Lesson 1 Flashcards
(27 cards)
what are the 6 key concepts in canadian income tax
- while tax laws in canada may appear arbitrary, their development is guided by economic policy and political/social goals
- taxation follows the legal structure of a transaction, not necessarily its economics
- there’s a continuous tension between the government and taxpayers - taxpayers want to pay as little tax as allowed within the law while the government wants to collect as much tax as possible within the spirit or letter of the law
- “income” is a net concept much like accounting, though tempered significantly by #3, leading to considerably less judgement or discretion than in accounting
- “income” is difference from capital appreciation
- basic structure of the tax payable calculation for all taxpayers under part 1 is: (add all source of income less general deductions) x tax rate schedule - tax credits = taxes payable
where all sources of income = net employemnt income
general deductions = moving expenses and enhanced CPP
tax rate schedule = progressive tax system
tax credits = basic credits, employment credits, education credits and donation credits
when is house flipping considered business income vs capital gain
if buy home and sell it in under 1 year = business income - more tax paid
if buy home and stay in if for more than 1 year = capital gain - less tax paid
what’s the net employment income formula
(A + B + C) - D
A = salary, wages, commissions, gratuities, and other forms of remuneration received
B = taxable benefits received
C = taxable allowances received
D = deduction specifically permitted against employment income
employed vs self-employed
employed: income earned = employment income, deductions = heavily restricted, employer is required to withhold income taxes/EI/CPP, lower risk vs reward
self-employed: income earned = business income, deductions have a wider range, must withhold and remit income taxes/CPP on your own, not eligible for EI, higher risk vs reward
what are the fundamental principles of employment income
- employment income = taxable when received - cash basis accounting
- any income or benefit paid/enjoyed is taxable, unless an exception applies - benefits/allowances
- any expense paid/incurred is disallowed, unless specifically allowed within the income tax act
- income taxes withheld, CPP + EI contributions are taken as tax credits
taxable vs non-taxable benefits
generally, taxable benefits arise when the benefit is greater for the employee than the employer - who’s the ultimate beneficiary
taxable benefits:
cash or near-cash gifts or awards, value of board + lodging (including meals), interest free or low interest loan, auto-benefits (usually), rent free and low-rent housing, holiday trips/prizes/incentive awards, spouse travel of no business reason for spouse, tax return preparation fees, fitness/gym/health club memberships (unless it’s a personal trainer), transit passes
not taxable benefits:
non-cash gifts or awards ($500 or less), nominal items (mugs with employer logo), overtime meals, group sickness or accident insurance plan, private health plan premiums, registered pension plan
what are the principles of taxable benefits
- generally, items received are taxed: cash or near-cash are always taxable
- who’s the ultimate beneficiary - employee = taxable benefit, employer = not taxable benefit
- CRA wants to administer the system realistically so doesn’t tax small non-cash items but limited; small non-cash items = nominal items, and gifts from employers for holidays where the first $500 of the gift = non-taxable and then the rest is taxable
- tax system supports governments social goals of health care and retirement savings = not taxable
define A in employment income
a taxpayer’s income for a taxation year (jan 1 - dec 31) from an office or employment is the salary, wages and other remuneration, including gratuities received by the taxpayer in the year
definfe the “b” in employment income formula
there shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable: value of benefits - the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
define the “C” in employment income formula
personal or living expenses - all amount received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purposes except
allowance vs reimbursements
allowance = employer provides employee with money = taxable
allowance = flat, specified amount to cover expenses, no receipts required, taxable unless exception applies
reimbursements = employee spends then reimburse by employer = non-tax
reimbursements = reimburse employee for specific expense, must be substantiated by voucher/receipt, non-taxable provided it’s a true business expense
define the “D” in employment income formula
except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment
what’s the summary of decision tree for employment items
received included (taxable)
paid = deductible (made to reduce)
difference in included and deductible = employment income
define marginal tax rate vs effective tax rate
marginal tax rate: tax rate imposed on your next dollar of income
effective tax rate: average rate you pay on all income
what’s the personal income tax calculation
step 1: taxable income
income (net)
less: general deductions
= net income for tax purposes
less: Division C deductions
= taxable income
step 2 taxes payable
taxable income * tax rate schedule
= gross taxes payable
less: non-refundable tax credits
= net taxes payable
less: refundable tax credits
= balance owing/(refund)
what’s included net employment income
compensation + taxable benefits less employment expenses
automobile/home office expenses and RPP contributions
what’s included in taxable income
net employment income - general deductions
moving expenses + enhanced CPP deduction
what’s included in taxes payable
gross taxes payable - non-refundable tax credits
(basic, CPP, EI, canada employment, tuition, donation)
less refundable tax credits (income taxes withheld)
define GST/HST - what is it, who pays. who charges
Goods + services tax; a transaction based consumption tax
Harmonized sales tax: purpose is to tax value added from supply chain - aka value added tax
purchasers of taxable suppliers must pay gst/hst
gst/hst registrants of taxable suppliers charge gst/hst to government - businesses who added value to goods/services they sell
what are the types if supplies
taxable supplies - fully taxable and zero-rated
exempt supplies
calculate gst/hst owing (refundable)
sales
gst/hst collected or collectible
- input tax credits
= net tax
- installments
- rebates
+ self-assessments
= gst/hst owing (refundable)
who are exceptions to registrants of gst/hst
small suppliers: businesses that make 30,000 or less in taxable sales in 4 consecutive quarters –> no collection of gst/hst on collectibles
define fully taxable supplies
registrants must charge gst/hst on sales
entitled to input tax credits on purchases
examples: retail items - cars, toys
services - haircuts, lawyers
commercial rent
define zero-rated taxable supplies
registrant’s gst/hst rate is 0%
entiteld to input tax credits on purchases
examples
basic groceries (vegetables)
farm livestock
prescription drugs
