Transcript Source of tax law Primary source: Income Tax Act Other sources: - Income tax application rules 1971 - Income tax regulations - Tax treaties - Tax.

Source of tax law
Primary source: Income Tax Act
Other sources:
- Income tax application rules 1971
- Income tax regulations
- Tax treaties
- Tax cases
week 1
Source of tax law
Other sources (continue)
- Bulletins, circulars, ruling, published
by CRA
- Technical notes and explanations,
issued by Department of Finance
- International financial Reporting
Standards (IFRS)
week 1
The administrative process
• Filing income tax return by taxpayers
• Quick check by CRA and Notice of
Assessment is issued
• Filing Notice of Objection if taxpayers
disagree
• Taxpayers appeal to the Tax Court
• Further appeal to the Federal Court
• The Supreme Court is the ultimate arbiter
week 1
Structure of the Act
•
•
•
•
•
•
Part I – Income Tax
Division A – liability
Division B – computation of income
(NIFTP)
Division C – taxable income
Division D – non-residents
Division E – tax payable
Division E.1 – minimum tax
week 1
Structure of the Act
• Division F – special rules
• Division G – deferred and other special
income arrangement
• Division H – exemptions
• Division I – returns, assessments,
payments, appeals
• Division J – appeals to the court
week 1
Division B - NIFTP
•
•
•
•
•
•
•
subdiv. a – employment income
subdiv. b – business and property income
subdiv. c – capital gains/losses
subdiv. d – other income
subdiv. e – other deductions
subdiv. f – relevant rules
…
week 1
Income determination
(a) Determine net taxable capital gains, i.e., taxable
capital gains net of allowable capital losses
(b) Sum up of (a) and (b), and net of other
deductions
(c) Aggregate losses from employment, business,
and property, and allowable business
investment losses (ABIL), and subtracted from
(c)
(d) Aggregate income from employment, business,
property and other sources
Div. E – Tax payable
• subdiv a – individual credits
• subdiv b – corporate credits
• subdiv c – both individual and corporate
credits
week 1
Calculate tax payable
Step 1 Calculate Div. B NIFTP

Step 2 Calculate taxable income
= Div.B NIFTP – Deductions in Div. C

Step 3 Taxable income x tax rates
Less credits

Federal tax payable
week 1
Tax evasion, avoidance, and
planning
• Tax planning: reduce taxes within the
law
• Tax evasion: avoid taxes by failing to
disclose complete and accurate
information
• Tax avoidance: circumvent the law to
reduce taxes
week 1
Click on
Business and Economics
Faculty/Staff Listing
Tao Zeng
Teaching
BU357
Chapter 2 Liability
• An income tax is paid on the taxable
income for each taxation year of every
person resident in Canada at any time in
the year. [Sec 2(1)]
• taxable income [Sec 2(2)]
= income for the year - the deductions
permitted by Division C
week 1
Individuals
• Full-time resident
• Part-time resident
• Non-resident
Full-time individual resident
• Criterion: (common law) a continuing state
of relationship/ties with Canada.
• the relationship/ties:
- a dwelling
- a family
- personal property and social ties.
week 1
Deemed full-time
• Sojourned in Canada in the year for an
aggregate of 183 days or more [Sec
250(1)(a)].
• Full-time resident will be taxed on his
worldwide income for the whole year.
week 1
Part-time
• A clean break or a fresh start
• Transitional status
• Part-time resident will be taxed on his
worldwide income for the part of year
while resident, and on his Canadian-source
income for the part of year while nonresident.
week 1
Non-resident [Sec 2(3)]
is taxed on his income from
• being employed in Canada,
• carrying on business in Canada,
• disposing of a taxable Canadian property,
at any time in the year or a previous year
week 1
Residence of corporation
Deemed resident
• Incorporated in Canada after April 26,
1965, [Sec 250(4)(a)]
or
• Central management and control in Canada
Non-resident
week 1
Chapter 3 Employment Income
Employed vs self-employed or
independent contractor
• Economic reality or entrepreneur test
- control
- ownership of tools
- chance of profit/risk of loss
• Integration or organization test
• Specific result test week 2
Structure
Sec 5 basic inclusion
+ Sec 6 benefits + allowance
+ Sec 7 stock option benefits
Less: Sec 8 deductions allowed
Basic inclusion: salary, wages, and other
remuneration, including gratuities received
week 2
Example - Payroll
Salary gross
Payroll deductions:
RPP
CPP
EI
Income tax withheld
Union dues
Net salary
week 2
$68,000
2,900
2,307
840
19,000
900 (25,947)
---------$42,053
======
Employee benefits [Sec 6(1)(a)]
All benefits shall be included, except
Employer’s contributions to
• Retirement plans - RPP and DPSP
• Group sickness or accident insurance plan,
private health services plan, a
supplementary unemployment benefits
plan, etc.
