Personal Taxation (48) Flashcards Preview

Income Tax Planning > Personal Taxation (48) > Flashcards

Flashcards in Personal Taxation (48) Deck (45)
Loading flashcards...
1

Tax deferral

Tax Deferral
A tax deferral involves postponing the payment of income taxes to a later date. This can be accomplished by postponing the recognition of income. An example would involve contributing $10,000 to a taxpayer’s RRSP, deducting the contribution, and reducing the taxpayer’s current income tax. Later, when the funds are withdrawn, the taxpayer must report the withdrawal as taxable income and the deferred tax becomes payable.

2

Tax Conversion

Tax conversion
A tax conversion refers to an investment that changes highly taxed income into more favourably taxed income. This cane be done through the use of capital gains, the dividend gross-up and other such methods.

3

Tax avoidance

Tax avoidance
Involves a situation in which the taxpayer had implemented certain legal course of action that allows them to avoid paying some amount of tax. Examples include the principal residence exemption, as well as the lifetime capital gains exemption (LCGE).

4

Income Splitting

The activity of income splitting is allocating taxable income and net income between two or more related parties, such that the allocation of taxable income and net income increases the amount of their after-tax income and social security benefits.

5

Perfect income split

The perfect income split is an income split between two or more related parties, such that the allocation of taxable income and net income results in the largest amount of after-tax income and social security benefits.

6

Worker's compensation

Worker’s compensation payments are not included in taxable income

7

Child Support Payments

Child support payments negotiated or ordered after April 30, 1997 are not included in taxable income.

8

Inclusion/Deduction Rule - Spousal Support


Under the inclusion/deduction rule, support paid to a current or former spouse/common-law partner in the form of an allowance made in accordance with a court order or a signed agreement is taxable in the hands of the recipient, and deductible to the payor (ITA 60).

To qualify under the inclusion/deduction rule, the payment must be made in the form of an allowance.

Legal costs incurred to enforce pre-existing right to interim or permanent support amount are deductible.

9

Allowance

Allowance
An allowance is a specified sum of money established in advance of payment as the amount the payor is required to pay periodically to the recipient for the maintenance of the recipient and/or child. Furthermore, the recipient must have discretion as to how to use the amount.

If you make or receive a lump-sum payment to satisfy arrears in periodic payments, you may consider it as a periodic payment for the inclusion/deduction rule.

10

Deduction legal costs

Deduction Legal Costs
Legal costs incurred in establishing the right to spousal support amounts, such as the costs of obtaining a divorce, a support order for spousal support under the Divorce Act or a separation agreement, are not deductible as these costs are on the account of capital or are personal or living expenses.

Legal costs of seeking to obtain an increase in spousal support are not deductible.

Legal fees incurred in establishing the right to child support are deductible. Because children have a pre-existing right, arising from legislation, to support or maintenance, legal costs to obtain an order for child support are deductible.

A pre-existing right to a support amount is a right that arises from a written agreement, a court order, or legislation such as sections 11 and 15.1 of the Divorce Act with respect to Child Support, or Part III of the Family Law Act of Ontario. Enforcing such a right does not create or establish a new right.

Legal costs incurred to enforce a pre-existing rights to interim or permanent support amounts are deductible. Legal fees paid to enforce previously established child or spousal support are deductible, even if the support itself is not taxable to the recipient, as in the case with child support awards negotiated after April 30, 1997.

11

Carrying costs

Carrying Charges
• Fees for the management or safe custody of investments
• Safety deposit box charges (prior to Budget 2013!)
• Accounting fees for recording investment income (but not tax return preparation services); and
• Investment counseling fees with regards to specific investments, but not brokerage fees or general financial planning fees.

Interest expense is not a carrying charge.

The legislation to implement Budget 2013 made the cost to a taxpayer of renting a Safety deposit box from a Financial institution non-deductible for income tax purposes. This measure applies to taxation years that begin on or after Budget Day 2013.

On Schedule 4, Statement of Investment Income, a taxpayer can deduct the total carrying charges and interest expenses related to his investment portfolio. On Schedule 4 of the T1, there is a section called IV Carrying charges and interest expense.

