FIN 502 Study Guide - Tax Avoidance

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21 Apr 2012

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CHAPTER 8 income tax planning
Income deferral: bring income into taxable income at a future date, and so deferring the payment of
income tax until later.
o Present value of future tax payment is less than if ti were paid at once
Registered pension plan (RPP): established by employer to defer income payable to employees to provide
retirement income for them
o Contributions to RPP are not taxed as income as it is put into the plan; pays taxes as it is received
o Contributions are deductible from taxable income, and accumulate at before-tax rate of return
Registered retirement savings plan (RRSP): a do-it-yourself pension plan
o Taxpayer contributes part of her income, contribution is deducted from income for tax purposes
in the year it was paid into the fund, and income on it accumulates tax-free
o When amount is withdrawn, principle and accrued earnings are taxable
o Amount you can contribute in a year is lesser than 18% of earned income in the previous year,
plus any unused contribution allowance from previous years
o The extra income can push you to a higher tax bracket
Capital gains: no tax is payable until they are realized; shares can increase in value at before-tax rate of
return if the return consists of capital gains instead of dividends
Income splitting: allocating income to family members with lower marginal tax rates to reduce the total
family tax bill
o Between spouses:
Spouse with the higher income pays all living expenses while the lower income spouse
does all the savings and accumulates investment assets
Coupon amounts will be taxed in the higher income spouse’s hands, but earnings on the
separate account will be taxed in the low income spouse’s hands
Spousal RRSP: taxpayer may contribute to an RRSP for his spouse, but claim the tax
o Between other family members
Registered educational savings plan (RESP): technique for splitting income with
children and deferring some of the taxes
Earnings compound untaxed, but there is no deduction from the parent’s
income for the principle payments
Principle amount is not taxed, and accumulated income is taxed in the child’s
hands, usually at a much lower rate than the contributing parent would have
o Single parent families and marriage breakdowns
One simple tax-saving device is for the parent who supports the children to claim one of
them as equivalent-to-married
Payments may be deducted by the payer and reported as income by the recipient if they
meet all of these conditions:
1. When payments were made, spouses were living apart and continued to
do so for the rest of the year
2. Payments were made under a decree, court order, judgement or written
3. Payments were made for the maintenance of the recipient
4. Payments were made an allowance to be made periodically
5. Payments were made to the spouse or former spouse, who has discretion
over how they are spent
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