• Retiring arrangement and allowance
week 2
Employee benefits [Sec 6(1)(a)]
All benefits shall be included, except
• Employer-paid counselling services of the mental
or physical health and the re-employment or
retirement
Also except
• Board and lodging at a special work site or
remote location [6(6)]
But
• Employer-paid group term life insurance is
included [6(4)]
week 2
Taxable benefits
• Special benefit calculations apply to:
– Housing loss/cost benefits
– Employee loan
– Use of employer automobiles
– Employment insurance benefits
week 2
Housing loss/cost benefits [6(19)-(23)]
Employer-paid for employee’s loss
on sale of home:
 one-half of any amount above
$15,000 is included
 Eligible housing loss
week 2
Automobiles
• To the extent that an automobile is
provided by employer, a taxable
benefit results
• There are two components:
1.Standby charge, and
2.Operating cost benefit
week 2
Standby charge [6(1)(e),6(2)]
Employer owns the automobile,
A
standby charge
=
 [2%  (C  D)]
B
A:A=B, if the car is not primarily used for work
(“primarily” is defined as 50% or more)
Otherwise, A = the lesser of personal km and B
B: 1,667km x # of available months
C: Cost of the car
D: # of available months
week 2
Standby charge [6(1)(e),6(2)]
Employer leases the automobile,
standby charge
=
A
 [2 / 3( E  F )]
B
E: lease payment (including insurance)
F: insurance
week 2
Operating cost benefit [6(1)(k)]
Operating Costs = Prescribed rate ($0.26) x
Personal km
or
½ of standby charge, if primarily for work
(defined as 50% or more)
week 2
Employee loans [6(9),80.4]
• Low-interest or interest-free loans
provided by employers are taxable
benefits
Taxable Benefit =
prescribed rate – actual interest rate
paid
week 2
Employee loans home purchase/relocation loans
Prescribed rate used to determine the
interest benefit is the lesser of:
– The prescribed rate in each quarter the
loan was outstanding
– The prescribed rate in effect at the time
the loan was granted
week 2
Fringe benefits & administrative
practice [IT-470R]
• Employer-paid social club membership is
not included if for employer advantage
• Employer-paid financial counselling and
tax return preparation are included
• Non-cash holiday gifts not over $500 are
not included
week 2
Allowance [6(1)(b)]
• All allowances are taxable, subject to
specific exceptions
• Allowance refers to:
– a fixed, specified amount paid above
salary,
– to cover certain expenses incurred
week 2
Allowance exceptions [6(1)(b)(v)]
• Salesperson (selling property or
negotiating contracts)
- Reasonable
- For traveling expenses
(e.g., meals, lodging, transportation)
week 2
Allowance exceptions [6(1)(b)(vii)]
• Employees other than salesperson
- Travel allowance not relating to the
use of an automobile only if:
 The allowance is a reasonable
amount, and
 The employee travels outside the
municipality or metropolitan area
where the employer is located
week 2
Allowance exceptions [6(1)(b)(vii.1)]
- Automobile
allowances if:
 The allowance is for the purpose of
travelling in the performance of duties
as employees, and
 The allowance is reasonable
 based solely on the number of
kilometres
week 2
Employment insurance benefits [6(1)(f)]
• Include into income to which the employer
made a contribution and the benefits are
paid on periodic basis.
less
aggregated employee’s contributions
• Include:
- sickness or accident insurance plan,
- disability insurance plan, or
- income maintenance insurance plan
week 2
Stock option benefits [Sec 7]
Applied to all corporations:
• A benefit must be included in employment
income
Benefit = FMV at Exercise Date – Option Price
•
•
The benefit is reduced by one-half under Div C
in determining taxable income if option price is
no less than FMV at grant date
On selling the stocks, capital gain or loss would
be incurred: capital gain/loss =
FMV at selling date – FMV at exercise date
week 3
Stock option benefits
If the option is issued by a CCPC:
• Include the benefit in income when stocks
are sold
• If employee holds shares for two years
after acquisition:
– the employment benefit is reduced by one-
half in determining taxable income.
week 3
Stock option benefits
If the option is issued by a public corp.:
•
•
Include the benefit in income at exercise
date
Income inclusion can be deferred until
stocks are sold if certain conditions are
met (repealed after March 4th 2010)
week 3
Deductions [Sec 8]
Rule: no deductions allowed, unless
specifically permitted [8(1)]
Most common:
1.
2.
3.
4.
5.
Salesperson’s Expenses [8(1)(f)]
Traveling Expenses [8(1)(h),(h.1)]
Professional and Union Dues [8(1)(i)]
Works Space in Home [8(13)]
Contributions to RPP [8(1)(m)]
Salesperson’s expenses [8(1)(f)]
• Deduction only allowed if all
conditions are met:
- Must be required to pay his own expenses.
- Must be required to carry on his duties
away from the employer’s place of business.
- Must not be in receipt of a tax-free
allowance
- Must receive commissions as part of
remuneration
week 3
Salesperson’s expenses [8(1)(f)]
• Can deduct all amounts expensed,
except
Capital expense
Recreational club and facilities, e.g.,
yacht, camp
• Limited to commission earned
week 3
Traveling expenses [8(1)(h) (h.1)]
• Travel expenses incurred in the course of
work-related duties provided that:
 Ordinarily required to carry
employment duties away from the
employer’s place of business,
 Employee is required to pay the travel
costs, and
 Has not received a non-taxable
allowance designed to cover such costs
week 3
Non-motor vehicle traveling
expenses [8(1)(h)]
• Include:
Transportation
Meals – limited to 50%, if away from
the metropolitan area of the employer
for at least 12 hours [8(4), 67.1]
Lodging
week 3
Dues and other expenses [8(1)(i)]
• Deductions are
Professional membership fees
Office rent or salary paid to an assistant
Supplies
Union dues
Certain expenses related to work space
in home (rent, utilities, repairs and
maintenance, supplies, telephone)
week 3
Work space in home [8(13)]
• Permitted only when the work space is
either:
The principal place duties are
performed, or
Used exclusively for earning
employment income, and
Used on a regular/continuous basis
for meeting customers or clients
week 3
Work space in home
allowable costs
• Non-salesperson:
Rent, repairs & maintenance,
supplies, phone, utilities [8(1)(i)]
• Salesperson:
Preceding items [8(1)(i)], plus property
taxes & house insurance [8(1)(f)]
• Expenses are allocated between work and
personal space
• Restricted to employment income; excess
amount could be carried forward
Registered pension plan
contributions [8(1)(m)]
• Most RPPs require the employee to
contribute an annual amount to the plan
• Within specified limits, contributions
made by an employee are deductible
week 3
Motor vehicle expenses
• Motor vehicle expenses include:
– Operating expenses: gas and oil,
repairs, and insurance
– Interest on car loan and capital cost
allowance
– Lease costs
• Expenses are prorated based on
employment kilometres
week 3
Interest on car loan and CCA
[8(1)(j), 67.2]
• Interest deduction is the lesser of
actual amount of interest paid and
$300 per month
• CCA – 30% depreciation rate (but
one-half for the year of
acquisition)
• Vehicle Costs limited to $30,000
week 3
Leased passenger vehicle [67.3]
Deduction is limited to the lesser of
[$800 x # of aggregate months] - C - D - E
and
 leasepaym ent  $30,000
DE


.85H

C: lease payment deduction in previous years
D: interest on refundable amount over $1,000
E: reimbursement received
H: is the greater of $30,000 x 100/85 and
manufacturer’s list price
Chapter 4 Business income –
Div B subdiv b
Business Income Defined and
General Rules for Determining
Business Income
II. Deductions denied and allowed
III. Salesperson’s expenses
I.
