Final Exam Flashcards
(124 cards)
1
Q
What provides the government with it’s major source of revenue?
A
Taxes
2
Q
What do taxes go towards?
A
- Funding operating expenditures
- Paying federal & provincial debt
3
Q
How much revenue did taxes provide the government with in the 2011-2012 fiscal year?
A
60%
4
Q
Most importantly, what do taxes affect?
A
Everyday decisions for individuals, businesses & government
5
Q
What is no longer possible?
A
Simple computation of taxes
6
Q
When did the formal tax system in Canada begin?
A
In 1867 when Canada became an independent country
7
Q
What did the Constitution Act 1867 grant?
A
It granted the federal government unlimited power to pass tax statutes and raise revenues using any system of tax
8
Q
What are the objectives of taxation?
A
- To redistribute wealth equitably
- To strengthen federal-provincial relations
- To be internationally competitive
- To maximize the growth of output of goods & services that are in the public interest
9
Q
What are the different types of taxes? (10)
A
- Direct tax
- Indirect tax
- Value Added tax
- Consumption tax
- User tax
- Head tax
- Tariff
- Transfer tax
- Property tax
- Income tax
10
Q
What is Direct Tax?
A
Tax demanded by the government from the vary person to whom the tax applies
11
Q
What is Indirect Tax?
A
Tax demanded from one person in the expectation that he will reimburse himself at the expense of another
12
Q
What is Value Added Tax?
A
Tax levied on the increase in the value of a commodity that has been created by the taxpayer’s stage of the production or distribution cycle
13
Q
What is Consumption Tax?
A
Tax levied on the consumption of some product or service
14
Q
What is User Tax?
A
Tax levied on the user of some facility
15
Q
What is Head Tax?
A
Tax levied on the existence of a classified group of people
16
Q
What is Tariff?
A
Tax imposed on the importation or exportation of certain goods or services
17
Q
What is Transfer Tax?
A
Tax imposed on the transfer of property from one owner to another
18
Q
What is Property Tax?
A
Tax imposed on the ownership of some particular set of goods
19
Q
What is Income Tax?
A
Tax imposed on the income of individuals, corporations and trusts
20
Q
What are other sources of revenue?
A
- Printing money
- Borrowing money
- Gambling
- Increasing the tax rate
- HST/GST
- Customs and duty fees
- Wealth/Death tax
- Capital tax
- Payroll tax
- Provincial tax
21
Q
What are the 3 taxable entities?
A
- Individuals (T1)
- Corporations (T2)
- Trusts (T3)
22
Q
What is a Resident?
A
- Where a person normally lives
- Everyone is a resident of some country
- Some persons can be deemed to be residents of more than one country
23
Q
How are residents taxed?
A
- Taxed on world income for the entire year
24
Q
What is the criteria of a Non-Resident?
A
- A person who did not leave a dwelling in Canada available to return to
- Did not leave a spouse or other dependents in Canada
- Did not leave any personal property in Canada
- Did not establish permanent residence somewhere else
25
What is a Part-time Resident?
A person who leaves or enters Canada once in that tax year
26
How are Part-time Residents taxed?
- Taxed in Canada on world income for part of the year in which they were resident in Canada
27
Who is a Deemed Resident in Canada?
1. Ambassadors, Ministers, high commissioners, officers of servants of Canada
2. Agents general, officers or servants of Province
- A spouse of 1 or 2 above if they were Canadian residents in some year
- Children
28
How are Deemed Residents taxed?
Taxed on world income for the entire year
29
Describe the taxation of Employment Income
All salaries and wages (including gratuities) and taxable benefits received from an employer
30
What is the main taxation principle when dealing with corporate tax?
Tax payable on Profit
31
What is a sojourners?
A person who is temporarily present in Canada for more than 183 days during any calendar year
32
When are sojourners deemed to be residents?
- Deemed to be resident for the entire year even if their actual home is outside of Canada
- If present less than 183, not deemed a resident
33
What do Canada and the United States have with regards to taxation?
A tax treaty that shares tax revenue
34
How do you determine the residency of a Trust (T3)?
