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Chapter 7.docx

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FIN 502
Joan Lobo

Chapter 7: Personal Income Tax Income tax act - stature of Parliament = law ∆ frequently → diff parts affected by federal govt budget administered by Canada Rev Agency (CRA) General Concepts of Income Taxation based on self assessment limited corp, trusts, indiv → complete income tax return on prescribed forms ← legally responsible Basic Format of Personal Income Taxation in Canada Income - Allowable Deductions = Taxable Income x Income tax rate = Income tax Payable b4 credits - Tax credits = Send cheque to govt Canadian system = progressive - higher levels of taxable income taxed at higher rates → average rate ≤ marginal rate - lower rate → applies to all income up to specified level, above level ↗ Marginal after tax rate of return you re/ = (1 - marginal tax rate)(interest rate) Marginal Federal Rate Income Tax Tax Bracket Tax Rate 2011 2012 15% On 1st 22% On next 26% On next 29% On amt over tax brackets - d/ whether to invest $ in term deposit surtaxes - taxes based on the tax - temporary, apply heavily on upper tax bracket - fin effect identical to ↑ basic tax rate Basic Outline of Personal Income Taxation 1. Add all sources of income - Deductions = Taxable income (carried forward to schedule 1) 2. Add all personal tax credits = P Tax credit is 15% or 0.15P Add all charitable donations = D Tax credit is 15% on 1st $200, 29% on rest = (0.15)[Min (D,200)] + Max [0,(0.29)(D-200)] Total non-refundable tax credits = (0.15)[Min (D,200)] + Max [0,(0.29)(D-200)] 3. Federal Tax [Calc: Tax 1st x dollars of taxable income at lowest rate then the next x dollars at the next higher rate] + Split Income; min tax earned forward - Non-refundable tax credits - Dividend tax credit = Basic Federal Tax +/- Other charges/credits = Net Federal Tax 4. Provincial Tax [Calc: similar to federal tax] - Provincial tax credits (inclu dividend tax credit) + Provincial surtax (rate & method differ by province) +/- Other charges/credits = Provincial Tax 5. Federal Tax + Provincial Tax - Tax withheld at source - Tax paid by instalments -/+ various other credits/ charges = Tax owing/ Tax refundable (if -ve) Completing an Income Tax Return Indiv file personal returns based on calendar yr → deadline: Apr 30 Taxpayers who have bus/ income get extended deadline: returns due June 15, still pay bal Apr 30 Total Income - self employment sources of income allow taxpayers to deduct exp f/ gross rev → exp incurred to earn it - unincorp taxpayer → file I/S & B/S → doc return - incorp taxpayer → bus/ file own corp income tax return - taxpayer owner income on personal return = salary, dividend, interest, commission Taxable Income - income tax act - Registered Pension Plans (employer sponsored plan, Registered Retirement Plan = deducted f/ total income - contrib taxed later w/ accrued income ← taxpayer re/ part of pension/ lump sum w/drawl Tax Credits - non-refundable tax credits - deductions f/ taxes otherwise payable w/ limit tax payable not reduced to 0 → multiplied by 15% Federal Tax - income tax return - m/ end of yr corrections to social service collections like CPP, EI, OAS - complain about high taxes given low marginal federal rate income tax b/c surtaxes and provincial taxes not inclu .. yet.. Provincial Tax - tax on income → base taxes on prov taxable income and have own provincial tax credits - similar calc to federal tax bus has diff % Balance Owing/ Refund - +ve = owe $ and pay by Apr 30 - -ve = re/ refund Everything else - complete form/subsidiaries Who is a spouse? - income tax act - legally married - couple separated but not divorced - issues: completing tax return, tax planning - certain tax credits and deductions apply only to a souse → some optional/mandatory - transfer of asset → income earning asset regardless who owns it → spousal RRSP - spousal couple, same sex/opp sex → cohabited for 1 yr. married, cohabited less than 1 yr but have child f/ union (inclu adopted child) Investment Income exp incurred to earn investment income are deductible f/ income → interest on investment loans, fees paid for $ mgmt by 3rd party Dividend - limited corp → pay income tax on earnings - dividend - distrib to SH of portion of corp earnings after corp paid tax on them - preferred dividend - specified by terms of issue - common share dividend - discretion of board of directors - SH re/ dividend → pay income tax on dividend ← double taxation - ex: ($100)(0.2327) = (141)(0.1644) = $23.17 o (dividend)(dividend tax credit) = (gross up)(% actual dividend paid = dividend tax credit o 141 = taxable amt = (dividend = 100)(gross up = 1.41) - - Dividend Tax Credit Dividen Interes d t Cash re/ 100 100 Taxable amt 14
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