MCS 2100 Lecture Notes - Lecture 2: Tax Rate, Tax Bracket, Dividend Tax

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Unit 02
The Income Tax Forms
- Main tax form is T1 General
oFill amounts from taxable income, income deductions and federal and provincial tax
payable.
oAs you fill out T1, will use various schedules
Schedules used to calculate amounts, which then are put into T1 General
- Main schedules used to calculate federal and provincial tax payable, investment income, tuition
and education amounts, and charitable donations
- With some exception, all income you receive must be included in tax forms
oEmployment income, self-employment income, retirement income (CPP, RRSP, RRIF, or
pension income), investment income (interest, dividend, rent), employment insurance
income, taxable capital gains, spousal support and old age security
- Income included in tax year in which its received
- Deductions- amounts the we’re allowed to subtract from income
oResult is called net income
- Deductions related to expensed that we incur while earning an income
oNotable exceptions- contributions made to RRSPs, RPPs and IPPs.
- Common income related deductions are
oChild care expenses, moving expenses (if move 40 km closer to a job), interest paid on
investment loans, carrying charges (expenses related to investment, including safety
deposit box rental), union and professional dues and employment expenses
o(pg 77 and 76)
- End result is taxable income
- Deductions don’t benefit all taxpayers equally
oTaxpayers in top tax bracket will receive greater benefit
- Schedule 1- used to calculate federal taxes
o4 federal tax brackets
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- As income increases, percentage paid in taxes increases also
oMarginal tax rate (MTR)- tax rate you pay on the next dollar earned
Use MTR to calculate how much RRSP contribution saves you in taxes or how
much you will pay in taxes
oAverage tax rate (ATR)- percentage of an individual’s income that is paid in income
taxes
Taxpayer in 15% tax bracket will have average tax rate that is less than 15%
Because of tax credits
Calculation for average tax rate= line 345/line 150 *100
- Second part of schedule 1 calculates tax credits
- Unlike deductions, tax credits benefit all taxpayers equally
oAll non-refundable tax credits, meaning need have tax payables to offset them
oInclude- basic personal (available to everyone), spousal (if your spouse has a low
income), dependents, age, disability, tuition, textbooks, public transit, children’s fitness,
charitable and political donations, medical expenses, Canada Employment amount,
student loan interest and dividend tax credits
oTax credits are subtracted from tax payables to arrive at net federal tax
- Ontario, major refundable tax credits are HST rebate and Ontario Trillium Benefit (ON-BEN)
oPayable to low-income taxpayers and are usually send as quarterly cheques
oDon’t need to have tax payables to receive them
- In Ontario, form ON428 is equivalent to schedule 1 for calculating provincial taxes
oProvinces may include credits that’s different from federal government or calculations
may be slightly different.
For ex, Ontario has child activity credit, end result will be net provincial tax
- Pg. 4 of T1 General, the fed and prov tax will be added together and any income deducted
(income tax deducted from pay cheque) will be subtracted to arrive at the refund or balance
owing amount
Tax Saving Strategies
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- Tax Free Savings Accounts (TFSAs) allow adults to contribute 5,500 of after-tax dollars per year
- Contribution room can be carried forward to future years
- Income earned on funds is not taxed
- Funds withdrawn from the account can be replaced starting the following year
oOver contributions are tax
- Allowed investments in a TFSA are the same as RRSP
- Common deductions and credits that will reduce tax payable:
oInterest paid on funds borrowed and used for investing is tax deductible
oMoving expenses are deductible if move 40 km closer to job
oContributions to RRSPs and RPPs are tax deductible
oTuition fees and education amount credits can be transferred to a supporting parent,
spouse or grandparent
Maximum allowed is $5,000 less the the student claimed
Unused tuition and education credits can be carried forward
oInterest paid on student loans can be claimed for tax credit
Unused amount can be carried forward up to 5 years
oEI and CPP are converted to tax credits
oEveryone receives basic tax credit, plus there’s spousal and dependent tax credits
oSpecial calculation for medical expenses.
Advantageous to have lower income spouse claim the expenses for both spouse
and any dependent children
Only expenses greater than 3% of claimant’s net income can be claimed
for tax credit
oFirst $200 of charitable donations is converted to tax credit at 15%. Any remaining is
converted to tax credit at 29% up to limit of 75% of individual’s net income
Couples can combine their charitable donations and claim them on just one tax
return for slightly greater tax credit
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