Trusts are deemed resident where the trustee, executor, administrator, beneficiary, heir or other legal representative resides
35
What is the taxation year end date for individuals?
December 31st
36
When is the taxation year end for corporations?
Corporations can choose their fiscal year end to suit the needs of their business
- Ex. Clothing stores are busiest at Christmas, may choose March 31st year end date
37
What class are partnerships taxed as?
Individuals (T1)
38
What two options do corporations have with regards to annual profit?
1. Retain profit - share value increases
| 2. Distribute profit via dividends - share value decreases
39
To avoid having double taxation on corporate profits, what two tax breaks does the government provide to shareholders?
1. Dividend Tax Credit
| 2. Capital Gain Tax Rate of 50%
40
What does CICA stand for?
Canadian Institute of Chartered Accountants
41
Who must abide by the rules of CICA?
- Any publicly traded company (over 50 shareholders)
| - Must adhere to mandatory audit provisions
42
What does IFRS stand for and who does it apply to?
- International Financial Reporting Standards
- small or private companies
- no mandatory auditing
43
What is ASPE?
Accounting Standards for Private Enterprise
44
What is CCPC?
Canadian Controlled Private Corporation
45
What is the Small Business Deduction?
- First $500,000 of annual income pays special reduced tax rate
- any additional money made over that is taxed at the highest rate
46
What does 'Revenue Recognition' mean with regards to the GAAP rules?
Revenue must be recognized when it is earned
47
What is the concept of Accrual?
Revenue can be claimed when the money is still owing?
48
What is the concept of Matching?
Must match expenses to revenue recieved
49
What does GAAP stand for?
Generally Accepted Accounting Principles
50
How many federal tax rates are there?
Four
51
What are the 6 exclusions from income?
1. Gifts
2. Inheritances
3. TFSA (tax free savings account)
4. Life insurance proceeds
5. Lotteries and Gambling
6. Accident or sickness insurance benefits
52
What is the exception to gambling being excluded from income?
Professional gamblers
53
What is the taxation issue with regards to accident and sickness insurance?
Proceeds are deemed taxable if the premium was paid in part, or the whole amount by the employer
54
How does a tax-deferred sale differ from a taxable sale?
- A tax-deferred sale involves payment in the form of shares issued by the purchasing corporation
- Taxable sales involve cash payments or a deferred payment of cash secured by notes bearing interest
55
What needs to be done when arranging a tax-deferred sale of a corporate business?
Utilize the special provisions of the Income Tax Act that are designed to provide tax relief when corporations are reorganized
56
What are the alternate courses of action available when arranging a tax deferred sale of a business?
1. A sale of assets by one corporation to another at an elected transfer price equal to the assets' tax values
2. A sale of the corporation's shares to a corporate purchaser at an elected transfer price equal to the tax value of the shares
3. An amalgamation of two or more corporations
4. A reorganization of share capital
57
What are a limited partners role in a corporation?
- Not liable, no role in the company
| - Only liable for the amount of money they invested in the company
58
What are high risk ventures?
- Tax shelters
- Oil and gas exploration and drilling
- Mining exploration
- Hotel, condo and apartment construction
59
What do high risk ventures have in common?
- A high risk of failure
- A need for significant amount of initial capital
- A likelihood of substantial losses in the early years
- If successful, a long wait before profits are realized
- Special incentives with respect to the timing of deductions for tax purposes
60
What are the liability issues when selling a business?
Can be held liable for previous issues with employees, taxes, fraud and criminal activity
61
What is the difference between a partnership and a joint venture?
- Separate tax calculation
- Each gets the small business deduction of $500,000
- Limited purpose
- One time only thing
62
What is a joint venture?
Not a partnership but an association of two or more entities for a given limited purpose without the usual powers and responsibilities of a partnership
63
What are the tax implications for joint ventures?
- Not a taxable entity
- Individuals, corporations are the taxable entities
- Separate tax calculation
64
What statute is used for limited partnerships?
Limited Partnership Act
65
What are the two different partners in a limited partnership?
- General partners
| - Limited partners
66
What are general partners?
- Fully liable for obligations of partnership
- Responsible for managing business affairs
- Treated in the same fashion as a partner in standard partnership
67
What are limited partners?
