute up to 18% of your years prior earned income, amount you are allows to contribute is diminished by amount you and your employer set aside for pension
- funds can be borrows from RRSP and piad back free of tax under Home Buyers Plan (can withdraw a $25,000 loan hich must be repaid over 15 years
- also under lifelong learning plan can tax-free withdrwal of $20,000 to permit you or spouse to stufy full time: must be repaid in 10 years
35
whats an RPP
- registered rension plan
- 2 main types: money-purchase and defined benefit
- money purchase = defined contribution pension plan (DCPP), like an RRSP. amount of pension depends on contributions made and growth achieved
- larger companies and public employers opt for defined benefit: amount you receive as a pension is known in advance and usually based on percentrage of your actual salary over specific number of years
36
37
what does it mean for pension benefits to be vested
you are entitled to receive the benefits you have accrued under your pension plan as a result of satisfying age or service requriement
- fi you leave pension plan before benefits are vested you lose right to any pension benefits under plan- only entitled to a taxable refund on contributions you made not the employer
- if pension benefits are vested at time your employment terminates but ur not yet eligable to receive pension income, you can leave it in the pension plan and receive it at time or retirement
38
what is an IPP?
- individual pension plan
- contributions are made according to the benefit payable at retirement, beneficial is in empolyers group RPP but benefits are not as high as you like
- optimal for executives, owner-managers, people voer 53 or those earning mroe than 100,000
39
what is a DPSP
deferred profit sharing plan
- less common than RPPS but operate basiaclly the same
- empolyer makes contribtuions and you are taxed only when you receive the funds
- contributions are based on current or accrued company profits but may have a defined minimum contribution amount
- limited to no more than 9% or one-half of the RPP contribution limits
40
what does the federal income tax act say
- contains a number of attribution rules
- state that if a taxpayer transfers moeny or assets to a spous or child under age of 18, any investment income earned on the maount transferred will be taxed in the hands of the taxpayer, unless the spouse or minor child purchases the asset at its fair market vlaue
41
what are some legal means of income splitting techniques
1. making contributions to spousal RRSP. withdrawls are taxed in hands of recipeint souse as long as funds not withdrawn within 2 years of ocntribution
2. splitting your CPP benefits with your spouse. You may direct tht 50% of your CPP to be paid to your spouse, if both voer 60
3. can split 1.2 ur eligible pension income with spouse, exact allocation amount is up to the individual but cannot exceed the prescribed limit
4. having high-income spouse pay living expenses, while lower income invests income
5. transferring assets that will be used to generate business income
6. opening RESP for minor children, allows you to build an education fund for a child by earning tax-deferred investment income. contribtions not tax dedubtible ubt income in plan grows tax free until withdrawn and taxed at hand of recipient
7. Registered diability savings plan: for parents wtih disabled child
42
how can you ensure your protfolio is tax efficient
- interest income is fully taxable and should he held in registered accounts like RRSP that defers taxes until withdrawl is made
- other financial assets pay dividends or are expected to appreciate in value and generate captial gain when sold - diviends on canadian stocks and captial gains are taxed less heavily than interest income so hold in non-registered investment account
- for high income earners the dividend tax dredit substncially reduces the effective tax rate on dividend income compared to other investment income - should hold non registered investments in dividend-generating assets to reduce tax bill
43
what are the 5 sections of your federal person tax
- income, decuctions , other deductins, tax creidts, other tax credits
44
where can you get tax informatoin
- Tax publications: several personal tax guides publihsed yearly
- internet: CRA site, canoe money, fraser institute, cantax etc.
45
whats electronic filing
- use to manage taxes
- get quicker refunds, can file returns with EFILE and NETFLIE
- EFILE:
* is service that lets authorized service providers and discounters send individual income tax return ingo to CRA directly form software used to prepare the tax return
* take documets to registered tax prepayer
- NETFILE
* do it yourself
46
tax preparation services
- pay somebody to prepare your income tax returns for a fee
- many poeple prepare their own taxes, can help you understand your financial situation but can be complicated esp if you have income sources other than ur salary
- sources available for professional assistance: tax services from national firms (H&R block, liberty tax service), accountants with (CPA)
- you are still responsible for supplying accurate and complete info, tax prepayer does not guarentee you pay the correct amount
47
what if your tax return is audited?
- if you make an error your tax return is automatically recalculated and you reeceive either a bill or refund
- a **tax audit** is a detailed examination of your tax return by the CRA often the department requets more info to support the entries on your tax return
48
what are the different types of audits?
- most common = desk audit: requires you to clarify or document minor questions about your tax return
- Feild audit: mroe complex, audit agents visits your home, buisness or office of ur accountant, done to verify whether an individual has an office in the home as claimed
- if you use EFILE\< TELEFILE or NETFILE you dont need to fiel receipts with your return, however the CRA may later ask to check certain climas
49
what are your audit rights
- auditor not entitled to scrutinize all documets at will
- may request specific information, but have rihgt to ask why that information is needed
- if audit is not what you have calucalted and declared the CRA will issue a reasessment, if this means you need to apy more taxes you will be contacted first and given opportunity to make representations on your behalf (has a 3 year limit)
- if find yourself unable to pay your taxes or make a tax filing on time due to natural or human made distaser, serious illness or accident the Income tax acts fairness rule give a degree of latiitute to CRA to waive penalties and interest on overdue payments
