Taxes

Question 1

What is the Canadian taxation system?

Answer 1

Is a cornerstone on public finance and governance, enabling the provision of essential services, economic regulation, and social equity

Question 2

Who are taxes collected by and what do they fund?

Answer 2

Collected by Individuals, businesses, trusts which allocated by governments to fund public Services & infrastructure

Question 3

What are the 4 forms of taxes?

Answer 3

Income tax

Sales tax

Property tax

Duties & tariffs

Question 4

Explain income taxes (define tax return)

Answer 4

• Individuals, businesses and trusts are obligated to pay taxes on their income
• amount of tax owing is calculated through a tax return

tax return: government form signed by a person or organization that presents an account of income, applicable expenses and credits and information on other relevant provisions that is used to determine liability for tax. Return includes amounts already paid against the liability for the period

Question 5

Explain income taxes (define tax return)

Answer 5

• Individuals, businesses and trusts are obligated to pay taxes on their income
• amount of tax owing is calculated through a tax return

tax return: government form signed by a person or organization that presents an account of income, applicable expenses and credits and information on other relevant provisions that is used to determine liability for tax. Return includes amounts already paid against the liability for the period

Question 6

How are Personal income taxes paid

Answer 6

Deducted at source for most employees. employers calculate deductions using tax tables published by the CRA and remit them directly to the government

Question 7

How are Personal income taxes paid

Answer 7

Deducted at source for most employees. employers calculate deductions using tax tables published by the CRA and remit them directly to the government

Question 8

Now are corporate taxes paid?

Answer 8

In installments based on anticipated annual profits, with adjustments made upon filing tax returns

Question 9

Now are trust taxes paid?

Answer 9

Generally paid no later than 90 days after the trusts tax year-end

Question 10

What is a sales tax & the 3 kinds of sale taxes

Answer 10

Goods and services tax (GST): federal tax you pay on most goods & services you purchase.rate is the same across the country

Provincial Sales tax (PST): tax some provinces charge. rate and items they tax are different between provinces

Harmonized Sales tax (HST): a tax some provinces charge. These provinces combine GST and PST to form HST

Question 11

What is a property tax and who is it collected by?

Answer 11

Are collected by municipal governments and are calculated based upon the value of lands and building

Question 12

What are duties and tariffs?

Answer 12

Taxes the federal government charges on certain imported & exported products

Question 13

Who are taxes collected from and what are they allocated to?

Answer 13

Tax revenues ave collected from individuals, businesses, other entities & then allocated to fund public goods, services, welfare programs

Question 14

What do taxes pay for?

Answer 14

-Education & schools
-Health and hospitals
- roads and bridges
- polices, ambulances, firetrucks
- libraries
- playgrounds
- arenas
- swimming pools
- garbage and recycling collection
- economic development
- wildlife conservation
- National defense

Question 15

What is the central aim of taxes as a redistribution tool?

Answer 15

To balance economic disparities, enhance social equity, and provide everyone with the basic standards of living

Question 16

What are 3 tools taxation uses to redistribute wealth

Answer 16

Progressive Taxation System
subsidies and tax credits that are made available to taxpayers
allocation of taxes collected to fund various public services and social programs

Question 17

Taxation Impact on Behavior: Consumer choices

Answer 17

Sin taxes: taxes on Tabasco, alcohol, and cannabis to discourage consumption while raising revenue

Carbon pricing: implemented federal carbon tax to reduce greenhouse gas emissions. Tax increases fell costs, enlarging energy efficiency and the use of greener alternatives

Question 18

Taxation Impact on Behavior: saving and investment

Answer 18

Registered retirement savings plan (RRSP): contributions to RRSP are tax-deductible, and investment growin is tax deferred, encouraging Canadians to save for retirement

Tax-free savings account (TSA): investment earnings within a TFSA are tax-free providing an incentive to save, and invest without worrying about future tax liabilities

Question 19

Taxation Impact on Behavior: labour and work effort

Answer 19

Marginal tax rates: Canadas progressive income tax systems means higher earners pay a larger percentage of their income in taxes. This may discourage additional work at the upper end, though redistributes wealth to fund public services

Childcare benefits: tax credits like the Canada Child Benefit (CCB) reduce the financial burden of raising children, encouraging workforce participation, particularly among parents

Question 20

Taxation Impact on Behavior: business behavior

Answer 20

Corporate tax rates: Canadas competitive corporate tax rates attract investment. Alberta and Ontario also adjust rates to entice businesses
- Quebec offers tax incentives for technology and aerospace industries
- Ontario provides tax credits for innovation(OITC)

Carbon pricing for businesses: federal carbon pricing system motivates companies to reduce emission or invest in greener technologies

Question 21

Taxation Impact on Behavior: Environmental Impact

Answer 21

Carbon tax rebates: to offset the Financial burden of carbon taxes, Canadian households receive rebates maintaining public support for environmental incentives