week 4
Business income defined and general
rules for determining the income
• “A taxpayer’s income for a taxation year
from a business is the profit therefrom for the
year” [9(1)]
• “Business” should be carried on with a profit
or REOP
• Profit is determined in accordance with wellestablished business principles
• IFRS/GAAP is a good starting point adjustments are made where the Act specifies
other requirements week 4
GAAP/IFRS and the Act
• Similarities:
– Accrual
– Net Concept
• Major Differences:
– Amortization (Depreciation) and other
Allocations
– Permanent Differences
– Non-Arm’s Length Transactions
IFRS/GAAP and the ITA
Net IFRS/GAAP Income
XXX
Add:
Expenses not allowed [Sec 18&19]
XXX
Deduct:
Expenses specifically allowed [Sec 20] (XXX)
Net income from a business
for tax purposes
week 1
XXX
====
Inventory valuation [10(1)]
• Inventory can be valued:
1. Value each item of inventory at LCM,
OR
2. Value all items of inventory at FMV
• Cost of good sold are calculated by:
1. Specific identification, OR
2. Average cost, OR
3. FIFO
week 4
Deductions – disallowed or
restricted deductions [Sec 18]
No deduction shall be made in respect of:
1. Not for Income Earning Purpose
2.
3.
4.
5.
6.
[18(1)(a)]
Capital Expenditures [18(1)(b)]
Exempt Income [18(1)(c)]
Reserve [18(1)(e)]
Personal Expense [18(1)(h)]
Not Reasonable
[Sec 67]
week 4
Examples
• Charitable donation if not for producing income
• Accounting depreciation on fixed assets
• Legal fees related to amending the articles of
incorporation
• Cost incurred for arrange a buy-sell agreement
for shareholders
• Appraisal fees to determine selling price of fixed
assets
• Premium for life insurance on the co. president,
the proceeds of which are payable to the co.
(unless used as a collateral for a loan
[20(1)(e.2)])
week 4
Other deductions denied
• Payments on discounted bonds [18(1)(f)]
• Use of recreational facilities and club dues
[18(1)(l)]
• No deduction permitted for the use or
maintenance of a yacht, a camp, a lodge,
or a golf course, unless part of normal
business
• Also denies all expenses incurred as
membership fees or dues in any club
• Political contributions [18(1)(n)]
Other deductions denied
• Automobile expenses [18(1)(r)]
• Payment under the Act [18(1)(t)]
• Meals and entertainment [67.1]
• Amount permitted is limited to 50%
of actual costs (except those
associated with fund-raising events
benefiting charity, and those available
to all employees no more than 6 times
a year)
week 4
Other deductions denied
• Work space in home [18(12)] - not
permitted unless the space is “the
individual’s principal place of business,” or
• used exclusively for the purpose of
earning income from business, and
• used on a regular/continuous basis for
meeting clients, customers or patients
• Restricted to business income; excess
amount could be carried forward
week 4
Deductions specifically
permitted [Sec 20]
• Write-offs of capital expenditures
[20(1)(a)(b)]
• Interest on borrowed money used
for earning business income
[20(1)(c)]
week 4
Deductions specifically permitted
• Expenses of issuing shares or borrowing
money [20(1)(e)]
• Permitted as a deduction equally over
five years
• Printing and ad costs, filing fees, legal
fees, transfer fees, commissions etc for
issuing shares and borrowing
• Refinancing costs such as rescheduling,
restructuring
week 4
Examples - Expenses of issuing
shares or borrowing money
• Legal and accounting fees related to
the issuance of shares
• Costs incurred regarding the
renegotiation of the bank loans
• Appraisal costs to determine value of
the equipment for the bank
week 4
Discount on debts 20(1)(f)
• A full deduction of the discount at the
early of redemption or maturity if
- debt is issued at no less than 97% of
face value, plus
- the yield is no more than 4/3 of the
normal interest rate
• Otherwise, only ½ of the discount is
deductible
week 4
Reserves
• Reserves for doubtful debts [20(1)(l)]
• Reserves for goods and services not
rendered [20(1)(m)]
• Reserves for delayed payment
revenues [20(1)(n)]
• Manufacturer’s warranty reserves
[20(1)(m.1)]
week 4
Reserves for delayed payment
revenues [20(1)(n)]
• Can be deducted for no more than 3
years
• Whenever a reserve is allowed, the
deduction must be added back to
income the following year
• A new reserve can be deducted if it
can still be justified
week 4
Deductions specifically permitted
• Employer’s contribution to RPP & DPSP
[20(1)(q)(y)] up to the limit [147.2]
• Representation expenses [20(1)(cc)]
• Representation to the government for
license, permit, franchise or trademark relating to business
• fully deductible
• can elect to deduct equally over 10
week 4
years
Deductions specifically permitted
Other expenses deductible
• Landscaping [20(1)(aa)]
• Convention expenses (limited to 2 in a
year)[20(10)]
• Site investigation fees [20(1)(dd)]
• Utility service connections [20(1)(ee)]
• Disability-related modification &
equipment [20(1)(qq)(rr)]
week 4
Review: Sales/negotiating person’s
expenses
• Deductions for non-salesperson
who is an employee:
 Traveling expenses [8(1)(h)(h.1)]
 The use of automobile [8(1)(j)]
 Work at home - rent, repairs &
maintenance, supplies, phone,
utilities [8(1)(i)]
week 4
Review: Sales/negotiating person’s
expenses
• Deductions for salesperson who is an
employee:
All expenses: incurred for employment purposes
except capital expenses and recreational facility
and club. The deductions are limited to
commissions [8(1)(f)]
Automobile:
- Interest on car loan and CCA [8(1)(j)]; not
limited to commissions
- Operating expenses; limited to commissions
week 4
Review: Sales/negotiating person’s
expenses
Work space in home:
