FIN 502 Study Guide - Interest Rate

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21 Apr 2012
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CHAPTER 7 personal income tax
GENERAL CONCEPTS OF INCOME TAXATION
Prescribed forms: Canadian income taxation based on self-assessment completed on income tax return
Progressive: for Canadian system for individuals that higher levels of taxable income are taxed at higher
rates
o Lower rate applies to all income up to a specific level, then al income above that level is taxed at
the higher level
Average tax rate: total tax payable divided by total income
Marginal tax rate: rate applied to one more dollar of income
o Average tax rate will be equal to or less than the marginal rate
Marginal after-tax rate = (1 marginal tax rate) x (interest rate)
Surtaxes: taxes based on the tax, they are temporary and usually apply most heavily on upper tax
brackets
INVESTMENT INCOME
Dividends tax credit: neutralizes the effect of double taxation
o A company pays dividends after it has paid tax on them; when shareholders receive dividends
from the company they must pay income tax on the dividends
o Any dividends received from a Canadian company is grossed up by one-quarter (multiplied by
1.25) and grossed-up amount, called taxable amount, is included in income
Deduct federal tax payable a dividends tax credit equal to 2/3 of gross-up
Deduct federal tax payable a dividends tax credit equal to 1/6 of actual dividends paid
Effect is to tax dividends paid by Canadian corporations less than an equivalent amount of interest
Capital gain: when you sell a capital item for more than the sum of its original price and all the transaction
costs of buying and selling it
Capital loss: when the selling price is less than the purchase and transaction costs
Taxable capital gain: added to income on line 127 of T1, multiplied by one-half
Capital gain deduction: if capital gain comes from disposition of qualified shares of a small business
corporation
Allowable capital loss: if sale creates a capital loss (one-half)
CALCULATING COMBINED MARGINAL TAX RATES
Marginal tax useful to compare two investments opportunities with different taxes; based on after-tax
cash flow
Marginal tax rates essential for long-term financial planning where trying to estimate how much a
particular savings plan will accumulate
tc the combined marginal tax rate
tf the marginal federal rate
tp the marginal provincial rate
tsf federal surtax rate on the marginal federal tax
tsp provincial surtax rate on the marginal provincial tax
DTCprov provincial dividends tax credit as a % of the dividends paid
Interest or ordinary income with surtaxes
tc = tf (1 + tsf) + tp (1 + tsp)
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