12

Tuition Tax Credit
Education Tax Credit
Textbook Tax Credit

Tuition Tax Credit
Is a non-refundable tax credit to provide income tax relief for tuition fees paid to a university, college, or other institution where post-secondary level courses are offered.

Education Credit
Is a non-refundable tax credit to provide income tax relief for the costs of higher education.

Textbook Credit
Is a non-refundable tax federal tax credit to provide income tax relief to post secondary students for the cost of textbooks.

The student has to claim their tuition fees, educations amounts and textbook amounts on their own return, even if someone else paid the fees. If the student does not have sufficient taxable income to use the tax credits, the tax credits will not be refundable to the student.

If the student does not need all of the tuition fees, education amounts and textbook amounts to reduce their Federal income tax to zero, a student can carryforward the amounts to a future year.

However, the student may be able to transfer the amounts for tuition fees, educations amounts and textbook amounts to a supporting parent, grandparent, spouse, or common-law partner.

13

Medical expenses
-Tax Credit for qualifying medical expenses
-How is the federal medical tax credit calculated
-For whom can medical expenses be claimed
-time period of expenses
-how much do medical expenses have to be in order for them to be eligible to be deducted?

Tax Credit for qualifying medical expenses
Is a non refundable federal tax credit to provide income tax relief for medical expenses. This conversion rate is the lowest income tax rate.

The federal medical expense tax credit is calculated as:
• ((the greater of ($0 and (qualifying medical expenses – (the lesser of ((3% x the taxpayer’s net income) and the net income ceiling)))) x conversion rate).

A tax payer can claim medical expenses for:
• themselves
• spouse/common-law partner
• dependent children/grandchildren
• her own, her spouse’s/common-law partner’s parent, grandparent, brother, sister, uncle, aunt, niece, nephew, provided that the relative lives in Canada and is dependent on the tax-payer for support.

The taxpayer can claim medical expenses that were paid in any 12 month period end in the year that were not claimed in the prior year.

The tax credit is only available on the medical expenses that are in excess of the amount as:
• (the lesser of (3% of the taxpayer’s net income and a medical expenses threshold)).

The medical expenses that can be claimed include:
• payments to a doctor, nurse, dentist, or to a public or licensed private hospital;
• payments for artificial limbs, wheelchairs, crutches, hearing aids, prescription glasses, contact lenses, dentures, pacemakes, and prescription drugs.
• Expenses for modifying the taxpayer’s home to allow a person for whom the taxpayer can claim medical expenses to be mobile and functional if the person has a mobility impairment.

14

Medical expenses
-Tax Credit for qualifying medical expenses
-How is the federal medical tax credit calculated
-For whom can medical expenses be claimed
-time period of expenses
-how much do medical expenses have to be in order for them to be eligible to be deducted?

Tax Credit for qualifying medical expenses
Is a non refundable federal tax credit to provide income tax relief for medical expenses. This conversion rate is the lowest income tax rate.

The federal medical expense tax credit is calculated as:
• ((the greater of ($0 and (qualifying medical expenses – (the lesser of ((3% x the taxpayer’s net income) and the net income ceiling)))) x conversion rate).

A tax payer can claim medical expenses for:
• themselves
• spouse/common-law partner
• dependent children/grandchildren
• her own, her spouse’s/common-law partner’s parent, grandparent, brother, sister, uncle, aunt, niece, nephew, provided that the relative lives in Canada and is dependent on the tax-payer for support.

The taxpayer can claim medical expenses that were paid in any 12 month period end in the year that were not claimed in the prior year.

The tax credit is only available on the medical expenses that are in excess of the amount as:
• (the lesser of (3% of the taxpayer’s net income and a medical expenses threshold)).

The medical expenses that can be claimed include:
• payments to a doctor, nurse, dentist, or to a public or licensed private hospital;
• payments for artificial limbs, wheelchairs, crutches, hearing aids, prescription glasses, contact lenses, dentures, pacemakers, and prescription drugs.
• Expenses for modifying the taxpayer’s home to allow a person for whom the taxpayer can claim medical expenses to be mobile and functional if the person has a mobility impairment.

15

Caregiver amount

Amount for the tax credit for caregivers:
= Max caregiver amount - (Greater of $ 0 and (dependant's net income - net income threshold.)