Green energy incentives: Tax credits for Solar panels, energy-efficient home renovations, and zero-emission vechiles encourage environmentally conscious choices

Question 22

Taxation Impact on Behavior: housing and real-estate

Answer 22

First-time home buyer incentives: programs like the first time home buyers tax credit and home buyers plan (HBO) to help Canadians enter the housing market by reducing upfront costs

Speculation and vacancy taxes: cities like Vancouver and Toronto have implemented taxes on vacant homes and foreign buyers to cool real estate speculation and increase housing availability

Question 23

Taxation Impact on Behavior: social and lifestyle choices

Answer 23

Charitable donations: Canadians receive tax credits for charitable donations, encouraging philanthropy
Tuition and education: fax credits for tuition fees make post-secondary education more accessible, shaping career and educational choices

Question 24

Taxation Impact on Behavior: indigenous communities

Answer 24

Tax exemption: certain income and goods fur indigenous people on reserves are tax-exempt. This affects economic activity and resource management in indigenous communities

Question 25

Who sets taxes in Canada?

Answer 25

By various levels of government, including the federal government, various provinces und territories and municipal governments such as cities

Question 26

What are the two fundamental approaches to taxation and what do they represent?

Answer 26

Progressive and regressive taxes and they reflect how tax rates or burdens change as income or wealth changes

Question 27

How do progressive taxes work?

Answer 27

- Structured so that the tax rate increases as an individuals income or wealth increases - Canadian personal income tax rates ave calculated using this system - based on the principal of ability to pay - aim to reduce economic inequality by redistributing wealth - federal income taxes use this method

Question 28

Now do regressive taxes work?

Answer 28

- regressive taxes apply the same tax rate regardless of income - this type of tax is simple to administer, effective + generating income, - imposes greater relative burden on lower- income individuals than higher income individuals - many regressive taxes are applied as a fixed amount or rate - Overall tax rate decreases as income increases - examples: Sales tax, excise taxes and payroll taxes

Question 29

How do governments offset regressivity?

Answer 29

Government provides GST / HST credit and there are stems that are exempt from GST/HST credit and there are items that are exempt from GST /HST GST/HST credit: low-income individuals receive quartly payments calculated based on their income and family size Gst/HST exemption: there are several goods and services that are exempt from HST, such as basic groceries, bank fees

Question 30

What is taxable income ? And the most common types of income?

Answer 30

Refers to income which taxes must be paid Most common types of income: - employment income - business income - property income - Capital gains

Question 31

Employment income

Answer 31

Incudes earnings derived from employment relationships und typically consists of wages, salariestips, bonuses, commissions, and taxable benefits Individuals that earn - employment income will also have several tax withholding- employers deduct terms like income tax, canada pension plan (CPP) premiums and employment (EI) preminus at source - employers provide employees with T4 slip which summarizes the employees income & deductions for the year

Question 32

What are the key employment income withholdings

Answer 32

Income tax, Canada pension plan (CPP) contributions and employment insurance (EI)

Question 33

Employment income: how is income tax accounted for?

Answer 33

- since employment income subject to federal and provincial territorial income taxes, these amounts are remitted by the employer to CRA on behalf of the employee with each payment to the employees - employers use tax table provided by the CRA to calculate with holdings based on the employee income, tax credits & province of employment

Question 34

Employment income: how is Canada pension plan (CPP) accounted for?

Answer 34

- The CPP retirement pension is a monthly taxable benefit that replaces part of your income when you retire - CPP funded through contributions made by both the employer and employee - each party contributes an equal amount, up until the annual maximum - CPP incudes basic exemption amount of 3500 & max annual contribution limit -Self employed required to pay employee and employer income -Employees under 18 or over 70 or those receiving a CPP retirement pension are exempt from CPP contributions

Question 35

Employment income: how is employment insurance (EI) premiums accounted for?

Answer 35

- program provides temporary support to unemployed workers while the look for employment or to upgrade their skill - EI program provides special benefits to workers uno take time off work due to special life events illness, pregnancy, caring for a newborn or newly adopted child, caring for a critically ill/injured person - workers relieve EI benefits only if they paid premiums in the past year - self -employed individuals can recieve EI - employees pay 1.66% on incurable turnings until max of 63200 while employers pay 1.4 times employee - income over $ 63200 nut subject to EI

Question 36

Business income

Answer 36

Includes income earned from self-employment or operating a business - individuals earning business income - individuals earning business income responsible fur reporting earnings & paying taxes on net profits ( R-E) - business expenses can be deducted in the calculation of net income

Question 37

Property income

Answer 37

Property income includes income earned from investments or property ownership such as interest, dividends, and rental income - each is taxed differently

Question 38

Property income: interest income

Answer 38

- is gained from savings accounts, term deposits, bonds or other interest bearing investments - amounts are fully taxable and 100% of interest is included in taxable income - taxed at your marginal tax rate -Reported on T5 slip provided by the financial institution

