Textbook Notes (369,205)
Canada (162,462)
Finance (362)
FIN 502 (69)
Chapter 7

Chapter 7 FIN502.docx

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Course Code
FIN 502
Coleen Clark

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Chapter 7 FIN502 General concepts of income taxation - Canadian income taxation is based on self assessment - Limited corporations, trusts and individuals must complete an income tax return on prescribed forms. Someone else may complete the return, but the person whose report is being prepared is responsbiel for it - The Canadian system for individuals is progressive, meaning that the higher income that is made, the more tax that is paid out to the government - - The average tax rate is the total tax payable divided by total income. - The marginal tax rate refers to the amount of tax that is paid on another dollar of income earned - The marginal after tax rate of return = (1-marginal tax rate) * (interest rate) - Surtaxes are taxed based on the tax, they are temporary and apply mainly to higher income earners who are in higher brackets. These have the same impact as an increase in the basic tax rate - Tax payer may have paid instalments or have tax withheld at source. Employers and certain institutions that deal with investments must have a certain amount of cash to pay towards the government T1 Total income - The first section combines all forms of income - Self employment sources of income allow deductions of expenses from gross revenues if it were incurred to earn that revenue - If a business is incorporated, they include their own tax retirm. The owner of the company’s sources of income would be through salary, dividends, contributions Taxable income - The income tax act tells us what is deductible and the limit to which they can be deducted Tax credits - Non refundable tax credits are deductions from taxes otherwise payable with a limit that the tax payable amount may not be below zero - - The total non refundable tax credits = 15% * total payables or 29% for charitable donations greater than $200 Provincial tax - The effective provincial tax rate differs from one province to another. The provinces uses a tax on income system where they base their taxes on taxable income andhave their own tax credits Balance owing or refund - Deduct credits from payable at the end of the year, if negative we receive a refund, if positive we owe money - Who is a spouse? - Under the income tax act, spouses are couples who have been married legally - Couples who underwent a separation agreement will be able to not be recognized as souses but if they do not explicitly imply that they do do not want to be spouses, it may bring up issues in a tax return or in tax planning - Problems include that one personal residence between them may be used for exemption from capital gains tax, Certain tax credits and deductions may only apply to spouses while some others are optional amnd some are mandatory Investment income - Expenses that occur in order to earn investment income are deductible from income. The main expenses are interest on investment loans and fees paid for money management by 3 parties rd Dividends - Income tax is paid on dividends, thus there is double taxation as the net income of a firm was taxed, and the dividend received from that net income is taxed as well - To neutralize double taxation, the income tax act includes the dividend tax credit where the dividend received Is grossed up which becomes the new taxable amount that is to be included in net income. - The dividend tax credit is equal to 23.17% of the actual dividend paid or 16.44% of the dividend tax credit
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