- Responsible for obligations of limited partnership only to extent of their involvement in the partnership
68
What is a partnership?
- Relationship between entities
| - Agreement to divide or apportion
69
What are the rules of capital contribution?
- Can be decided however the parties wish
| - Should be in writing
70
What are the rules of management?
- Can be assigned by an agreement of the partners
| - Often a "managing partner" who is voted in by a committee vote
71
What are the rules of profit?
- Can be divided however agreed upon by partners
- In writing - follows basic contract law
- Based on their ownership interest
72
What are the rules of a partnership?
- NOT a separate legal entity like a corporation
- Partnership name cannot be sued as if it's a legal entity - partners must be named individually
- NOT a taxable entity, however net income is calculated for the partnership
73
What are the Federal Tax Credits?
- Dividend Tax Credit
- Personal Tax Credit
- Tuition, textbook, education Credit
- Medical Expenses
- Charitable donations
- Pension Income
- CPP & EI Premiums
- Foreign Tax Credit
- Political Contributions
- Investment Tax Credits
- Public Transit Credits
- Pension Income Splitting Credit
- Children's Fitness Credit
74
What is the difference between a tax credit and tax deduction?
- Tax credits are things paid for that assist with amount of return you'll receive from your income tax
- Tax deductions are things paid for that reduce the amount of taxes you may have to pay to the government
75
What are some sources of other income?
- RRSP (Registered Retirement Savings Plan)
- RRIF (Registered Retirement Income Fund)
- RPP (Registered Pension Plan)
- CPP (Canada Pension Plan)
- OAS (Old Age Security)
- EI (Employment Insurance)
- RESP (registered Education Savings Plan)
- Awards, scholarships, bursaries over $500.00
- Spousal support
- Child support payments from spouse
76
What are students eligible for when claiming awards, scholarships and bursaries as other income?
Education Tax Credit exemption
77
What are the rules on claiming spousal support as other income?
Only if periodic payments, lump sum doesn't apply
78
What is the rule on claiming child support payments?
- Before May 1st 1997 it was taxable
| - After May 1st 1997 it's not deductible by payor or taxable to payee unless court order says otherwise
79
Describe a Registered Retirement Savings Plan (RRSP).
- Tax sheltered investment (taxable when cashed)
- Terminates at age 71
- Guaranteed monthly payment until death
- Fixed term annuity
- Ability to transfer funds to spouse's RRSP tax free
80
What is the rule regarding transferring funds from one spouse's RRSP to the others?
Money must not be cashed within 3 years of the date of the transfer or it will be deemed taxable in the giving spouse's name
81
What is the annual contribution limit for RRSP's?
If an individual does NOT belong to an employer's registered pension plan, the annual contribution limit is 18% of the individual's prior year's earned income
82
What happens to funds in an RRSP upon retirement?
Funds accumulated in an RRSP can be paid out in a lump sum or gradually over a period of time in the form of a pension
83
What are retirement options for an RRSP?
- Life annuity
- Guaranteed fixed-term annuity
- Registered retirement income fund
84
Describe a Registered Education Savings Plan (RESP).
- Purpose is to help families save funds for their children's post secondary education
- Individuals can contribute funds at any time before the child reaches 31 years of age
- Life time contribution limit of $50,000
- Normally taxed as income of the student when the funds are withdrawn
85
Describe a Canada Education Savings Grant.
- A grant given annually by the federal government to children under the age of 17
- Maximum lifetime grant per child - $7,200 but is not limited to an annual amount of 20% of the contribution to a maximum of $2,500 per year
- If the child does not pursue post-secondary education, the CESG is returned to the government
86
What are withdrawals from RESP's called, describe them.
- Educational Assistance Payments (EAPs)
- Students can be enrolled as a full-time student or part-time students who are at least 16 years of age
- For the first 13 consecutive weeks of study, payments are limited to $5,000 for full-time and $2,500 for part-time students
- No limit on payments following the initial 13 week period
- Partly taxable
87
What is recapture?
- Catch all
- When dispositions make the account go negative - expensed too much
- Brings accounts out of negative
- Must pay tax on the recapture
88
What are the rules of G.A.A.P.?