No tax credit is available if the dependent's net income exceeds the income level cut off, which is calculated as:
(Maximum caregiver amount + theshold.)

16

Medical expense tax credit

=Qualifying medical expenses - (the lesser of 3% of net income and the net income ceiling) x the federal and provincial conversion rate.

17

Canada employment tax credit

is a non refundable federal tax credit to provide income tax relief that recognizes work related expenses incurred by employees. The conversion rate is the lowest income tax rate.

The amount for the Canada employment tax credit is calculated as:
-the lesser of (The amount for the Canada employment tax credit and the individual's income for the taxation year from all offices and employment)
(Multiply by lowest income tax rate to get the credit amount.)

If an employee works from his home, he may be able to claim a deduction for workspace in home expenses.

18

Tax credit for public transit

is a non-refundable federal tax credit that provides income tax relief for the cost of monthly public transit passes or those passes of a longer duration.

The cost of electronic payment cards is eligible for the tax credit if:
-the cost relates to the use of public transfer for at least 32 one way trips during an un interrupted period not exceeding 31 days.
-the transit usage and cost of those trips are recorded and receipted to the purchaser by the relevant transit authority, in sufficient detail as to allow the CRA to verify the eligibility of the credit.

Where an individual purchases at least four consecutive weekly passes, the cost would be eligible for the credit.

19

Tax credit for public transit

is a non-refundable federal tax credit that provides income tax relief for the cost of monthly public transit passes or those passes of a longer duration.

The cost of electronic payment cards is eligible for the tax credit if:
-the cost relates to the use of public transfer for at least 32 one way trips during an un interrupted period not exceeding 31 days.
-the transit usage and cost of those trips are recorded and receipted to the purchaser by the relevant transit authority, in sufficient detail as to allow the CRA to verify the eligibility of the credit.

Where an individual purchases at least four consecutive weekly passes, the cost would be eligible for the credit.

The conversion rate is the lowest income tax rate.

20

Children's fitness tax credit

A non refundable tax credit to provide income tax relief to parents for the enrolment of a child who is under 16 years of age in an eligible program of physical activity. The conversion rate is the lowest income tax rate.

Amount for the children's fitness tax credit is calculated as:
-the lesser of (eligible expenses and $500/child).

The credit can be claimed by either parent.

An individual cannot make a claim for a children's fitness tax credit in respect of amounts for which any person has made a claim under the child care expense deduction.

21

Adoption expense tax credit

is a non-refundable tax credit to provide income tax relief to parents for eligible adoption expenses for the completed adoption of a child under the age of 18 years. The conversion rate is the lowest income tax rate. Parents can claim these incurred expenses in the tax year that includes the end of the adoption period in respect of the child.

Eligible adoption expenses are expenses incurred during the adoption period in respect of that child to the extent that the individual has not been reimbursed, and is not entitled to be reimbursed, for these expenses.

The eligible amount for the tax credit is calculated as:
-the lesser of (maximum adoption expense amount and eligible adoption expenses)
The maximum adoption expense amount is indexed.

Eligible adoption expenses include:
1. fees paid to an adoption agency licensed by a provincial or territorial government.
2. court costs, legal and administrative expenses
3. reasonable travel and living expenses of the child and the adoptive parents.
4. document translation fees.
5. mandatory fees paid to a foreign institution
6. Any other reasonable expenses required by a provincial or territorial government or an adoption agency licensed by a provincial or territorial government.

Adoption period:
-begins when application is made
-end at time of adoption

Where there is more than one individual entitled to a deduction for a taxation year in respect of a particular child, these individuals can share the Adoption Expense tax credit in whichever portions they can agree, but the combined total expenses cannot exceed the maximum adoption expense amount for each child.

If the individuals cannot agree as to what portion of the tax credit each can deduct, the Minister of National Revenue is permitted to apportion the tax credit.

22

Children's fitness tax credit

A non refundable tax credit to provide income tax relief to parents for the enrolment of a child who is under 16 years of age in an eligible program of physical activity. The conversion rate is the lowest income tax rate.

Amount for the children's fitness tax credit is calculated as:
-the lesser of (eligible expenses and $500/child).

The credit can be claimed by either parent.

