Unit 8 Income tax

Question 1

What does income tax include

Answer 1

federal and provincial taxes

Question 2

Who do you remit income tax deductions to

Answer 2

they are remitted to CRA

Question 3

What are the income taxes based on

Answer 3

the province of the employee`s employment rather than the province where they live

Question 4

what year did the government pass legislation which enabled them to levy a tax on personal income

Answer 4

July 1917

Question 5

what was the original purpose of personal income tax

Answer 5

help finance government for world war 1

Question 6

how was income tax collect originally

Answer 6

people were responsible for paying for their own personal taxes directly to the government

Question 7

what year was it mandatory to have income tax deducted directly off the employee`s payÉ

Answer 7

1940

Question 8

what is income tax base on

Answer 8

employee’s net taxable income

Question 9

what is included in net taxable income

Answer 9

salary, wages, commissions, bonuses, vacation pay, pensions, retiring allowances, death benefits, the values of any taxable benefits and the values of any taxable allowances

Question 10

how is income tax reduced

Answer 10

when employee makes contributions to an RRSP , Registered pension plan, union dues, a deduction for living in a prescribed zone and any other deductions authorized by CRA (deduct these amounts from gross income before calculating the tax)

Question 11

when first hired an employee must fill in what

Answer 11

a TD1 (federal tax form) and the provincial counterpart

Question 12

What is the TD1 for Ontario called

Answer 12

TD1ON

Question 13

What is a TD1

Answer 13

determine the amount of tax an employer will deduct from an employee’s taxable earnings as it has amounts they can use to decrease their tax deducted at the source

Question 14

TD1 form credits taken what does this represent

Answer 14

it increases their exemption amount

Question 15

if an employee has more than basic exemption on their TD1 forms, they must do what

Answer 15

complete a new one each year

Question 16

Can employees request more tax be deducted? if so, how do they do it

Answer 16

yes, on the federal TD1

Question 17

If an employee is hired in a second part time position, what must they do with regards to the TD1

Answer 17

they must claim maximum exemption as their basic exemption can only be claimed once?

Question 18

Barb is paid the following: a monthly salary of $6,000, a car allowance of $800 per month. She pays $400 into the company pension plan each pay.
What is her gross taxable income?
What is her net taxable income?
What would she pay tax on?

Answer 18

Gross taxable income
6,000 + 800 = 6,800

Net taxable income
$6,800 - 400 = 6,400

She would pay tax on $6,400

Question 19

What are the penalties for non-compliance with regards to income tax deductions

Answer 19

subject to 10% penalty for the first occurrence

increases to 20% for second and subsequent occurrences in the same calendar year.

penalties are applied to amounts over $500 except in cases of willful delay or deficiency

Question 20

If an employer is late remitting their source deductions (CPP, EI and income tax) what will happen

Answer 20

the will face penalties that will increase based on the number of days they are late

Question 21

What are the penalties for source deductions be remitted late

Answer 21

1 - 3 days late 3%
4 -5 days late 5%
6 - 7 days late 7%
over 7 days late 10% or if no amount is remitted
Note: (CRA does not consider Saturday and Sunday or public holiday as business days so if payment falls on a Sunday you actually have until the Monday to remit)

Question 22

what are the remitter frequencies for remitting source deductions

Answer 22

1. Quarterly
2. Regular
3. Accelerated remitter (Threshold 1 and Threshold 2)

Question 23

What does AMWA stand for

Answer 23

average monthly withholding amounts

Question 24

What is used to determine AMWA

Answer 24

based on two years prior

so for 2014, CRA would look at 2012

Question 25

explain quarterly remitter

Answer 25

if your AMWA was less than $3000 and you have a perfect remittance history

Question 26

Explain regular remitter

Answer 26

if your AMWA was less than $15,000

Question 27

Accelerated Remitter:

Answer 27

Threshold 1: AMWA is between $15,000 to $49,999.99

Threshold 2: AMWA is over $50,000

Question 28

What are the dates for remitting for Quarterly

Answer 28

April 15, July 15, Oct 15 and January 15

Question 29

What are the dates for remitting for regular

Answer 29

the 15th day after the month following when deductions were collected

Question 30

What are the dates for accelerated remitter? Threshold 1

Answer 30

Threshold 1:
1st to the 15th - remit on the 25th

from the 15th to the last day of the month - remit on the 10th day of the following month

Question 31

What are the dates for accelerated remitter?