- The above items for non-salesperson;
not limited to commissions [8(1)(i)]
- Property taxes and house insurance;
limited to commissions [8(1)(f)]
week 4
Review: Sales/negotiating person’s
expenses
• Deductions for salesperson who is
self-employed:
All the above items for salesperson
who is an employee, plus
CCA, and
Mortgage interest if work in home
week 4
Ch 5. Depreciable property and
eligible capital property
I. Depreciable Property and Capital
Cost Allowance (“CCA”)
II. The Treatment of Eligible Capital
Property (“ECP”) and Cumulative
Eligible Capital Amount (“CECA”)
week 6
Depreciable property and CCA
-----------------------------------------------Start with opening balance (UCC)
Add any additional purchases
Deduct any disposals
Apply the appropriate CCA rate to the
resulting balance to calculate CCA
Ending UCC balance
------------------------------------------------week 6
Classes and CCA rates
• The Act assigns various types of assets to
specific classes
• Each class has a specific rate attached to it
• signifies the maximum deductible in any year
• No requirement to claim this maximum:
• can choose to claim any amount up to the
maximum
• Unclaimed portions is available for
deduction in future years
Common classes (Reg. Part XI)
• Class 1 (4%) - building after 1987
• Class 1 –MB (10%) – used at least
90% for M&P
• Class 1 – NRB (6%) – non-residential
building after Mar 18, 2007
• Class 8 (20%) - miscellaneous
tangible such as furniture, fixtures,
photocopiers
week 6
Common classes
• Class 10 – 30%
– Automobile, van, truck
– Computer with system software
before March 23, 2004
• Class 10.1 – 30%
– Motor vehicles with cost greater
than $30,000
week 6
Common classes
• Class 12 (100%)
–
–
–
–
Tools & instruments cost less than $500
Linen, uniforms
Dies, jigs, moulds
Computer Software
• Class 13 – Leasehold interest
• Class 14 – Patent, franchise, licence
for a limited period
week 6
Common classes
• Class 29 (50%) - Manufacturing machinery
and equipment after Mar 19, 2007 and
before 2014
• Class 43 (30%) - Manufacturing machinery
and equipment after Feb 25, 1992 and
before Mar 19, 2007
• Class 44 (25%) - Patents after April 26,
1993
week 6
Common classes
• Class 45 (45%) - Computers after Mar
22, 2004 and before Mar 19, 2007
• Class 50 (55%) – Computers after Mar
18, 2007
• Class 52 (100%) – Computer after Jan.
27, 2009 and before Feb. 2011 (not
subject to half-year rule)
week 6
Pooling assets of the same class
[13(21)]
• The one-half rule applies only on net
additions
- If disposals exceed purchases, no one-half rule
• When assets are sold, the CCA pool is
reduced by lower of:
– Original cost, or
– Proceeds of disposition
week 6
Gains/losses on disposition
• Gains/losses can occur at three points:
Terminal Loss [20(16)]:
- Positive balance in the class, and
- All assets are disposed of
Recapture [13(21)]:
- Negative balance left in a class
- Regardless of whether there are assets left
Capital Gain
- The selling price exceeds the original cost
Class 10.1 Automobile
• Passenger vehicles costing more than
$30,000
Maximum claim is $30,000 regardless
of cost
Not pooled
No recapture or terminal loss
One-half rule
Applies in the year of acquisition
Claimable in disposal year
Electronic office equipment (computers, faxes,
photocopiers in Class 8 or 10) [Reg 1101(5p)]
• Equipment subject to rapid obsolescence
• Elect to set up a separate class for each
property costing more than $1,000
• Transferred back to their original class and
pooled after 4 taxation years
week 6
Exceptions to declining balance
Leasehold improvement (class 13):
• Tenant pays cost of making the rented space
suitable to their needs
• Using the straight-line method over the life of
the lease plus one renewable period
• CCA is the lesser of 1/5 of cost, and the cost
divided by the # of remaining years of the
lease plus first renewal term
• First year CCA would be one-half of the
above amount
week 6
Exceptions to declining balance
Limited-life intangibles (class 14)
• Patents, franchises, licences etc
• CCA is determined separately for each
item
• Annual CCA:
– straight-line basis based on number of days
owned in the year divided by the total
number of days in the life of the asset
week 6
Exceptions to declining balance
• Class 29: Manufacturing and
processing machinery and equipment
• 25% CCA rate for the first year, 50%
for the second year and 25% for the
third year
• CCA is calculated based on original
cost
week 6
Eligible capital property [Sec 14]
• Intangible nature, unlimited life
• Some common types:
Goodwill (purchased)
Franchises, licences, and concessions with
no legal limited life
Trademarks
Customer lists
Incorporation costs
week 6
Rules for eligible capital property
• All assets are pooled together
• Additions and disposals are recorded
at 75%
• Annual deduction rate of 7%
• No one-half rule
• Negative balance - recapture
week 6
Chapter 6. Income from Property
I. Inclusions
 Dividends – shares
 Interest – loans, deposits, etc.
 Income attribution
 Rental income – real estate
II Deductions
week 7
Interest income [Sec 12]
•
Interest income – the compensation
received for the use of borrowed funds
•
Corporations – annual accrual method
Include as income on a daily basis and
accrued to the taxation year end
• even though not received or receivable
until some future time
week 7
Interest income
• Individuals
1.The cash method (if receive
interest every year)
2.The annual accrual method (if not
receive interest every year)
- the interest accrued to the
anniversary day
week 7
Annual Accrual Method
Required method
so cannot defer
for long periods
Loans $100,000 on February 1, 2010. Loan must be repaid in two years.
