Chapter 4 - Income Taxes

Question 1

Why do governments collect taxes?

Answer 1

Taxes fund government services and programs such as healthcare, social benefits, and employment insurance.

Question 2

How is personal income tax typically paid?

Answer 2

Through withholding, where an employer deducts taxes from an employee’s paycheck.

Question 3

What form allows your employer to withhold taxes from your paycheck?

Answer 3

The TD1 Personal Tax Credits Return.

Question 4

What happens if you overpay your income taxes?

Answer 4

You receive a refund when you file your tax return.

Question 5

If you overpay for taxes and you don’t file your tax return, do you get a refund?

Answer 5

No, you must file a tax return to get your refund

Question 6

What are the main types of sales taxes in Canada?

Answer 6

Goods and Services Tax (GST), Provincial Sales Tax (PST), and Harmonized Sales Tax (HST).

Question 7

What are excise taxes?

Answer 7

Special taxes applied to specific products like cigarettes, alcohol, and gasoline.

Question 8

When are taxes paid on capital assets?

Answer 8

When the asset is sold, gifted, transferred, or inherited.

Question 9

What is a capital gain?

Answer 9

When an asset is sold for more than its original or adjusted cost.

Question 10

How is property tax calculated?

Answer 10

By multiplying the assessed value of the property by the property tax rate (mill rate).

Question 11

What is the deadline for filing income tax returns?

Answer 11

April 30 for most individuals, June 15 for self-employed individuals (but any owed taxes must still be paid by April 30).

Question 12

What happens if you file your tax return late and owe taxes?

Answer 12

You are charged interest and a late-filing penalty.

Question 13

What is a Notice of Assessment? Tip: This is a statement that you receive from the CRA

Answer 13

This notice will either confirm your calculations on your tax return or you will be provided with corrections that may result in either additional taxes owing or a larger tax refund.

Question 14

What is the Canada Workers Benefit (CWB)?

Answer 14

Known as Canada Workers Benefit and it’s a refundable tax credit intended to provide tax relief for eligible low-income individuals

Question 15

What are Employment Insurance (EI) benefits?

Answer 15

Known as employment Insurance benefits that are government benefits which are payable for periods of time when you are away from work due to specific situations
Ex// Parental leave of absence

Question 16

Why should students file tax returns?

Answer 16

As a student, you have eligible tuition tax credits that can be used to reduce the amount of tax you have to pay

Also by filling a return, you open your RRSP room earlier and have more contribution room

And if you are working and it just so happens that you paid more tax than necessary, you can get the money you overpaid back

Question 17

What is the difference between a marginal and average tax rate?

Answer 17

Marginal tax rate: The percentage of tax you pay on your next dollar of taxable income

Average tax rate: the amount of tax you pay as a percentage of your total income

Question 18

What if you don’t like income taxes, what do you do then?

A. Forget that they exist
B. Cut all ties with the government
C. Call Ben, cause we all know there’s a reason why he’s been keeping a low profile

Answer 18

Please post your answer in the Discord Chat

But we all know the answer is C, right Ben?

Question 19

What are refundable tax credits?

Answer 19

This is tax money that is returned to you if you have overpaid.

Examples include GST/HST credit for low income individuals, the Canada Child Benefit, and the CWB

Question 20

What is a Registered Education Savings Plan (RESP)?

Answer 20

A tax-sheltered account that allows contributions for a child’s education, with government grants such as the Canada Education Savings Grant (CESG). The investments grow tax-free within the account

Its opened by someone other than the student and prof’s opinion is that owners should self-direct the RESP and make their own decisions

The person that own the plan, chooses how the money is invested

No more than 50,000 lifetime can be contributed per child and Lifetime maximum CESG is $7200 per child

NOTE: Generally, anyone can contribute money to an RESP. However, contributers do not receive a tax deduction for the contributions they make.

Question 21

What is a Tax-Free Savings Account (TFSA)?

Answer 21

A tax-free investment account where contributions are made with after-tax dollars, and withdrawals are not taxed.

If a student is not able to make the maximum annual contribution, the contribution room is carried forward.

A big advantage of this savings account is that any money you withdraw will be added back to your contribution room for the following year, thereby allowing you to maintain your average annual contribution limit

Question 22

What is the benefit of contributing to a Registered Retirement Savings Plan (RRSP)?

Answer 22

Contributions are tax-deductible, reducing taxable income and providing future retirement savings.

Question 23

How long should tax returns and supporting documents be kept?

Answer 23

It is recommended to keep them indefinitely, as the CRA can request documents older than seven years during audits.

Question 24

When does the Tax Year End?

Answer 24

December 31

Question 25

Income tax is the greatest form of tax you pay in Canada? T/F

Answer 25

True

Question 26

What are the steps to completing an income Tax & Benefit Return?

Answer 26

1. Provide personal information. 2. Calculate total income. 3. Calculate net income by subtracting deductions. 4. Calculate taxable income 5. Calculate Federal Tax 6. Calculate Provincial Tax 7. Calculate refund or balance owing.

Question 27

If you earn $1 dollar working, and earn $1 from a dividend (owning shares of a company), are these dollars taxed equally?

Answer 27

No you end up paying less tax on $1 earned from Canadian dividends compared to $1 from your salary

Question 28

How are Capital Gains taxed?

Answer 28

Only 50% of your capital gain is taxed while the other is not. This is only if you realize the gain! Only if you actually sell your bitcoin for example Also note that capital gain is based on a weighted average. This is important when you buy the same stock at different prices throughout the years. When you sell, your gain is a based on a weighted average

Question 29

What is Capital Property?

