Textbook Notes (368,125)
Canada (161,663)
Finance (362)
FIN 502 (69)
Joan Lobo (33)
Chapter 7

CFIN502- Chapter 7- Personal Income Tax.docx

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FIN 502
Joan Lobo

CFIN502- Chapter 7- Personal Income Tax GENERAL CONCEPTS OF INCOME TAXATION  Canadian income taxation is based on self assessment  Basic format of personal income taxation o Income - allowable deductions = Taxation income X income tax rate = Income tax payable before credits – tax credits = Send cheque to government  Few exception, every resident – limited corporations trusts, or individuals required to complete an income tax on prescribed forms  Canadian system for individuals is progressive o Higher levels of taxable income are taxed at higher rates o Lower rates—applies to all income up to a specified level—all income above that level is taxed at the higher level  Average tax rate- total tax payable divided by total income  Marginal tax rate- rate that applies to one more dollar of income  Highest category or tax bracket- and you are deciding whether to invest your money in a term deposit o Marginal after-tax rate od return you receive will be (1- marginal tax rate)(interest rate)  Under progressive system—average rate will be equal to or less than the marginal rate  Addition or subtraction of an amount of income—put you in different tax bracket o Use 2 different rates pro rata on the amount of income to which each applies  Tax payable on taxation in different tax brackets is added up and then tax credits are deducted to arrive on basic federal tax  Provincial taxable income and tax bracket are calculated in the same way—deduct provincial tax credits to arrive at provincial tax  Surtax- taxes based on tax—temporary and usually apply most heavily on upper tax brackets  Taxpayer may have paid installments to had tax withheld at source COMPLETING AN INCOME TAX RETURN  T1 package—2 copies of the return and schedules and a detailed line by line guide to completing it  Deadline to file return—April 30 of the year following the calendar year o Business income—June 15 —must still pay any balance owing April 30  Total income—employment, investment, business o Page 2 o Self-employment—deduct expenses form the gross revenue to the extent that the expenses were incurred to earn it o Unincorporated taxpayer—file income statement and balance sheet  Business—file its own corporate income tax returns  Taxable income o Sum of incomes is totaled on line 150 and transferred to page 3 o Various deductions from total income to arrive at net income and then taxable income  Specific items are deductible and the limits on deductibility  Tax credits o Page 1 of schedule 1—calculations of federal non-refundable tax credits o Deductions from taxes otherwise payable—limit that tax payable cannot be reduced below 0 o Items—basic allowance, employment insurance and Canada pension plan or quebec pension plan premiums, education expenses, medical expenses, and charitable donations o Total multiplied by 15% to get the total non-refundable tax credit  Carried forward to page 2 of schedule 1 o Non-refundable provincial tax credits are calculated in the same manner on form 428  Federal tax 1 CFIN502- Chapter 7- Personal Income Tax o Page 1 schedule 1—calculations of federal tax before deduction of tax credits at progressive rate o 4 tax brackets—government may reduce even more o Part 2 schedule 1—deduct a variety of items from the federal income tax calculated on page 1  Political donation tax credits and dividend tax credit o Net of tax payable and the tax credits is transferred back to page 4 of the T1 return (line 420)  Provincial tax o Tan on income—base their taxes on provincial taxable income and have their own provincial tax credits  Balance owing or refund o Lie 435—total the federal and provincial taxes plus the other social services collections to arrive at the total payable for the year o Largest one for most people is the income tax already deducted at source and paid in installments—there are other credits  Everything else o  Who is a spouse? o Persons who are legally married o Includes—any spousal couple, same sex or opposite sex  Cohabited for 1 year, or who are married, or who have cohabited less then 1 year but have children form the union, included adopted child o Couple who are separated but not yet divorced may elect not to be treated as spouses o May claim only 1 personal residence between them for exemption from capital gains tax o Certain tax credits and deductions only apply to a spouse—some are optional, others mandatory INVESTMENT INCOME  Expenses incurred to earn investment income are deductible from income generally through there are some restrictions o Most significant—interest on investment loans and fees paid for money management by 3 parties  Dividends- distributed to shareholders of some portion of the corporations earnings after the corporation has paid tax on them o Preferred shares—specified by terms of the issue o Common shares—discretion of the board of directors o Share holders receive dividends from the company—must pay income tax on the dividends  Double taxation—in order to neutralize its effect-- approximately the income tax act includes dividend tax credit o Total effect is to tax dividends paid by Canadian corporations less than an equivalent amount of interest o Marginal tax rate is the total tax payable dividend by the original cash amount of the dividend  Deduct taxes from the cash amount and not the taxable amount o Financial issue—lower tax bracket investors benefit more from the dividend tax credit than so the top bracket  Capital gains and losses o Capital gain- occurs 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 o Capital loss- occurs when the selling price is less than the purchase and transaction costs o What is a capital item  Annual income from business—revenue – expenses incurred to earn it (including allowance for depreciation) 2 CFIN502- Chapter 7- Personal Income Tax  Income that ente
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