Interest is charged at 12%, compounded annually and is payable
at the end of two years
Cash Method
Year
Income
2010
0
2011
0
2012
$25,440
Total
$25,440
Yr 1 100,000 x 12% = $12,000
Yr 2 112,000 x 12% = 13,440
$25,440
Annual Accrual Method
Year
Income
2010
0
2011
$12,000
2012
13,440
Total
$25,440
week 7
Dividends received by individuals
• Dividends from taxable Canadian
corporate shares are included when
received
• Dividends from ABI or investment
income of a CCPC
- Dividends are grossed by 25%
- Federal dividend tax credit is available
equal to 16.67% of the dividends paid
week 7
Dividends received by individuals
• Dividends from a public corporation
or a CCPC not eligible for above
calculation
- Dividends are grossed by 38%
- Federal dividend tax credit is available
equal to 20.7% of the dividends paid
week 7
Dividends received by individuals from
CCPC
Corporation
Income
Tax @ 20%
Net earnings
$100
(20)
$ 80
Dividend from Corporation
$ 80
Taxable dividend ($80 x 1.25)
$100
Tax @ 46%
46
less DTC
(20)
Net personal tax
$26
Total tax paid on Corporate profits
Paid by corporation
$ 20
Paid by individual
26
$ 46
Individuals receive dividends from
foreign companies
• No gross-up of income
• No dividend tax credit
week 7
Income attribution [Sec 74.1-74.5]
• When a property is transferred or
loaned to spouse or minor,
subsequent income received by
spouse/minor on transferred
property is attributed back to
original owner
week 7
Income attribution exceptions
Exceptions:
• If property is transferred or loaned at
FMV
• Second-generation income
• Income on property transferred to
related child
– If over 18
– If capital gains or losses
Deductions
• Carrying charges on land [18(2)(3)]
- interest and property tax on vacant land are
deductible up to the income from the land
- otherwise added to the cost base of the land
• Soft cost on construction [18(3.1)(3.3)]
- no deductible and added to cost base
week 7
CCA on rental property [Reg. 1100]
Rental Income = Rent – Expenses
• CCA claimed on rental properties cannot
incur a rental loss
• Separate classes for each rental building
costing $50,000 or more
week 7
Personal tax planning
•
•
Given two investment choices, choose
the one with higher after-tax return
Use excess cash to purchase personal
assets or pay down personal debt ; use
borrowed funds to purchase investment
assets – maintain clear records
• Interest on personal loan is not deductible
week 7
Ch 7. Capital gains: Personal
I. CG/CL Defined
II. Determining CG/CL – General
Rules
III.Specific Capital Properties
week 8
Business income vs. capital gains
• Relationship of the transaction to the
taxpayer’s business
• Activities associated with the trade
• Nature of the assets
• Number and frequency of the transactions
• The length of the holding period
• Articles of incorporation
week 8
Determining CG/CL [Sec 40]
Proceeds of disposition (POD)
less: adjusted cost base (ACB)
less: disposition expenses
Net amount
less: reserve
CG/CL
TCG/ACL = ½*CG/CL
ACL is deductible only from TCG
week 8
xxx
(xxx)
(xxx)
xxx
(xxx)
xxx
Deferred Proceeds [40(1)(a)] (Ch 8
– Capital gains: business related)
• Maximum reserve in any year is
equal to the lesser of:
(i) [deferred proceeds / total
proceeds] x net amount, and
(ii) (1/5 of net amount) x (4 - # of
preceding years after disposition)
week 8
Problem 2 (Chapter 8)
Len bought a parcel of land in 1991 for
$4,000.
On October 1, 2011, Len received an offer
from an acquaintance to purchase the land
for $160,000 with the following purchase
term: $40,000 down payment on purchase
date; $20,000 payable on January 1 each
year for the period January 2012 through
January 2017 inclusive.
Discuss the tax consequences to Len.
week 8
Personal Use Property (PUP)
[Sec 46, 54]
• Gains are Taxed
• Losses are Non-Deductible
• This restriction is applied to each item of
personal property.
• Minimum P of D = $1,000
• Minimum ACB = $1,000
week 8
Listed Personal Property (LPP)
[41(2), 54]
• PUP that has some element of investment value:
A print, etching, drawing, painting, or
sculpture, or other similar works of art
Jewellery
A rare folio, rare manuscript, or rare book
A stamp
A coin
• Losses recognized, but only deductible against
gains on LPP.
• Unused losses: carried back 3 years, or forward 7 years
Remember:
– Minimum P of D = $1,000
– Minimum ACB = $1,000
Allowable business investment loss
(ABIL) [Sec 39]
• Allowable business investment loss (ABIL):
incurred on the disposition of:
– Shares or loans of a small business corporation
(SBC)
• SBC: Canadian-controlled private corporation
(CCPC), with all or substantially all of its assets
to conduct an active business
• An ABIL can offset against all sources of income
week 8
Principal residence [Sec 54]
• Owned and ordinarily inhabited for
personal use
• One principal residence per family
unit
• Designation at sale
• Claim exemption against capital gains
week 8
Principal residence exemption
[40(2)(b)]
• Exemption:
1 + # Yrs. Designated as Principal Residence X Gain
# Yrs Owned
• The “1+” is included to cover the year in
which two houses are owned as a result of the
normal process of selling one house and
acquiring a new one
• In order to use “1+”, the home should be
designated at least for one year
week 8
Identical properties [Sec 47]
• The ACB of identical property (e.g. shares)
acquired is the floating weighted average
cost of all the identical properties acquired
Aggregated costs of the shares
ACB =
Total number of shares
week 9
Stock dividends [sec.52]
• Before May 23, 1985, ACB of stock
dividends is nil
• After May 22, 1985, ACB of stock
dividends is equal to paid-up capital (PUC)
week 9
Superficial Losses (denied)
[53(1)(f)]
• No intention of disposing of the
asset,
– disposed of and then reacquired
within 30 days
• The denied losses are added to the
ACB of the reacquired asset
week 9
Superficial loss example
Taxpayer sold 500 shares in Corp X for $8,000 on
Dec. 31, 2010 with an ACB of $10,000.
On Jan 5, 2011 he reacquires 500 shares of Corp X
for $7,500.