Answer 29

Capital property is generally defined as property you have purchased to earn income. Common types of Capital Property: * Stocks & Bonds * Units/Shares in a Mutual Fund/ ETF * Cottage * Land/ Building/Equipment used in a rental operation

Question 30

What are Capital Losses, and how can they be used?

Answer 30

Capital losses occur when a capital asset (such as stocks, real estate, or other investments) is sold for less than its original or adjusted cost They can be used to offset capital gains, reducing taxable income. Unused capital losses can be carried forward to future tax years or carried back up to three years to offset past capital gains. Capital losses cannot be used to reduce other types of income (e.g., employment income).

Question 31

What is on the T4 slip?

Answer 31

This is a tax document that an employer provides to employees at the end of the year. It summarizes the total income earned and the deductions taken from the employee’s pay On the slip you can find: Employment income (salary, wages, bonuses, etc.) Income tax deducted (federal and provincial/territorial) Canada Pension Plan (CPP) contributions Employment Insurance (EI) premiums Other taxable benefits and deductions

Question 32

What is a deduction?

Answer 32

This is an item that can be used to reduce total income to determine the taxable income. This is step 3 of completing your tax return Common Examples: RRSP Contributions Union/Professional Dues Child Care Expenses Employment Expenses Etc...

Question 33

Why do we have "Net Income" & "Taxable Income"?

Answer 33

Net-income-is used to make adjustments to certain government benefits Taxable-income is used to calculate net federal and provincial income tax

Question 34

What are non-refundable tax credits? What are they used for?

Answer 34

These are credits that cannot be used to lower your income tax liability below zero! They are used to reduce the federal and provincial taxes that you owe. The non-refundable credits are multiplied by the lowest marginal tax bracket and then we deduct that value from the federal and provincial taxes we owe

Question 35

What is a tax refund?

Answer 35

This is when you paid already too much tax and you get some money back

Question 36

What is tax owing?

Answer 36

The amount you owe is greater than what you have paid, so you need to pay the rest

Question 37

What is a principal residence?

Answer 37

This is your designated property! You can only have ONE! You must own the property alone or jointly with another person If you own multiple properties you can pick your principal property

Question 38

When can money be withdrawn from the RESP?

Answer 38

Once the child has enrolled in a "qualifying post-secondary education" Note: There are certain tax consequences for the child. This money will be taxed as the Childs income

Question 39

What are the 3 buckets that the RESP account is composed of? And can the owner choose which bucket to draw money from?

Answer 39

1. Contributions - This is the money deposited into the RESP by the subscriber. When withdrawn, its not taxed. 2. CESG Principle - These are government grants. These amounts are taxable when withdrawn by the student. 3. Investment Growth – Any interest, dividends, or capital gains earned within the RESP. This amount is taxable when withdrawn by the student, but since students usually have low income, they may pay little to no tax. And the answer is yes, the plan owner can choose

Question 40

Do you get a tax deduction from a RRSP?

Answer 40

Yes you do!

Question 41

What is the maximum amount you can contribute to a RRSP every year?

Answer 41

Max annual contribution room is 18% of prior year's earned with a max of $31,560

Question 42

What happens if you don't contribute the max to a RRSP account every year?

Answer 42

Unused contribution room is carried forward to future years and you can use it until age 71

Question 43

Is there a minimum age to open an RRSP?

Answer 43

No there isn't, so the earlier you open it the better!

Question 44

What is an important thing you need to do every year to to ensure that your RRSP contribution room grows?

Answer 44

Since RRSP contribution room is based on your past income, you MUST file a tax return to build room

Question 45

Can you choose when to use your tax deduction from RRSP?

Answer 45

Yes you can. You can keep your tax deduction and use it later

Question 46

Once money is taken out of a RRSP, can it be put back?

Answer 46

No it can not! Once money is taken out, you will never be able to put it back

Question 47

Give some examples in what you can invest your RRSP money in

Answer 47

Stocks Bonds Mutual Funds GICs Etc

Question 48

Do you have to pay tax on any of the interest, dividends and/or capital gains while your money is in the RRSP account?

Answer 48

No! You only have to pay tax when money is withdrawn from the account

Question 49

Is there a time when you need to start withdrawing from your RRSP?

Answer 49

Yes, the government requires that withdrawals begin at age 71

Question 50

Who should you designate as your beneficiary on your RRSP?

Answer 50

You should make your spouse your beneficiary This will allow them to take over your RRSP as their own without having to take all money out and face tax consequences

Question 51

What is a TFSA account?

Answer 51

Its a tax free savings account, but it should have never been called a savings account since its better used for long term wealth building

Question 52

When can you open a TFSA account?

Answer 52

You can only open it when you turn 18

Question 53

Comment on the TFSA account. 1. Is there a limit to your annual contribution? 2. What happens if you exceed the contribution limit? 3. What if you don't use you contribution room, does it carry over? 4. When do you need to take the money out of the account? 5. If I withdraw money, can I then put it back in?

Answer 53

1. Annual Limit Set by the Gov't 2. If you put in more money, you will be penalized 3. Unused contribution room carries over 4. You can leave the money in the account forever 5. Yes you can put it back anytime you want, but it can't be sooner than a year after you withdrew the money

Question 54

Do you pay tax on ANY income earned in a TFSA account?

Answer 54

No, you never pay tax on any income earned

Question 55

If you have a TFSA account, you would want to designate your spouse as the ________

Answer 55

Successor Holder If you don't do this, the money will be cashed out and it can no longer grow tax free