Unit 8 Income tax Flashcards
What does income tax include
federal and provincial taxes
Who do you remit income tax deductions to
they are remitted to CRA
What are the income taxes based on
the province of the employee`s employment rather than the province where they live
what year did the government pass legislation which enabled them to levy a tax on personal income
July 1917
what was the original purpose of personal income tax
help finance government for world war 1
how was income tax collect originally
people were responsible for paying for their own personal taxes directly to the government
what year was it mandatory to have income tax deducted directly off the employee`s payÉ
1940
what is income tax base on
employee’s net taxable income
what is included in net taxable income
salary, wages, commissions, bonuses, vacation pay, pensions, retiring allowances, death benefits, the values of any taxable benefits and the values of any taxable allowances
how is income tax reduced
when employee makes contributions to an RRSP , Registered pension plan, union dues, a deduction for living in a prescribed zone and any other deductions authorized by CRA (deduct these amounts from gross income before calculating the tax)
when first hired an employee must fill in what
a TD1 (federal tax form) and the provincial counterpart
What is the TD1 for Ontario called
TD1ON
What is a TD1
determine the amount of tax an employer will deduct from an employee’s taxable earnings as it has amounts they can use to decrease their tax deducted at the source
TD1 form credits taken what does this represent
it increases their exemption amount
if an employee has more than basic exemption on their TD1 forms, they must do what
complete a new one each year
Can employees request more tax be deducted? if so, how do they do it
yes, on the federal TD1
If an employee is hired in a second part time position, what must they do with regards to the TD1
they must claim maximum exemption as their basic exemption can only be claimed once?
Barb is paid the following: a monthly salary of $6,000, a car allowance of $800 per month. She pays $400 into the company pension plan each pay.
What is her gross taxable income?
What is her net taxable income?
What would she pay tax on?
Gross taxable income
6,000 + 800 = 6,800
Net taxable income
$6,800 - 400 = 6,400
She would pay tax on $6,400
What are the penalties for non-compliance with regards to income tax deductions
subject to 10% penalty for the first occurrence
increases to 20% for second and subsequent occurrences in the same calendar year.
penalties are applied to amounts over $500 except in cases of willful delay or deficiency
If an employer is late remitting their source deductions (CPP, EI and income tax) what will happen
the will face penalties that will increase based on the number of days they are late
What are the penalties for source deductions be remitted late
1 - 3 days late 3%
4 -5 days late 5%
6 - 7 days late 7%
over 7 days late 10% or if no amount is remitted
Note: (CRA does not consider Saturday and Sunday or public holiday as business days so if payment falls on a Sunday you actually have until the Monday to remit)
what are the remitter frequencies for remitting source deductions
- Quarterly
- Regular
- Accelerated remitter (Threshold 1 and Threshold 2)
What does AMWA stand for
average monthly withholding amounts
What is used to determine AMWA
based on two years prior
so for 2014, CRA would look at 2012
explain quarterly remitter
if your AMWA was less than $3000 and you have a perfect remittance history
Explain regular remitter
if your AMWA was less than $15,000
Accelerated Remitter:
Threshold 1: AMWA is between $15,000 to $49,999.99
Threshold 2: AMWA is over $50,000
What are the dates for remitting for Quarterly
April 15, July 15, Oct 15 and January 15
What are the dates for remitting for regular
the 15th day after the month following when deductions were collected
What are the dates for accelerated remitter? Threshold 1
Threshold 1:
1st to the 15th - remit on the 25th
from the 15th to the last day of the month - remit on the 10th day of the following month
What are the dates for accelerated remitter?
Threshold 2
payments must be made no later than 3 days after the end of the time period
1st of the month to the 7th
8th of the month to the 14th
15 of the month to the 21st
22nd to the last day of the month
how do you determine the dates of remittance
the employer uses the dates the employees are paid not the end date of their pay period
what are the 4 methods for calculating federal and provincial income tax deductions?
- tables method (most common)
- formula method
- PDOC (Payroll deductions online calculator) replaces the TOD method
- manual method
many companies also use computerized payroll software packages or services that do it automatically
How do you the table method for determining income tax
- use federal tax tables
- use provincial tax tables for Ontario
- tables are broken down into different pay periods
- can be obtained from CRA website
Steps:
1. determine the net taxable income less credits and deductions (ie. RRSP contributions)
- select the correct pay frequency tax tables ( ie. bi-weekly)
- locate the correct net taxable income range
- follow the line across to the correct claim code as per te employee’s federal and provincial td1 forms.
- the corresponding amount is the amount of tax to be deducted
what is the formula method for calculating income tax deduction
- also called the machine computation method
- refers to computerized payroll systems
- the formula used by these systems must first be approved by CRA
The manual method for calculating income tax
this is a complex method
- used rarely since the inception of PDOC
Other payments that affect income tax
2 others
- bonus payments, pay in lieu of notice and vacation pay paid when no time is taken
- retroactive payments
- both are calculated differently
why can’t you tax bonus payments the same way?
bonus does not represent a regular pay period earning therefore they cannot be taxed using the regular pay period tax rules
Bonuses and such increase the amount an employee will make in the year and an adjustment will need to be made.