Shares sold on December 31, 2010
POD
ACB
capital loss
superficial loss is denied
$ 8,000
( 10,000)
($ 2,000)
nil
ACB of shares purchased on Jan 5, 2011
Original ACB
$ 7,500
Denied loss
2,000
New ACB
$ 9,500
week 9
Death of a taxpayer [sec. 70, 73]
• All income should be reported, e.g.,
interest, rent, and salary that are received
or accrued to the date of death
• Income from “rights and things” should be
reported, (matured but uncashed bond
coupons, declared but unpaid dividends,,
unpaid salary)
week 9
Death of a taxpayer
• The deceased taxpayer is deemed to
dispose of his/her property at FMV and the
beneficiary is deemed to acquire the
property at FMV
• If the beneficiary is the spouse, property
can be elected to be disposed of at cost by
the deceased taxpayer, and acquired by the
spouse at cost
week 9
Sec 3 – Computation of Div. B
NIFTP
3(a) Aggregate income (worldwide)
Employment
+
Business Income
+
Property Income
+
Other items
+
+ or 0
(must be positive or zero)
week 9
Sec 3 – Computation of Div. B
NIFTP
3(b) Net taxable capital gains
Taxable Capital Gains
Exceeds
Allowable Capital losses (except
ABIL, LPP losses)
+ or 0
(must be positive or zero)
week 9
Sec 3 – Computation of Div. B
NIFTP
3(c): 3(a) + 3(b) - Other deductions
(must be positive or zero)
3(d): 3(c) less
Employment losses Business losses
Property losses
ABIL
Div. B NIFTP
+ or 0 (positive or zero)
week 9
Mr. Payer provides the following
income/loss for tax purposes for the year
Employment income
$35,000
Business income
2,000
Property income (loss)
(3,000)
Taxable capital gains (allowable capital losses)
Taxable capital gains
3,000
Allowable capital losses*
(8,000)
*Includes $2,000 allowable business investment
losses.
Mr. Payer contributed to RRSP of $1,000 within
the limit in the year.
Determine net income for tax purposes.
week 9
Non-arm’s length transfer
and attribution [Sec 251]
Non-arm’s length (“NAL”)
– special rules prevent the elimination or
reduction of tax by selling at a price other
than fair market value
• Taxpayers are considered not to be
dealing at arm’s length if they are related
to each other
week 9
Non-Arm’s Length (“NAL”)
1. Individuals are related if they are
direct-line descendents
2. Individual is related to a
corporation if:
– controls the corporation,
– is related to an individual who controls the
corporation, etc.
3. Corporations are related if
“control”
week 9
Non-Arm’s Length (“NAL”)
[Sec 69]
1. Sell Price < FMV:
• Vendor: deemed to sell at FMV
• Purchaser: ACB = sell price
2. Sell Price > FMV:
• Vendor: deemed to sell at sell price
• Purchaser: ACB is deemed equal to FMV
3. Gifting:
• Vendor: sales price = FMV
• Purchaser: ACB = FMV
week 9
Property transferred to spouse
[Sec 73,74.1, 74.2]
• Deemed to have been sold at cost
(rollover) – automatic
• Can choose to recognize a gain on
spousal transfer (use Sec 69)
• Property income and capital gains will
be attributed back unless transferred at
FMV
week 9
Property transferred to minor
[Sec 74.1]
• Sec 69 applies
• Property income will be attributed
back unless transferred at FMV
• Capital gains are not attributed back
week 9
Ch 9. Other sources of
income/deductions
I. Other Income [subdiv d]
II. Other Deductions [subdiv e]
week 10
Other income
Major items:
Benefits from pensions
Amounts received from deferred
income plans
Annuity payment
week 10
Other income
Major items (continue):
Retiring allowances
Social assistance, workers’
compensations
Support payments from former
spouse
Periodic and
By virtue of a court order
week 10
Other deductions
Major items:
RRSP contributions
Support payments to a former spouse
Fees/expenses for objection or appeal of a
tax assessment
Retiring allowance transferred to
RRSP/RPP
Moving expenses
Child care expenses – lower income spouse
Registered Retirement Savings
Plans “RRSP” [Div G]
• Investments in an RRSP:
– are not taxed until withdrawn
• Contribution (within the limit) is deductible
• Contribution limit is the lesser of:
– 18% of prior year’s “earned income,” and
– $22,970 (for 2012)
Net of prior year’s Pension Adjustment
(PA)
• Unused contribution room can be carried
forward
Earned Income
“Earned income” includes:
– employment income (before RPP contribution
deduction)
– business income,
– rental income,
– Support payment income, and
– research grants net of related expenses
Reduced by:
– business losses,
– rental losses, and
– deductible support payments
Excess contribution
• Contributions exceeding the annual
limit are subject to a penalty of 1%
per month on excess
• Permitted to over-contribute up to
$2,000
• Over-contribution is not deductible
week 10
Spousal RRSP
• An individual can contribute all or part of
his/her contribution limit to the RRSP of a
spouse
• Contributor claims the deduction
• Limitations: withdrawals from the spousal
plan within two taxation years of the
contribution year are included in the
contributor’s income
week 10
RRSP
• Withdrawals before retirement subject
to withhold tax [Regs.103(4)(6)]
• Home buyer’s plan [sec.146.01], and
lifelong learning plan
• RRSP maturity options: RRIF
[sec.146.3]
week 10
Retiring allowance transferred to
RRSP [Sec 60]
• The transfer (up to the limit) is deductible
• Limit:
- $2,000 per year employed before 1996
plus
- $1,500 per year before 1989 when
employer’s RPP and DPSP contribution
did not vest
week 10
Moving expenses
[Sec 62]
• Incurred for relocation to start a business or
employment, attend a university
• To the extent of income earned in the new