Threshold 2

Answer 31

payments must be made no later than 3 days after the end of the time period

1st of the month to the 7th

8th of the month to the 14th

15 of the month to the 21st

22nd to the last day of the month

Question 32

how do you determine the dates of remittance

Answer 32

the employer uses the dates the employees are paid not the end date of their pay period

Question 33

what are the 4 methods for calculating federal and provincial income tax deductions?

Answer 33

1. tables method (most common)
2. formula method
3. PDOC (Payroll deductions online calculator) replaces the TOD method
4. manual method

many companies also use computerized payroll software packages or services that do it automatically

Question 34

How do you the table method for determining income tax

Answer 34

1. use federal tax tables
2. use provincial tax tables for Ontario
   - tables are broken down into different pay periods
   - can be obtained from CRA website

Steps:
1. determine the net taxable income less credits and deductions (ie. RRSP contributions)

2. select the correct pay frequency tax tables ( ie. bi-weekly)
3. locate the correct net taxable income range
4. follow the line across to the correct claim code as per te employee’s federal and provincial td1 forms.
5. the corresponding amount is the amount of tax to be deducted

Question 35

what is the formula method for calculating income tax deduction

Answer 35

• also called the machine computation method
• refers to computerized payroll systems
• the formula used by these systems must first be approved by CRA

Question 36

The manual method for calculating income tax

Answer 36

this is a complex method

- used rarely since the inception of PDOC

Question 37

Other payments that affect income tax

Answer 37

2 others

1. bonus payments, pay in lieu of notice and vacation pay paid when no time is taken
2. retroactive payments
   - both are calculated differently

Question 38

why can’t you tax bonus payments the same way?

Answer 38

bonus does not represent a regular pay period earning therefore they cannot be taxed using the regular pay period tax rules

Bonuses and such increase the amount an employee will make in the year and an adjustment will need to be made.

Question 39

What is the calculation for bonuses adjustment for income tax.
ex. an employee who earns a weekly taxable income of $425, is paid a bonus of $300. the employee’s federal and Ontario provisional TD1 claim codes are both basic

Answer 39

step 1:
divide the bonus being paid by the pay period type

$300 / 52 = 5.77

Step 2:
add the amount form step 1 to the employee’s regular net taxable income

$425 + 5.77 = $430.77

Step 3:
look up the tax amount federal and Ontario provincial on the step 2 total

Federal tax on $430.77 = $25.55

Provincial tax: = $13.95

Step 4:
look up the tax amount on the employee’s regular net taxable income federal and provincial

Federal tax on $425 = $24.95
Provincial tax on $425 = $13.10 or $13.50 (either is acceptable)

Step 5:
take the difference from step 3 and step 4 and multiply it by the pay period type
- this will give you the total amount of tax (federal and provincial) to be assed on the bonus payment

Federal : $25.55 - 24.95 = $.60
Prov: $13.95 - 13.10 = .85

federal $.60 x 52 = $31.20
prov: $.85 x 52 = 44.20

total tax: $75.40 this should be deducted from the bonus payment of $300

Question 40

when do retroactive payments occur

Answer 40

when an employee receives a wage increase during the year that should`ve occurred in a prior pay period

Question 41

How do you calculate the retroactive pay income tax adjustment

Answer 41

the difference between what they should have been paid and what was actually paid

