Week 9 & 10: Canadian Taxation Flashcards
What types of income do investments generate?
- Interest
- Dividends
- Capital gains/losses
How is interest income taxed from investments?
The FULL amount of interest is added to taxable income
How are eligible dividends taxed?
No accrual, only received (cash) amounts.
For federal taxation:
- Dividends is grossed up by 38% (i.e multiply dividends by 138%)
- Dividend Tax Credit equal to 25% of the “grossed up” amount is deducted (i.e multiply grossed up amount by 25%)
Does Canada’s federal taxation only apply to eligible dividends? What are eligible dividends?
Yes, it only applies to “eligible” dividends, which are generally from Canadian corporations.
Foreign dividends are FULLY TAXED like interest.
Describe a dividend example, assuming you receive $150 in dividends and were in the 48% tax bracket.
On tax return, taxable amt. of dividends, you would record:
- $150 * 138% = $207 (“grossed up” amount)
Then you would calculate the Dividend Tax Credit:
- $207 * 25% = $51.75
Then, the total federal tax on dividends, with the 48% tax bracket being incorporated…
- $207 * 48% - $51.75 = $47.61
- Can also calculated Effective Federal tax rate on the dividends. $47.61 / $150 of dividends = 31.7%
Describe taxation in reference to Capital Gains/Losses
- Gains are included in taxable income – ONLY 50% of capital gain is included.
- Losses can be accrued over time to reduce ONLY capital gains in other years.
Ex. capital loss from 2018 > Can offset capital gains in other years, but not taxable income in that current year (2018).
Example of taxation in capital gains, assuming $2,000 of capital gain was generataed and you are in the 26% tax bracket.
$2000 * 50% = $1000 is included in income.
If in the 26% tax bracket, your federal tax on the capital gain is $1000 * 26% = $260.
What is the formula for calculating tax owed for investments?
= Taxable income (all of interest income) * tax rate (depends on what tax bracket you’re in)
What is the formula for calculating tax owed for dividends?
= Grossed up amount (* 130%) * tax rate - tax credit (* 25%)
What is the formula for calculating tax owed for capital gain?
= taxable income (50% of gains) * tax rate
How do you calculate Effective Tax Rate for each investment income, dividends, and capital gain?
= tax owed / income
** NOT taxable income
What are four types of investment accounts we can have?
- Non-registered Plan / Investment account
- TFSA
- RRSP
- FHSA (First home-buyer savings account)
Describe maximum and taxation for “Non-registered Plan / Investment account”
- No maximum
- Fully taxed
What’s the difference between RPP and RRSP?
Identical, except…
Registered Pension Plan (RPP): employers contribute to an RPP
Registered Retirement Savings Plan (RRSP): individuals contribute to an RRSP
What are Registered Pension Plans for?
They help save for retirement through:
- Providing a tax deduction for contributions
- ARE NOT TAXED as investment income WHILE IN THE PLAN
- WITHDRAWALS from the plan are TAXED (ideally in retirement when tax rate is lower)
What are the details of contributing to an RRSP?
- You MUST have income. You can contribute to an RRSP based on income
- 18% of income up to a maximum = 29,210 (2022)
- If you dont contribute to an RRSP in one year, you can carry forward that contribution amt. indefinitely
How old do you have to be to contribute to a TFSA? What’s the maximum constribution (2024)?
- You have to be 18 and older
- Maximum contribution in 2024 = $7,000
- If you don’t contribute to TFSA in one year/don’t contribute the max, you can carry that amt to the next year
What is not tax DEDUCTIBLE for a TFSA? And what is NOT TAXED in a TFSA?
Not tax deductible
- Deposits
Not taxed:
- Investment income
- Withdrawals
Who can contribute to an FHSA? What’s the max contribution in 2024? Is there a time limit regarding the FHSA?
- 18 and over can contribute, must be a first-time home buyer
- Max contribution (2024) is $8,000
- FHSA must be used for home purchase within 15 years of FHSA being opened
What happens if you do not contribute to a FHSA/don’t contribute the max?
You can carry over that amt. to the next year up to a maximum contribution of $16,000
In an FHSA, what is tax deductible? What is NOT taxed?
Tax deductible:
- Deposits
Not taxed:
- Investment income inside FHSA
- Withdrawals
For each account (Investment/RRSP/TFSA/FHSA), describe whether they’re - tax deductible,
if their withdrawals are taxed,
if the investment returns taxed
if a house purchase is required
https://ibb.co/B23hrHZS
What does “tax deductible” mean?
You deduct contribution from your income.
Your tax rate is then applied to lowered income, making your tax payable lower.
Steps to finding out amount at retirement from investing
- find amt to invest
- calculate any tax rate
- add tax rate to amt to invest
- find rate of return until retirement = given rate of return * (1-tax rate)
- do future value formula using values above to find amt at retirement
