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Canada (162,227)
Finance (362)
FIN 502 (69)
Chapter 8

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FIN 502
Steve Joyce

thChapter 8 Income Tax PlanningFebruary 7 2012SummaryFour fundamental tax minimization strategies 1 Income Deferral bringing income into taxable income at a future date and so deferring the payment of income tax until later 2 Income Splitting allocating income to family members with lower marginal tax rates to reduce the total family tax bill 3 Income Spreading shifting income from years of higher marginal tax rates to years of lower marginal tax rates 4 Income Sheltering reducing tax paid on income usually investment income because of some special characteristic Three basic aspects of the nature of income taxation in Canada and most other countries 1 The tax rates are progressive and the rate for each higher bracket applies only to the additional or marginal income 2 Governments try to achieve several objectives at once with taxation laws raise revenue promote social equity encourage discourage certain financial actions and manage economic trends 3 Tax deferral often saves money because of the time value of moneyIncome DeferralThe general principle is that if you cant use the income for consumption purposes you shouldnt have to pay tax on it until you can use itIf you can invest the taxdeferred income at a rate of return which is untaxed then you get a second advantage with faster compounding Registered Pension Plans RPPEstablished by an employer to defer income payable to employees to provide retirement income for themMay have payments made into it by either or both the employer and the employee depending on the terms of the planContributions are deposited with a plan trustee who invests themWhen employee retires he receives a pension from the plan The contributions to the plan are not taxed as income in the employees hands at the time they are put into the planThe employee pays tax on the pension as it is receivedEmployees pension contributions are deductible from taxable income and accumulate at the beforetax rate of returnEmployers contributions are not included in the employees income until they are paid out of the plan in retirement and these contributions also accumulate at the beforetax rate of returnThe plan may be amended to allow or higher contributions for past service or allow employees to join the plan who were not previously in it and to gain credit for past services past service contributions o You get tax deduction for buying more pension income Registered Retirement Savings Plan RRSPDoityourself pension planTaxpayer contributes part of her income to a trusteed fundContribution is deducted from income for tax purposes in the year it is paid into the fund and income on it accumulates taxfree
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