Question 42

Ex. of retroactive pay and income tax
Sheila’s company gives their employees a wage increase the first pay period of each year, however, this year that did not happen until pay period 10. her rate in pay period 1 was $25.80 per hour, she received a cost of living increase of 1% therefore, her new rate of pay is $26.06. She is paid bi-weekly and she has basic tax deducted (claim code 1 for both provincial and federal) she works 40 hrs per week. she ahs no deductions

Answer 42

step 1: calculate the retro payment

retro = hrs per week x 2 (bi-weekly) x 9 pay periods x difference between her new rate and her old one

= 40 x 2 x 9 x (26.06 - 25.80)
= 720 x .26
= $187.20 retro payment

Step 2: calculate her tax on bi-weekly pay period at her new rate

new earnings per pay period = 80 hrs x 26.06
=$2,084.80

Fed: 252.75
Prov: 125.50

Step 3: calculate her tax on a bi-weekly pay period at her old rate

old earnings per pay period = 80 hrs x 25.8
=$2,064
fed tax: 247.45
prov tax; 124.05

Step 4: calculate the difference in tax amounts form her new rate to her old rate

fed: 252.75 - 247.45 = 5.30
prov: 125.50 - 124.05 = 1.45

Step 5: multiply the tax by the number for pay periods

fed: = 5.30 x 9 pay periods
= 47.70
prov: 1.45 x 9 pay periods
= 13.05

total tax on retro pay of $187.20 is equal to $60.75

Question 43

) Sally Smith is due to be paid the following on January 23, 2014: her weekly salary of $1200.00, overtime $200.00, 4% vacation on her overtime, a taxable car allowance of $75.00 and a group life insurance non cash taxable benefit of $15.75. Sally pays into the company’s registered pension plan of 4% of her weekly salary and she also pays union dues of $8.00 each pay. Using this information please determine her gross taxable income and her net taxable income. She resides in Ontario. Please show all your work.

Answer 43

answer pending

Question 44

Jennie receives a weekly salary of $950.00. She is a Payroll Manager for Broomsticks Emporium located in Windsor Ontario and as such is not entitled to overtime pay. However, she has been working long hours to ensure the T4s are issued on time. The Director has agreed to pay her $ 500.00 as a onetime bonus as a show of appreciation for all her hard work. She is a claim code 1 and on her signed and dated TD1 she has requested that payroll deducts an extra $25.00 in income tax each pay. Please calculate the income tax to be deducted this pay

Answer 44

answer pending

Question 45

Roger Thumb works in Ontario at a manufacturing company. His hourly rate of pay is $31.50 and he works 40 hours per week, he does not work any overtime. He is paid biweekly. Effective pay period 7 Roger received a rate increase to $32.75 per hour. The new rate should have been effective pay period 1 therefore his company is giving him a retroactive payment with his pay on pay period 7 to cover the difference in wages he should have received since the beginning of the year. The payment will be made on a separate deposit from his regular pay. Calculate the net pay for his retroactive increase. He signed his TD1 form with claim code 2. Show all calculations.

Answer 45

answer pending

Question 46

Using the CRA website please determine the amount of income tax to be deducted from the following-DO NOT USE THE PDOC CALCULATOR PLEASE USE THE ONTARIO TAX TABLES

a) Claim Code 1, Pay frequency – Biweekly Income of $2500.00, $100.00 RRSP, $5.00 United Way and a $200 cash allowance. Tax =
b) Claim Code 3, Pay frequency – Weekly Income of $1500.00, $500.00 RRSP and $100.00 non-cash allowance. Tax =
c) Claim Code 1, Pay frequency – Semi monthly Income of $6500.00 and a $500.00 cash allowance. Tax =
d) Claim Code 1, Pay frequency – Monthly Income of $9500.00, $200.00 union dues, $5.00 United Way, $200.00 Cash allowance and $200.00 non-cash allowance. Tax =

Answer 46

answer pending