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Accg_Tax_Notes_C9.doc

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Department
Business
Course
BU357
Professor
Susan Lade
Semester
Summer

Description
1CHAPTER NINE - OTHER INCOME AND DEDUCTIONS (Div B, Subdiv d,e,g, S56-66, 81, 146-8) OTHER SOURCES OF INCOME S56 - This includes miscellaneous taxable amounts not attributable to sources previouslystudied: Benefits in the nature of pensions: Old Age Security benefits, Canada Pension Plan benefits, Death Benefits (received from former employer on or after death of employee; $10,000 exemption), Employment Insurance Act benefits. Pension Income Splitting with a spouse who is in a lower tax bracket (for tax reduction): 1. CPP – 50% of combined CPP benefits may be paid to a spouse (some additional restrictions) – this requires application to HRDC. 2. Pension Income which qualifies for the pension tax credit – effective 2007, where both parties agree , up to 50% of eligible pension income may be allocated to a spouse. Retiring allowances and other payments on termination of employment which are not included in employment income under S6(3), are generallytaxable as a retiring allowance. This includes payments in recognition of long service or compensation for loss of office, including court- awarded damages. Specific exclusions include amounts such as pensions, death benefits, and other amounts otherwise required to be included in income under other sections of the ITA. (Note the possibility to “rollover” qualifying amounts of a Retiring Allowance to an RRSP, to defer the income tax consequences.) Familysupport payments resulting from marital splits are taxable to the recipient onlyif the payments are deductible to the payor. Pre-April 30, 1997 agreements: both spousal and child support are taxable to the recipient (and deductible by the payor). Post-April 30 1997 agreements (new or revised): spousal support (if specificallyidentified in the agreement) remains taxable to the recipient (and deductible by the payor), but child support is no longer taxable (or deductible). (Result of Thibaudeau v The Queen decision by Supreme Court) Annuity payments are included in other income when received. An offsetting deduction for the principal portion of the annuity payment is available under S60 below, where the annuity was acquired with after-tax funds rather than with funds from deferred income plans. Receipts from deferred income plans (RRSP, RRIF, DPSP,) are generally included in income 100%, whether the amounts are lump sums or periodic payments, since neither the original contributions nor the income earned has been subjected to taxation. RESP benefits representing income and CESG grants are taxable on receipt, usuallyby the student. The capital portion is returned tax free, since no deduction was allowed on the contribution. (See page 483-486) Education assistance payments including scholarships, bursaries, fellowships and research grants (in excess of research costs) are taxable, subject to an annual exemption for scholarships, bursaries and fellowships if the student qualifies for an education tax credit with respect to the course of study. Effective 2010, the exemption willonly apply if the program of study leads to a diploma or degree (College, CEGEP, University). Other inclusions: Legal costs awarded by a court are included in income if these costs are deductible under other sections of the Act. Social assistance payments (welfare) are included in the income of the spouse with the higher income. WSIB benefits are included in income of the recipient. (NOTE: Offsetting deductions for welfare and WSIB benefits are available under DIV C. The purpose is to include these amounts in DIV B only, to limit the personal tax credits available to supporting persons. See Chapter 10.) The principle of Constructive Receipt may be used to attribute Indirect Payments which have been directed to another related taxpayer with the objective of minimizing tax. These indirect payments would be included in Other Income under S56. (eg. Dividend Sprinkling, where high income taxpayer waives dividends to benefit lower income related taxpayer.) The Universal Child Care Benefit is paid to qualifying families with children under 6 years of age, effective July 2006. The amounts received are to be reported as income by the spouse with the lower income. (See chapter 10) Restrictive Covenants: Amounts received or receivable after Oct 7, 2003 on account of “restrictive covenants” are included in other income (S56.4) unless they are already included in Div B income under other provisions. (Employment income, Proceeds on sale of Eligible Capital Property, Proceeds on sale of Eligible Interest capital property.) S81 provides a small list of specific receipts which are not taxable under the ITA. (Amounts exempted by other federal statutes...Indian Act exempts incomes of native peoples residing on a Reserve...expense allowances of members of federal legislature; expense allowances of elected municipal officers and members of provincial legislatures; certain pensions related to war services, etc.) Tax Free Savings Account : Effective 2009, individuals > 18 years can earn investment income tax free using such a registered account. The maximumcontribution is $5,000 per year, with rules similar to those for RRSPs, except that contributions are not deductible and there are no attribution rules. OTHER DEDUCTIONS S60 - 64 - This includes miscellaneous deductions which are allowed by law but are not attributable to specific sources of income, and hence need not be “incurred in order to earn income”: Capital Element of Annuity is deductible where the fullannuity amount is included in income above, but the investment was acquired with non-registered funds. (Note that the computation of the tax-free capital portion by Regulation 300 is favourable to the taxpayer. A straight-line amortization is applied rather than the effective-interest method.) Support Payments are deductible by the payor in situations where these same amounts are taxable to the recipient (see above). IT-99R5 describes other conditions relating to deductible support payments including the requirements that they be periodic, pursuant to a court order or written agreement between the former spouses and the requirement that the former spouses be living apart. Legal fees paid to obtain or revise spousal support under government legislation or to enforce a prior support agreement are also deductible by the payee spouse. Registered Retirement Savings Plans represent an opportunity to save for retirement on a tax deferred basis (both deductible contributions and income earned within the plan are not taxed until withdrawn) and potentially achieve income splitting with a lower income spouse, by way of a spousal plan. Annual RRSP Deduction Limit: Unused RRSP deduction room carried forward from prior years (Cumulative annual deduction limits since 1991 in excess of cumulative annual deductions claimed since 1991), plus the lesser of: - the annual dollar limit (2011 - 22,450) and - 18% of “earned income” for the prior year, less the Pension Adjustment, if any, for the prior year (as reported on prior year T4) less the Past Service Pension Adjustment, if any, for the current year. (as reported by employer) Earned Income - See text page 497 - S146(1). Pension Adjustment - See text page 498, (Integration of Contribution Limits, page 495). Excess Contributions - may be carried forward similar to unused deduction room. Contributions exceeding cumulative deduction limits by more than $2,000 in any given month are subject to a 1% per month penalty to discourage over-contributions which would benefit from tax-free compo
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