location
• If
Moving
expense
>
Income in
new location
Then
carry forward unclaimed portion and deduct
in following year week 10
Moving expenses
Deductible expenses include:
Travel costs in moving to new place (meal $51
per day w/o receipt),
Transportation and storage of belongings,
Temporary board and lodging (up to 15 days),
Costs of cancelling a lease for the old
residence,
Selling costs of the old residence,
Legal fees and land transfer taxes,
Cost of maintaining a vacant former residence
within limits (up to $5,000),
Cost of revising legal documents
Child care expenses [Sec 63]
• Includes:
– the cost of babysitting, day care, or
lodging at a boarding school,
– children under 16
Limits to the lesser of:
– $4,000 per child 7 to 16, $7,000 per
child under 7, $10,000 per disable child
– 2/3 of earned income
• Lower income spouse claims
week 10
Child care expenses
• High-income spouse claims if the low-income
spouse in a such special situation: becomes a
student, stay in hospital, go to jail, marriage
breakdown
• Limits:
- the limit calculation for low-income spouse
(using earned income for high-income spouse),
not exceeding
- the sum of $250 per disable child, $175 per
child under 7, and $100 per child 7 to 16, times #
of weeks the low-income spouse in the above
week 10
special situation
Ch 10. Individual’s Taxable Income
and Taxes Payable
I. Taxable income [Div. C]
II. Calculation of Tax for
Individuals [Div. E]
III.Minimum Tax
IV. HST
week 11
Taxable income [Div. C]
• A taxpayer’s taxable income for a taxation
year is:
Taxable income = Div. B NIFTP – Div. C
Special Deductions
• The special deductions in Division C:
Stock options
Home relocation loan
Loss carryovers
Lifetime capital gain deduction
Social assistance; workers’ compensation
Home relocation loan (HRL)
[110(1)(j)]
• Deduction is the least of
(a) Interest benefits on the HRL
(b) Interest benefits on a $25,000
HRL
(c) Interest benefits on all employee
loans
week 11
Loss carryovers [Sec 111]
• Net capital loss
• Non-capital loss
• Farm loss
Non-capital losses
- Unused business, property and
employment losses and ABILs
- carried back three years and forward
twenty years against
any income
week 11
Losses carryovers
• Net Capital Losses:
– Allowable capital losses incurred but cannot
be utilized,
• carried back three years, and forward
indefinitely,
• deductible against taxable capital gains
• Rate adjustment may be needed
• ABILs: if unused after twenty-years:
• reclassified asweek
net11 capital loss
Farm losses
• Farm losses: chief source of income is
farming
• Farm losses are treated the same as
business losses
• RFL: Part-time farming
• Unused losses can be:
– carried back three years and forward twenty
years,
– only be deducted against farming income
week 11
Federal Income Tax Brackets
[117.1]
Taxable Income Bracket (2012)
Rate
$42,707 or less
15%
$ 42,708 - $85,414
22%
$ 85,415 - $132,406
26%
Over $ 132,406
29%
Income tax calculation
Total federal tax
Subtract: Non-refundable credits
Dividend tax credit
Basic federal tax
Subtract: FTC
Subtract: Political contribution credit
Net federal tax
week 11
xxx
xxx
xxx
xxx
xxx
xxx
xxx
===
Sec 118 Tax credits
• Basic (single status):
15% x $10,822= $1,623
• Married or equivalent-to-married (ETM):
15% x
$10,822, Plus
$10,822
Reduced by the spouse/ETM’s Div. B income
week 11
Sec 118 Tax credits
• ETM: A taxpayer could claim ETM if
he/she is single, divorced, separated, or
widowed, and supports a relative
dependent (who is under 18 or disable)
• Child amount:
For each child under 18
15% x $2,191= $329
week 11
Sec 118 Tax credits
Dependants:
Individuals supporting a:
 related person,
over the age of 18, and
dependent by reason of physical or
mental infirmity
Tax credit: 15% of
$4,402,
reduced by dependant’s Div. B income in
excess of $6,420
week 11
Sec 118 Tax credits
Caregiver:
Provide in-home care for:
a parent or grandparent who is 65 or
older, or
dependent relative who is infirm
Tax credit: 15% of
$4,402,
Reduced by the dependent’s Div. B income
in excess of $15,033
week 11
Personal credits (some restrictions)
• Every taxpayer will take either the married,
equivalent to married, or single credit
• The same dependent person cannot be used for
both equivalent to married and the dependent
credit
• The same dependent person cannot be used for
both dependent and caregiver credit
• The same dependent person cannot be used for
both equivalent to married and caregiver credit
week 11
Sec 118 Tax credits
Age amount – 65 years of age or older
15% x
– $6,720
– reduced by Div. B net income in excess of
$33,884
Pension income amount
15% x the lesser of $2,000 and (qualified) pension
income
Canada employment credit
15% x the lesser of $1,095 and employment income
week 11
Sec. 118 Credits
Adoption expense credit [118.01]
- up to $11,440 for eligible adoption
expense (for a child under 18)
Public transit passes credit [118.02]
- the amount paid for the individual, the
individual’s spouse, or a child not reached
19 before the end of the year
week 11
Sec. 118 Credits
Children’s fitness credit [118.03]
- up to $500 eligible fees for a child under 16 in
an eligible program of physical activity
Children’s arts tax credit [118.031]
- up to $500 eligible fees for a child under 16 in
an eligible program of artistic, cultural,
recreational and developmental activities
First-time home buyers’ credit [118.05]
- 15% x $5,000 for the purchase of a qualifying
home by a first-time home buyer.
