Flashcards in Exam Deck (54):
What are the four objectives of taxation?
1. To maximize the growth of output of goods and services that are in the public interest
2. To redistribute wealth equitably
3. To protect the liberty and rights of the individual
4. To strengthen federal and provincial relations
What is direct tax?
Tax demanded by government from the very person to whom the tax applies
What is indirect tax?
Text demanded from one person in the expectation that he'll reimburse himself at the expense of another
What is value added tax?
Tax levied on the increase in the value of a commodity that's been created by the tax payers stage of the production or distribution cycle
What is consumption tax?
Tax levied on the consumption of some products or services
What is user tax?
Tax levied on the user of some facility
What is head tax?
Tax levied on the existence of a classified group
What is a tariff?
Tax imposed on the importation or exportation of certain goods and services.
What is transfer tax?
Tax imposed on the transfer of property from one owner to another
What is property tax?
Tax imposed on the ownership of some particular set of goods
What is income tax?
Tax imposed on the income of individuals, corporations, and trusts
What is tax planning?
A legitimate way to decrease taxable money to build your wealth.
1. Shifting income from one time period to another (RRSP)
2. Transfer income to another entity (trusts)
3. Converting income from one type to another (capital gains)
What is tax evasion?
Illegal, don't declare any tips you've earned, penalties, jail high-profile cases, failing to declare all income, falsifying expenses, interest arrears
What is tax avoidance?
Great area, aggressive tax planning on verge of sending you to prison, tax lawyers good at tax avoidance schemes, not always able to do it
Specific anti-avoidance rules versus general anti-avoidance rules
Specific anti-avoidance rules:
– Prevents people from being too aggressive on tax planning
– No tax on monetary gifts
– Attribution – attributed back
– Entertainment expenses – abuse too much only certain things allowed
– Private club – taking client there for lunch couldn't write it off has been changed to 50% deductible
General anti-avoidance rule:
Three requirement test
1. Tax benefit must result
2. Transaction is an anti-avoidance transaction
3. Abusive tax avoidance in the sense that the tax avoidance would be inconsistent with the object, spirit, or purpose of the provisions relied upon by taxpayers
What is a nonresident?
Didn't leave a dwelling in Canada, didn't leave a spouse or dependent in Canada, didn't leave personal property in Canada, did establish permanent residence somewhere else, doesn't return to Canada on a regular basis
25% of tax withheld at source
What is the two-year rule
If a person is out of the country for less than two years air presumed to have maintained residence unless they can prove Aultice of been severed. If a person is out of the country for more than two years assumed they are no longer a resident unless otherwise proven.
What are the tax implications for a part-time resident?
Taxed in Canada on world income for the part of the year in which they were resident in Canada
Incorporated in Canada after April 26, 1965 – deemed to be resident in Canada
Prior to April 26, 1965 treated as residents if:
- reside in Canada
- Carry on business in Canada
- mind and management operations are located in Canada
What are the taxation year ends for individuals, corporations, trusts?
Can choose fiscal year end
Inter vivos – December 31
Testamentary trust – can choose fiscal year end
What is income from business?
Income earned from a profession, calling, trade, manufacturer, or undertaking of any kind whatsoever and an adventure or concern in nature of trade.
Tax payable on profit only.
What are the principles affecting calculation of income from business?
Canadian Institute chartered accountants
International financial reporting system - publicly traded companies (need auditor)
Accounting standards for private enterprise - private companies (don't need auditor only accountant)
Generally accepted accounting principles - old term
What are tangible assets/who qualifies:
Any entity who acquires a capital asset for the purpose of producing income.
Tangible assets: asset that has some enduring life value and produces income (land not included)
Special rule: involuntary disposition
If equipment is lost or destroyed insurance will give money to replace it tax-free if you decide to keep the money it is then taxable
Special rule: change in use
If an asset goes from being a business asset to the personal asset it is deemed to have been sold at Fairmarket value and must pay Fairmarket value tax
Special rule: first year of acquisition
An anti-avoidance rule that reduces the amount of capital cost allowance allowed in the first year of ownership half of the normal rate of CCA applies
What is recapture?
Every year a company subtracts the capital cost allowance for an account the amount that was written off for the value of the disposition is too great and the account is in the negative. Recapture reflects the fact that you have to bring the negative amount back into income.
What is a terminal loss?
It is the opposite of recapture, after all of the assets have been sold there is a realization that the assets were not appreciated enough. There is a positive balance on the account but there are no assets. There is deemed to be a terminal loss when you did not write off enough dispositions you're able to write the whole thing off because the assets are gone.
What is eligible capital property?
Intangible assets – no specific life, no chattels, not physical things. Ex. Goodwill, trademarks, franchise, license.
Declining balance method:
calculate the value of the eligible capital property
Able to write off 75% of the original cost of the asset at 7% per year when sold the seller receives a capital gain and the purchaser is allowed to write it off - recapture negative amounts
Capital gain (loss)
Intended purpose of the acquisition was long-term enduring to achieve benefits
Benefit: financial or personal enjoyment
Intention: for resale versus enduring benefit
Four factors to consider:
Period of ownership
Nature of transaction
Number or frequency of the transaction
Relation to the taxpayers business
Capital gains and losses:
Personal use property: Things that are purchased for personal use no losses allowed
Listed personal property: Special category in income tax act for collectibles. Because they go up in value losses are allowed against other gains from this category.