Question 39

Property income: dividend income

Answer 39

Comes from owning shares in corporations - has preferential fax treatment to encourage investment - dividend income undergoes a gross-up and dividend tax credit system to prevent double taxation Eligible dividends: payed by public corporations. These are grossed up 38% and then qualify for a dividend tax credit Non eligible dividends: paid by smaller Canadian corporation. Grossed up 15%, qualify for smaller tax credit Foreign dividend: do not qualify for dividend tax credit & taxed as regular income

Question 40

Property income: rental income

Answer 40

- Earned from leasing real estate or other property to tenants - tax is paid on the net rental income ( total rent collected - allowable expenses) -net income added to total taxable income & taxed at marginal tax rate

Question 41

Capital gains

Answer 41

Arise from the sale or deposition of capital property such as real estate, stocks or other investments capital gains = proceeds of Sale - adjusted cost base (ACB) of assets and any associated selling expenses - basically any profit made on the sale of capital property - Capital gains up to 250 000 have inclusion rate of 50% - capital gains above 2 so 000 have inclusion rate of 66.67% - corporations have capital gains inclusion rate of 66.67%

Question 42

Tax deductions

Answer 42

Reduce your taxable income, which is the base amount used to calculate taxes you owe - by lowering your taxable income, deductions reduce the amount tax calculated at your marginal tax rate - the higher your marginal tax rate, the more value a deduction provides

Question 43

Tax credits

Answer 43

- Reduce the amount of tax owed rather khan taxable income Refundable credits: excess amounts are refunded to taxpayers Non-refundable credits: these reduce taxes owed but cannot result in refund

Question 44

The two most popular accounts with special tax attribtes

Answer 44

RRSP and TFSA

Question 45

Registered retirement savings plan

Answer 45

- Purpose is to encourage individuals to save for retirement by offering specific tax advantages for contributions made into RRSP - individuals that make contributions to the RRSP receive tax deduction for the full contribution, which reduces taxable income for the year - investments made grow tax-free until the funds are withdrawn - withdrawals are fully taxable as income at your marginal tax rate when funds are taken out - individuals have lower income level in their retirement years, reducing the tax payable - has annual contributions limits of 18% of the prior years earned income - unused contribution can be carried out indefinitely

Question 46

Tax free savings account

Answer 46

- TFSA provides individuals with a flexible way to save or invest as after tax funds can be deposited into a TFSA with tax free growth of investments - Withdrawals are not taxed - contributions made with after tax dollars, there is no deduction to taxable income for contributions - contribution room starts the year you turned 18 and accumulates every year after that year - contribution room not used is carried over - amounts withdrawn are added back to your contribution room in the following year

Question 47

Difference between personal tax rates and Corporate tax rates

Answer 47

Personal tax rates are progressive while corporate tax rates are primarly flat ( excluding SBD)

Question 48

Corporate tax rates

Answer 48

Corporate taxable income includes all revenue from business activities-investments, and other sources, minus allowable expenses and deductions Expenses and deductions include: - business expenses - Capital cost allowance - Charitable donations (up to 75% of net income) - interest on business loans - research and development expenditures

Question 49

General Corporate income tax rate

Answer 49

- Corporations are subject to a flat federal rate of 38% are - series of deductions including federal abatement (10%.) manufacturing and processing (13%) General rate reduction (13%) most corporations are subject to a federal tax rate of 15% -Each province and territory charges their own tax rates on top of federal rate which ranges from 8% -16%

Question 50

Small business deduction (SBD) rate

Answer 50

Federal tax on Canadian controlled private corporations (ccpc) on active business income is reduced to 9% for all income up to $500 000 Provincial/territorial rates are also reduced with combined rates reduced to 9% to 15%

Question 51

Corporate Investment income

Answer 51

- Passive income is taxed at a higher rate to discourage income deferral - federal rate on investment income is 38.67% combined with provincial/territorial is 50% to 55% - there are various tax mechanisms available that provide partial to full refunds of this excessive tax burden when the income is distributed as dividends

Question 52

Integration

Answer 52

- corporations have a flat tax rate that is lower than the marginal persona income tax rate, it may be tempting to create a organization - integration is designed to ensure that income earned through a corporation and subsequently distributed to shareholders is not taxed more heavily or lightly than income earned directly by an individual

Question 53

How integration works?

Answer 53

Corporation subject to corporate tax rate on table income in the corporation - amounts remaining after paying corporate taxes becomes available to pay dividends - dividend taxes then paid by shareholder - dividends are grossed up to reflect pre-tax corporate income and then receive tax credit to account for corporate taxes already paid

Question 54

Filing requirement differences between individuals and corporations

Answer 54

Corporations file taxes based upon their fiscal year which can differ from the calendar year Corporate tax returns (T2) must be filed within six months after the fiscal year-end and taxes owed must be paid 2 months after fiscal year end