Chapter 4

Question 1

Why do we pay taxes?

Answer 1

Taxes fund government services such as healthcare, education, infrastructure, and defense.

Question 2

With respect to taxation, what is the role of the federal government? What is the role of the CRA?

Answer 2

The federal government sets tax policies and rates. The Canada Revenue Agency (CRA) administers and enforces tax laws and collects taxes.

Question 3

Define personal income tax.

Answer 3

Personal income tax is a tax on an individual’s earnings, including wages, investment income, and other sources, imposed by the government.

Question 4

What is the purpose of the TD1 form? Why is it important?

Answer 4

The TD1 form determines the amount of tax to be deducted from your income. It’s important because it ensures accurate withholding based on personal exemptions.

Question 5

What types of taxes are paid on consumer purchases? Provide examples of an excise tax.

Answer 5

Sales taxes (e.g., GST, HST) are paid on purchases. Excise taxes include taxes on gasoline, alcohol, and tobacco.

Question 6

What is a capital asset? Under what circumstances would you incur a capital gain on a capital asset?

Answer 6

A capital asset is property like stocks or real estate. A capital gain occurs when you sell the asset for more than its purchase price.

Question 7

Which level of government collects property taxes?

Answer 7

Municipal governments collect property taxes.

Question 8

Under what circumstances do you have to file a tax return?

Answer 8

You must file a tax return if you owe taxes, want to claim a refund, or have earnings over a certain threshold.

Question 9

Provide four reasons why students should file a tax return.

Answer 9

1. To claim tuition tax credits.
2. To receive a refund of any overpaid taxes.
3. To claim GST/HST credits.
4. To transfer unused credits to parents or spouses.

Question 10

When does the tax year end? By what date do taxpayers have to file their income tax returns?

Answer 10

The tax year ends on December 31. Tax returns must be filed by April 30 of the following year.

Question 11

What is the penalty if you do not pay taxes owing by the due date?

Answer 11

A penalty of 5% of the tax owing is charged, plus 1% for each additional month the payment is late, up to a maximum of 12 months.

Question 12

Describe the different ways in which a taxpayer may file their tax return.

Answer 12

Taxpayers can file online using software, by mail using paper forms, or through an accountant or tax preparer.

Question 13

What is the purpose of a Notice of Assessment?

Answer 13

A Notice of Assessment confirms the CRA has processed your tax return, showing the calculation of taxes owed or refunded.

Question 14

What are the eight steps to completing a T1 General?

Answer 14

1. Enter personal information.
2. Calculate Total income
3. Calculate net income
4. Calculate taxable income
5. Calculate federal tax
6. Calculate provincial tax
7. Calculate the refund or amount owing.

Question 15

What is a T4 slip?

Answer 15

A T4 slip is issued by an employer and shows total earnings and tax deductions for the year.

Question 16

What is total income? List some types of income that are included in total income.

Answer 16

Total income includes all earnings such as wages, investment income, and business income. Examples: salary, interest, and rental income. Non-included payments: gifts, inheritances.

Question 17

In general, under what circumstance is someone considered self-employed?

Answer 17

Someone is considered self-employed if they run their own business or work as an independent contractor rather than as an employee.

Question 18

What is interest income? What is the purpose of a T5 slip?

Answer 18

Interest income is earnings from investments like savings accounts. A T5 slip reports interest, dividends, and investment income to the CRA.

Question 19

What is dividend income? What is the purpose of the dividend adjustment?

Answer 19

Dividend income is money earned from owning shares in a company. The dividend adjustment reduces taxes on dividends to avoid double taxation.

Question 20

Describe the distinction between eligible and non-eligible dividends.

Answer 20

Eligible dividends are paid by Canadian companies and receive a higher tax credit. Non-eligible dividends, from private or small businesses, get a lower tax credit.

Question 21

What is the difference between a capital gain and a capital loss?

Answer 21

A capital gain occurs when you sell an asset for more than its cost. A capital loss happens when the selling price is lower than the purchase price.

Question 22

What are deductions? Describe the most common types of deductions.

Answer 22

Deductions reduce taxable income. Common types include RRSP contributions, childcare expenses, and moving expenses.

Question 23

What is net income? Differentiate between net income and taxable income.

Answer 23

Net income is total income minus deductions. Taxable income is net income minus additional deductions like capital loss carryforwards.

Question 24

What is meant by a progressive tax system? What is the difference between marginal and average tax rates?

Answer 24

A progressive tax system taxes higher incomes at higher rates. Marginal tax rate is the tax on the last dollar earned, while average tax rate is the total tax paid divided by total income

Question 25

What is a tax credit? What is the difference between a refundable and non-refundable tax credit?

Answer 25

A tax credit reduces the tax owed. Refundable tax credits can result in a refund, while non-refundable credits only reduce the tax to zero.

Question 26

What is the difference between a tax deduction and a tax credit?

Answer 26

A tax deduction reduces taxable income, while a tax credit directly reduces the tax owed. Credits are generally more valuable.

Question 27

List some examples of refundable and non-refundable tax credits.

Answer 27

Refundable credits: GST/HST credit, Canada Workers Benefit. Non-refundable credits: Basic personal amount, tuition tax credit.

Question 28

Under what circumstances can you claim the interest paid on your student loans as a tax credit?

Answer 28

You can claim interest on student loans if they were provided under government student loan programs.

Question 29

Describe the Tuition Amount tax credit.

Answer 29

The Tuition Amount tax credit reduces taxes owed based on eligible tuition fees paid to qualifying institutions.

Question 30

List the non-refundable tax credits that are transferable. List the non-refundable tax credits that may be carried forward.

Answer 30

Transferable credits: Tuition tax credit, pension income amount. Carried forward credits: Unused tuition amounts, charitable donations.

Question 31

Compare the calculation for net provincial tax payable with the calculation for net federal tax payable.

Answer 31

Both calculate net tax based on taxable income, but provincial tax rates and credits differ from federal ones. The calculation process is similar.

Question 32

What is the difference between tax avoidance and tax evasion?

Answer 32

Tax avoidance is legally minimizing taxes. Tax evasion is illegally underreporting or not paying taxes.

Question 33

Explain how different types of income received will make a difference in the amount of tax you pay.

Answer 33

Employment income is fully taxable, while capital gains are only partially taxable. Dividends receive preferential tax treatment.

Question 34

What is a registered education savings plan (RESP)? How does the Canada Education Savings Grant (CESG) work?

Answer 34

An RESP is a tax-sheltered account for education savings. The CESG is a government grant that matches RESP contributions up to a limit.

Question 35

What are the differences between an educational assistance payment (EAP) and an accumulated income payment (AIP)?

Answer 35

EAPs are withdrawals from an RESP used for education and taxed as income. AIPs are taxed and penalized if RESP funds are not used for education.

Question 36

What is the purpose of a registered disability savings plan (RDSP)?

Answer 36

An RDSP helps individuals with disabilities save for long-term financial security with government contributions and tax-sheltered growth.

Question 37

What is a tax-free savings account (TFSA)? How can it help to reduce tax payable?

Answer 37

A TFSA allows investments to grow tax-free. Withdrawals are also tax-free, helping reduce overall taxable income.

Question 38

What are the major deductions and tax credits that can be used by students to minimize their tax payable?

Answer 38

Major deductions include tuition fees, interest on student loans, and moving expenses. Tax credits include the tuition amount, GST/HST credit, and non-refundable tax credits like the basic personal amount.