Unit 10

Question 1

some examples of some legal tax avoidance approaches:

Answer 1

*capitalizing on tax-advantaged retirement accounts
* full utilization of allowable deductions such as medical expenses and charitable donations;
* conversion of non-deductible expenses into tax-deductible expenditures;
* postponing the receipt of income
* splitting income with other family members, when handled properly; and
*selecting investments that provide a better after-tax rate of return.

Question 2

Calculating Tax
To calculate tax payable, follow these general steps.

Answer 2

• Step 1: calculate total income by adding together sources of income
• Step 2: subtract permissible deductions (e.g. RRSP contributions)
• Step 3: calculate taxable income
• Step 4: calculate the tax payable before tax credits by applying federal and provincial tax rates
• Step 5: subtract applicable tax credits (e.g. charitable donation)
• Step 6: calculate the total tax payable

Question 3

Some of the major tax deductions

Answer 3

pension plan contributions, RRSP contributions, union dues, childcare expenses, support payments, carrying
charges, and moving expenses.

Question 4

taxable income

Answer 4

Taxable Income = Total Income – Tax Deductions

Question 5

Tax Deductions versus Tax Credits

Answer 5

Recall that a tax deduction reduces the amount of income on which an individual pays tax. On the other hand, a tax credit reduces the amount of tax payable. Tax credits are applied after all tax deductions have been made and tax payable has been calculated using the combined federal and provincial marginal tax rates.

Question 6

Types of Tax Credits

Answer 6

• refundable
• non-refundable

Question 7

Tax Credit Calculation

Answer 7

The tax credit calculation is performed separately for federal tax payable and provincial tax payable. As a result, individuals multiply their total federal tax credits by 15% and their total provincial tax credits by the lowest marginal tax rate in their respective provinces.v

Question 8

The main types of registered accounts are

Answer 8

• tax-free savings account (TFSA)
• registered education savings plan (RESP)
• registered retirement savings plan (RRSP)
• registered retirement income fund (RRIF)
• registered disability savings plan (RDSP)

Question 9

Foreign Investment Income

Answer 9

Foreign investment income is often subject to withholding tax levied by the country in which the income
originates. However, the full amount of these earnings must be reported on a Canadian tax return. For
example, the U.S.-Canada Tax Treaty, Articles X and XI, stipulates a 10% withholding tax on U.S. interest
income, while the rate is 15% for U.S dividend income. Hence, $250 of interest income from the U.S. would be subject to $25 of withholding tax, leaving $225 in the hands of the Canadian recipient. However, the full $250
must be included in income for tax purposes.

Question 10

Taxation of Capital Gains and Losses

Answer 10

In Canada, only 50% of a capital gain is taxable.

Question 11

Taxation of Capital Gains and Losses

Answer 11

Similarly,
only 50% of a capital loss is allowable.