unit 25 | canadian taxation

Question 1

How Investments are Taxed

Answer 1

Investments generate 3 types of income
- Interest
- Dividends
- Capital Gains/Losses

Each of these types of income is treated differently by the CRA

Question 2

Dividend taxation

Answer 2

• Dividends is “grossed up” by 38% for tax purposes
  > Ie. multiplying dividends by 138%
• Dividend Tax Credit equal to 25% of the “grossed up” amount is deducted
  > Ie. multiply grossed up amount by 25%

Only applies to “eligible” dividends (generally from Canadian corporations) | Foreign dividends are fully taxed like interest

Question 3

When are capital gains/losses taxed?

Answer 3

• Only taxable when you sell an investment (tax deferral) → when monetized/crystalized
  > Don’t pay tax until share is selled
• Can be triggered strategically (tax loss selling)

Question 4

How are capital gains included in the taxable income?

Answer 4

Only 50% of the capital gain is included in income

Question 5

How are capital losses leveraged in taxation?

Answer 5

Losses can be accrued over time & used to reduce capital gains (but not taxable income from other sources like employment)
- For example, if you have a capital loss in 2018, it can only be used to reduce (or offset) capital gains in other years, but not taxable income in 2018

Question 6

Non-Registered Plan/Account | Investment Vehicles

Answer 6

• Typical trading/investment account
• No maximum to the amount that you can deposit to be invested
• All investments are taxed based on whether the income received from the investments are:
  > Interest
  > Dividends
  > Capital gains

Question 7

Registered Pension Plan (RPP) & Registered Retirement Savings Plan (RRSP) are identical except for who contributes:

Answer 7

Employers + employees contribute to an RPP, individuals contribute to an RRSP

Question 8

What is the purpose of Registered Pension Plans?

Answer 8

Created to help save for retirement:
- Provide a tax deduction for contributions (reduce current taxable income)
- Are not taxed as investment income while in the Plan
- Withdrawals from the Plan are taxed (ideally in retirement, when an individual’s tax rate is lower)

Question 9

What is the condition to contribute to RRSP?

Answer 9

If you don’t have income, you cannot contribute to an RRSP

If you create contribution room based on income but don’t contribute to an RRSP in 1 year, you can carry forward that contribution amount indefinitely

Question 10

Tax Free Savings Accounts (TFSA)

Answer 10

• All Canadians 18 & over can contribute to a TFSA
• Maximum contribution in 2024 = $7,000
• If you do not contribute to a TFSA in one year (or don’t contribute the maximum) you can carry over that amount to the next year
  > Contribution room starts at age 18 → this could save you a lot of money
• Deposits into a TFS are not tax deductible
• Investment income inside a TFSA is not taxed
• Withdrawals from a TFSA are not taxed

Question 11

First Homebuyers Savings Accounts (FHSA)

Answer 11

• All Canadians 18 & over can contribute to a FHSA
• Must be a first time home buyer
• Maximum contribution in 2024 = $8,000; life maximum = $40,000
• FHSA must be used for home purchase within 15 years of FHSA being opened
• If you do not contribute to a FHSA (or don’t contribute the maximum) you can carry over that amount to the next year up to a maximum contribution = $16,000
• Deposits into a FHSA are tax deductible
• Investment income inside a FHSA is not taxed
• Withdrawals from a FHSA are not taxed

Question 12

What does “Tax Deductible” mean?

Answer 12

• You deduct the contribution from your income
• Tax payable is reduced; tax rebate paid to you