- Revenue recognition
- Concept of accrual
- Concept of matching
- Concept of conservatism
89
What is the special rule of involuntary disposition?
Taxpayer is permitted to defer recognition of recapture if a property with a similar use is acquired within 24 months of the year of forced disposition
90
When do the 'special rules' of Capital Cost Allowance apply?
- Involuntary disposition
- 2 year rule for insurance proceeds
- Change in use
- Disposition at fair market value
- Recapture
- First year of acquisition and year of disposition – ½ normal rate of CCA applies
- Terminal loss
91
What is the special rule for change in use?
If fair market value (fmv) of asset lower than original cost, then fmv is cost for tax purposes and capital cost allowance can be claimed on that amount
92
What is the special rule for disposition at fair market value?
May cause a recapture of capital cost allowance or a terminal loss
93
What does income from property include?
- Dividend income
- Interest income
- Rental income
- Royalty income
94
What are the tax rules on income from property?
- Pay tax on the profit
| - Income minus expenses
95
What is dividend income?
The return on the investment in capital shares of public and private corporations
96
What is interest income?
The return on the investments in bank deposits, loans, mortgages, bonds, and debentures
97
What is rental income?
The return on the ownership of real estate or other tangible property
98
What is royalty income?
The income on the ownership of properties, such as patents and mineral rights
99
What are the tax rules on capital depreciation?
- Capital Cost Allowance
- Opening Balance
- Add + New Purchases – Subtract – Dispositions
- Multiply by Applicable CCA rate set by Act
- Recapture
100
What is a capital gain (or capital loss)?
- The gain (loss) realized on the disposition of capital property
- The intended purpose of acquisition was long term or enduring to achieve benefits
101
What is 'benefit' to capital gains (loss)?
Financial or personal enjoyment
102
What is 'intention' of a capital gain (loss)?
For resale versus enduring benefit
103
What are factors to be considered for intention of capital gains (loss)?
- Period of ownership
- Nature of transaction
- Number or frequency of transaction
- Relation to taxpayers’ business
104
What are the categories of capital property?
- Personal use property
- Listed personal property
- Financial property
105
What is personal use property?
Property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer and does not generate financial returns
106
What is listed personal property?
Property for personal use that also has some element of investment value (ex. art, jewellery, stamps, coins)
107
What is financial property?
All capital property that was acquired primarily to generate a benefit through a financial reward (ex. bonds, shares, loans, land etc.)
108
What are the tax implications for non-residents?
25% of tax withheld at source
109
What is the principal residence exemption?
May be subject to capital gain on sale, but it cannot realize a capital loss
110
What is the formula used to reduce the capital gain on the sale of a principal residence?
1 + Number of Years as Principal Residence/ Number of Years Owned x Gain
111
What is meant by the special clawback on old age security?
What is given is fully returned
112
What losses carry over?
- Capital losses
- Non-capital losses
- Farm losses
113
What are capital gain exemptions?
- Abolished for individual (formerly $100,000)
- Small business corp. ($800,000 for 2014 + index)
- Qualified farm property ($800,000 for 2014 + index)
114
What are capital losses?
Allowable capital losses incurred in a current year - if they cannot be utilized in arriving at net income because of insufficient taxable capital gains
115
What are non-capital losses?
Business, employment, and property losses- if they cannot be used because of insufficient income in the year
116
What are farm losses?
Business, employment, and property losses whose chief income is farming and fishing - if they cannot be used because of insufficient income in the year
117
In income from business, what is taxed?
Tax payable on profit only - pay tax only once by corporation
118
How many years can you go back for loss carry overs?
3 years
119
What happens if a corporation retains the profit?
Share values will increase
120
What happens if a corporation distributes the profit?
Share values decrease
121
What happens when share value increases?
Capital gain (50% taxable)
122
What needs to be done if you want dividends?
Invest in a company that pays out dividends
123
What is the dividend tax credit?
Dividends are taxed lower as a reflection of them already being taxed once
124
What is the rule with inter corporate dividends?
Public corporations pay the highest rate of tax