What is the calculation for bonuses adjustment for income tax.
ex. an employee who earns a weekly taxable income of $425, is paid a bonus of $300. the employee’s federal and Ontario provisional TD1 claim codes are both basic
step 1:
divide the bonus being paid by the pay period type
$300 / 52 = 5.77
Step 2:
add the amount form step 1 to the employee’s regular net taxable income
$425 + 5.77 = $430.77
Step 3:
look up the tax amount federal and Ontario provincial on the step 2 total
Federal tax on $430.77 = $25.55
Provincial tax: = $13.95
Step 4:
look up the tax amount on the employee’s regular net taxable income federal and provincial
Federal tax on $425 = $24.95
Provincial tax on $425 = $13.10 or $13.50 (either is acceptable)
Step 5:
take the difference from step 3 and step 4 and multiply it by the pay period type
- this will give you the total amount of tax (federal and provincial) to be assed on the bonus payment
Federal : $25.55 - 24.95 = $.60
Prov: $13.95 - 13.10 = .85
federal $.60 x 52 = $31.20
prov: $.85 x 52 = 44.20
total tax: $75.40 this should be deducted from the bonus payment of $300
when do retroactive payments occur
when an employee receives a wage increase during the year that should`ve occurred in a prior pay period
How do you calculate the retroactive pay income tax adjustment
the difference between what they should have been paid and what was actually paid
Ex. of retroactive pay and income tax
Sheila’s company gives their employees a wage increase the first pay period of each year, however, this year that did not happen until pay period 10. her rate in pay period 1 was $25.80 per hour, she received a cost of living increase of 1% therefore, her new rate of pay is $26.06. She is paid bi-weekly and she has basic tax deducted (claim code 1 for both provincial and federal) she works 40 hrs per week. she ahs no deductions
step 1: calculate the retro payment
retro = hrs per week x 2 (bi-weekly) x 9 pay periods x difference between her new rate and her old one
= 40 x 2 x 9 x (26.06 - 25.80)
= 720 x .26
= $187.20 retro payment
Step 2: calculate her tax on bi-weekly pay period at her new rate
new earnings per pay period = 80 hrs x 26.06
=$2,084.80
Fed: 252.75
Prov: 125.50
Step 3: calculate her tax on a bi-weekly pay period at her old rate
old earnings per pay period = 80 hrs x 25.8
=$2,064
fed tax: 247.45
prov tax; 124.05
Step 4: calculate the difference in tax amounts form her new rate to her old rate
fed: 252.75 - 247.45 = 5.30
prov: 125.50 - 124.05 = 1.45
Step 5: multiply the tax by the number for pay periods
fed: = 5.30 x 9 pay periods
= 47.70
prov: 1.45 x 9 pay periods
= 13.05
total tax on retro pay of $187.20 is equal to $60.75
) Sally Smith is due to be paid the following on January 23, 2014: her weekly salary of $1200.00, overtime $200.00, 4% vacation on her overtime, a taxable car allowance of $75.00 and a group life insurance non cash taxable benefit of $15.75. Sally pays into the company’s registered pension plan of 4% of her weekly salary and she also pays union dues of $8.00 each pay. Using this information please determine her gross taxable income and her net taxable income. She resides in Ontario. Please show all your work.
answer pending
Jennie receives a weekly salary of $950.00. She is a Payroll Manager for Broomsticks Emporium located in Windsor Ontario and as such is not entitled to overtime pay. However, she has been working long hours to ensure the T4s are issued on time. The Director has agreed to pay her $ 500.00 as a onetime bonus as a show of appreciation for all her hard work. She is a claim code 1 and on her signed and dated TD1 she has requested that payroll deducts an extra $25.00 in income tax each pay. Please calculate the income tax to be deducted this pay
answer pending
Roger Thumb works in Ontario at a manufacturing company. His hourly rate of pay is $31.50 and he works 40 hours per week, he does not work any overtime. He is paid biweekly. Effective pay period 7 Roger received a rate increase to $32.75 per hour. The new rate should have been effective pay period 1 therefore his company is giving him a retroactive payment with his pay on pay period 7 to cover the difference in wages he should have received since the beginning of the year. The payment will be made on a separate deposit from his regular pay. Calculate the net pay for his retroactive increase. He signed his TD1 form with claim code 2. Show all calculations.
answer pending
Using the CRA website please determine the amount of income tax to be deducted from the following-DO NOT USE THE PDOC CALCULATOR PLEASE USE THE ONTARIO TAX TABLES
a) Claim Code 1, Pay frequency – Biweekly Income of $2500.00, $100.00 RRSP, $5.00 United Way and a $200 cash allowance. Tax =
b) Claim Code 3, Pay frequency – Weekly Income of $1500.00, $500.00 RRSP and $100.00 non-cash allowance. Tax =
c) Claim Code 1, Pay frequency – Semi monthly Income of $6500.00 and a $500.00 cash allowance. Tax =
d) Claim Code 1, Pay frequency – Monthly Income of $9500.00, $200.00 union dues, $5.00 United Way, $200.00 Cash allowance and $200.00 non-cash allowance. Tax =
answer pending