An individual cannot make a claim for a children's fitness tax credit in respect of amounts for which any person has made a claim under the child care expense deduction.

23

Children's art tax credit

Same as the children's fitness tax credit

A non refundable tax credit to provide income tax relief to parents for the enrolment of a child who is under 16 years of age in an eligible program of artistic, cultural, recreational, or developmental activities.. The conversion rate is the lowest income tax rate.

Amount for the children's art tax credit is calculated as:
-the lesser of (eligible expenses and $500/child).

The credit can be claimed by either parent.

An individual cannot make a claim for a children's art tax credit in respect of amounts for which any person has made a claim under the child care expense deduction.

An eligible program must include a significant amount of eligible activities, must be ongoing in nature and must be either:

-weekly program lasting a minimum or 8 consecutive weeks, or
-in case of children's caps, a program lasting a minimum of 5 consecutive days.

An individual cannot make a claim for a children's art tax credit in respect of amounts for which any person has made a claim under the child care expense deduction.

24

Paying income tax by instalment

The instalment threshold amount for all provinces besides Quebec is $3000, Quebec is $1800 (for 2015).

For 2015, a taxpayer will have to pay income tax by instalments if his net tax owing:
-will be more than the instalment threshold amount of $3000 in 2015; and
-was more than the installment threshold amount in either 2014 or 2013.

If you have to pay tax by instalments, there are three ways to determine how much you are required to pay known as:
1. the no-calculation option
2. the prior year option
3. the current year option.

Under the no calc option, CRA will determine how much the taxpayer must pay each quarter in the current taxation year based on its knowledge of the tax and CPP owing in the previous two years. It will then inform the taxpayer how much he must pay on an installment reminder.

Under the prior year option, if a taxpayer had to pay tax by instalments, the taxpayer would pay one quarter of his net tax owing for the prior year on each instalment date.

Under the current year option, if a taxpayer has to pay tax by instalments, the taxpayer can pay one quarter for his estimated net tax owing for the current taxation year on each instalment date. However, if the taxpayer makes an error in estimating the taxes that he owes, he will be charged installment interest and penalties when the CRA assesses his return.

25

Tax filing deadlines

-Corporations must file within 6 months after fiscal year end.
-personal representatives of deceased individual's, who die between Jan 1 and Oct 31, must file by the deceased's normal filing date. This also applies to spouses or common law partners of deceased individual's.
-personal representatives of deceased individual's who die in November and December, 6 month's after date of death.
This also applies to spouses or common law partners of deceased individual's.
-Trusts must file within 90 days from the end of the trust's fiscal year
-self employed individual's and their spouse's or common law partners must file by June 15
-All other individual's must file by April 30

26

late filing penalty

Tax owing x (5% + (1% x number of months return overdue)B

27

Balance due day

The balance due day is the day all taxes are due for the last taxation year and it varies depending on the taxpayer as follows:

-a trust, 90 days after end of the trust's fiscal year.
-an individual who dies after October in the year and before May the following taxation year, the day that is 6 months after date of death; and
-for other individual's, April 30th following taxation year.

A taxpayer, other than a corporation, is generally considered to have paid their taxes by the balance due date if she sends payment by first class mail or courier by that date.

28

Child care expenses - if looked after by older children

Amounts that a taxpayer pays to an older child to take care of younger children in the family are not deductible as a childcare expense unless the caregiver is over 17 years old.

29

Non capital loss

Is a loss that arises from
-unused losses from an office, employment, business, or property
-unused allowable business investment losses (ABILs)
-the unused portion of the taxpayer's share of partnership losses from business or property; and
-the unused portion of the taxpayer's share of partnership ABILs

Non capital losses can be carried back 3 years. Non capital losses that arise in 2006 and subsequent years may be carried forward 20 years.

However, the carry forward period for ABILs is only 10 years. An ABIL that you were not able to deduct as a non capital loss by the end of its carry forward period will become a net capital loss at the end of the year.

You could only deduct net capital loss from taxable capital gains. You would be able to carry forward net capital loss indefinitely, but you could only deduct from taxable capital gains.

30

Net capital losses

is any excess of his allowable capital losses over his taxable capital gains.

-can be carried back 3 years
-can be carried forward indefinitely