Financial property: Everything else that is of a capital nature anything purchased that you intend to make a profit on, losses allowed if matched against a gain.
RRSP & Special RRSP features
Any unused contribution room +18% of last years income.
Tax-sheltered investment deductible going in & taxable coming out
Terminated at age 71
Fixed term annuity
Homebuyer plan $25,000 15 year payback
Lifelong learning plan $20,000 10 year payback
Spousal RRSP and income splitting 65 and up
Business property employment loss
Special business bath come through owning shares in the corporation
All of those bosses get taken against income.
Capital loss: Can only be used if you have a capital gain carry losses forward indefinitely or go backwards in time for three years to get back the money that you paid
Non-capital loss: Business loses money for five years
Losses can be carried forward for 20 years or go back three years in time
Farm loss: Business losses are allowed can't be used towards a hobby farm
Capital gain exemption: Abolished for individuals
Small business Corporation and qualified farm property $750,000 ($800,000 for 2014 plus index)
Exclusion from income: gifts, TFSA, inheritance, *life insurance proceeds, *lotteries&gambling, *accident and sickness insurance
Business income issue: in professional
Death of a taxpayer:
Terminal return plates and things returned
All income to the date of the death
Deemed disposition of capital property
RRSP and RRIF taxable unless rollover to spouse
Executor T3 trust return after date of death clearance certificate
Registered retirement income fund
Move all money from RRSP into the RRIF account. Formula must take out 5% the first year goes up to 20% but does not go higher afterwards.
Registered pension plan
What contribution you put in 10% and the government puts in 10%
Canada pension plan
Deductible going in and taxable coming out index to inflation
Registered education savings plan
$5000 per year grant, 20% of 2500 per year to a maximum of 7500
Maxim contribution of $50,000
Taxable in the hands of the children
Prior to May 1, 1997 taxable
Post May 1, 1997 not deductible for the payor nor taxable to the payee
Profits of corporations subject to tax:
Option to retain profit or distribute profit
Retain profit: share value increases
Distribute profit: share value decreases
Share value up: capital gains
Shareholders pay taxes on dividends or capital gains:
Double taxation on corporate profit
Offset by either: dividend tax credit, capital gains tax rate of 50%
Incorporated dividends & small business deduction
Tax-free flow between affiliated corporations.
Public corporations have a higher rate of tax.
Private corporations get a small business deduction the first $500,000 reduced tax on business income.
Relationship between and entities that is set up by an arrangement to conduct business.
Equal partners, equity partners, senior/junior partners, managing partner.
Profit is distributed as set up in the contract.
Not a taxable entity - net income calculated for partnership (GAAP)
If two corporations must share $500,00 small business deduction.
Tax treatment is the same as ordinary partnership.
Gen. partners: no limits liability, management role, treated in the same fashion as a partner in a standard partnership and is an active participant in the business
Limited partners: Limited liability by amount invested in the business, investor in the business can be used to minimize tax passive investor, can't have a management role, usually used as an investment for someone with a lot of money.
Like enhanced limited partnership. Not ongoing relationship has limited purpose. Independent operators to get together every once in a while to work on a project.
Separate tax calculation, separate tax return, both get small business deduction of $500,000.
Situations in which limited liability partnerships and joint ventures are used
Used as tax shelter, oil & gas exploration (high risk, high cost, don't want to pay income tax, invest, get tax deduction), condos/hotel (expensive& require financing - bank wouldn't take risk), mining
Asset vs share purchase
Complex decision, tax rates of purchaser and vendor, get small business deduction on both, after cash flow (depends on how business is structured/sold), return on investments (affects good will), liability issues (change of shareholder changes nothing, change of ownership changes everything), gov legislation present/future can change business plan
Sale of business
- max capital gains (value of land)
- recapture - must consider what value you will allocate to all assets (preferable to sell at fm tax value)
- business income
- good will/patents - big part of negotiations (if business started with no good will & develops vendor will look for substantial costs
- when sold there is a capital gain
- exemption: 800,000 tax free when shares are sold (also for qualified farm business & small business)
What is the purpose of a tax-deferred sale?
Special rules, very complex area, many corporate decisions that exist to differ tax, shelter tax, to minimize tax, driven by tax based structures
Tax-deferred sales: asset sale at tax values, no gain
Special election to transfer assets added tax value to a new entity.
purpose: to keep business going and bring in a new owner.
Retain part of business - shares as consideration for the difference between what the books say & fm value
Tax-deferred sales: sale of shares tax value, no gain
Sell shares at their tax value and then issue more shares on the difference between the tax value and the Fairmarket value.
Effective if business is sold but you still retain part of it and will pay tax on shares when they're sold.
Tax deferred sales: amalgamation – takeover
Companies that lose money are often targets for takeover.
Desirable because income and finances can be merged, if one corporation is losing money and the other corporation pays a lot of tax can take the losses of the previous entity and carry it forward or backwards
Tax-deferred sales: reorganization of share capital/estate freeze
Shares in a corporation, wants to redeem and issue new shares, all have tax consequences, if you make a lot of money you pay a lot of tax, shares help.
Freeze value of your shares, issue new shares to family, they are now in charge of the business.