week 11
Medical expense credit
Medical expenses:
– 15% x qualified medical expenses exceeding:
• 3% of the taxpayer’s net income, or
• $2,109, whichever is less
Plus
– 15% x medical expenses paid for dependant
exceeding:
• 3% of the dependant’s net income, or
• $2,109, whichever is less
- Not exceeding $10,000
Medical credit – tax planning
• Choose the 12 month period to maximize
the credit, i.e., group the maximum
amount together in the 12 month period
• Choose the taxation year with lower net
income
week 11
Impairment tax credit
• Disability – a severe & prolonged
mental or physical impairment
15% x $7,546 = $1,132
– Can be transferred to spouse or parents
if cannot be used by the impairment
person
week 11
Sec 118 Tax credits
Charitable donations:
– 15% x first $200 of donations, plus
– 29% x the remainder
– Annual donations cannot exceed 75% Div. B
income
– Unused Donations can be carried forward for 5
years
CPP and EI:
– 15% x CPP and EI contributions
– Maximum EI premium = $840
– Maximum CPP contribution = $2,307
Tuition and education credits
Tuition fees:
– attend a university, college, or other certified
post-secondary institution
– 15% x tuition fees paid
Education amount and textbook credit:
– Full-time or disable – 15% x $(400+65) x each
month of attendance
– Part-time – 15% x $(120+20) x each month of
part-time attendance
week 12
Tuition and education credits
The student may not have sufficient
income to utilize the above credits
The unused portion is transferable –
up to $750 (15% x $5,000) annually
to a spouse, parent, or grandparent
Alternatively, the student may carry
forward the unused portion
week 12
Dividend tax credit [121, 82(3)]
• 20.7% of dividends paid from public
corporations and others taxed at general tax
rates
• 16.67% of dividends paid from CCPC
corporations with low tax rates
• Can be transferred to high-income spouse
if the married credit claimed by the highincome spouse is increased from the
transfer
week 12
Transfer of unused credits to spouse
• Tuition, education and textbook
credits (maximum of 15%x5,000)
• Age credit
• Pension credit
• Impairment credits
• Child amount
• DTC
week 12
Foreign tax credit [126]
• The lesser of
(a) foreign tax paid, and
(b) (foreign income/Div. B income net
of adjustments) x tax payable under
Part I
• Foreign non-business credit and
foreign business credit
week 12
Political contributions [127(3)]
– Based on a graduated scale
– The credit is:
• 75% of the first $400,
• 50% of the next $350, and
• 33 1/3% of contributions over
$750
– Maximum of $650 annually
week 12
Refundable tax credits
• Working income tax benefit (WITB)
[122.7]
• Refundable GST credit [122.5]
• Refundable medical expense supplement
[122.51]
• Refundable Canada child tax credit
[122.6]
week 12
Alternative Minimum Tax (AMT)
Implemented in 1986, to address concerns
that some individuals and trusts with high
gross incomes paid little or no income tax,
due to the fact that a significant portion of
their income is reduced by certain
deductions or “tax preferences”, such as
tax shelters.
AMT
• AMT is an alternative to an individual’s regular
income tax: One must pay the higher of the two,
but not both.
• If you must pay AMT in a year, the excess of that
AMT over your regular tax amount can be
carried forward as part of your “minimum tax
carryover”. This can be carried forward seven
years to offset your regular income tax to the
extent it exceeds AMT for that year.
What is a tax shelter?
Tax shelters are defined in the Income Tax Act. A
tax shelter includes either a gifting arrangement
or the acquisition of property, where the tax
benefits and deductions arising from the
arrangement or acquisition will equal or exceed
the net costs of entering into the arrangement or
the property.
Large losses created by
• CCA claimed for certified feature films and
certified productions
• deductions of carrying charges on certain
investments, including rental or leasing property
and resource property
• a limited partner of a limited partnership
• resource expenditures and depletion allowances
Minimum Tax [120, 127]
• Minimum tax is used to prevent highincome individuals from taking advantage
of tax incentives and sheltering their
income
• 15% x (B-C)-D
• B: Adjusted taxable income
• C: Basic exemption = $40,000
• D: Basic minimum tax credit
week 12
Adjusted taxable income [127]
• Is calculated based on regular taxable income and
adds back or subtracts certain amounts
• The amounts added back include
- loss from film or videotape properties
- losses from resource properties
- 30% of capital gains in excess of capital losses
- 60% of ESO deduction
- home relocation loan deduction
The amounts subtracted include
- dividend gross-up
- non-deductible fraction of ABIL
Basic minimum credits [127]
• Personal credits for married, ETM, single, dependent and
caregiver [118(1)], Age credit [118(2)]
• Canada employment credit [118(10)]
• Adoption expense credit [118.01(2)]
• Public transit pass [118.02(2)], Children’s fitness
[118.03(2)]
• Charitable donation [118.1]
• Medical expense [118.2]
• Mental/physical impairment [118.3]
• Tuition and education, carry-over, interest on student loan
[118.5, 118.6, 118.61, 118.62]
• CPP and EI credits [118.7]
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
Excise Tax Act (ETA) Part IX – GST/HST
legislation
Division I – Interpretation (definition and
basic interpretation rules)
Division II – Goods and Services Tax (tax
rate, liability, credits, etc.)
Division III – Tax on importation of goods
…
week 12
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
• GST/HST is a tax on the consumption of
goods and services (supplies) in Canada
• It is collected by businesses (registrants)
who sell supplies
• It is intended to be a tax on final
consumption (i.e., input tax credit applies
on purchases)
week 12
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
• “Supplies” for GST/HST purposes include
- sales or rentals of goods
- rendering of services
- leases, sales, or other transfer of real
property
- licensing of copyrights or patents
- barter and exchange transactions and gifts
week 12
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
• Once it is determined that there is a supply,
a further determination must made as to the
type of supply
• Supplies are divided into 3 categories
- Taxable supplies
- subject to 5% of tax
- entitled to full input tax credit
- taxable supplies are subject to tax
each time they are sold
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
- Zero-rated supplies
- 0% of tax
- entitled to full input tax credit
- Examples: prescription drugs, medical
devices, basic groceries, and exported
goods and service
week 12
Introduction to the goods and services tax
(GST)/Harmonized sales tax (HST)
- Exempt supplies
- no GST/HST
- no input tax credit
- Examples: health care and child care
services, educational services, most
financial services, and sales of used
residential housing and rentals of
residential premises
week 12
Input Tax Credit (ITC)
• An entitlement to claim refundable input
tax credits on business purchases
• In order to qualify for ITCs, the goods and
services must have been purchased for use
in a commercial activity, or exclusively
used in a commercial activity
• If goods and services are not purchased for
exclusive use in a commercial activity,
ITCs should be apportioned
Input Tax Credit (ITC)
• ITCs claimed by registrant are subtract
from tax collected on goods and services to
arrive at net tax payable (purchase and sale
need not be matched to claim ITCs)
• If ITCs exceed tax payable, registrant
receives a refund
• Registrants are required to keep certain
document to support ITCs
week 12
Harmonized Sales Tax (HST)
• HST was first implemented on April 1,
1997.
• Effective July 1, 2010. The HST rate in
Ontario is 13% (8% provincial and 5%
federal).
• HST is administrated by the CRA, as is the
GST. Registrants account for GST/HST on
a single form.
week 12