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HECOL321 (3)
Chapter 3

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Human Ecology
Patricia French

Taxes and Financial Planning About one-third of each dollar you earn goes to pay taxes. An effective tax strategy is vital for successful financial planning. Understanding tax rules and regulations can help you maximize after-tax cash flows and net worth. To help you cope with the many types of taxes you should... Know current tax laws as they affect you. Make employment, purchase and investment decisions that leave you with the greatest after-tax cash flows and net worth. Maintain complete tax records. Four Types of Taxes Taxes on purchases. Sales tax & excise tax. Taxes on property. Real estate tax. Personal property tax. Taxes on wealth. Estate taxes. Capital gains (losses). Taxes on earnings. Income tax. Filing Your Federal & Provincial Income Tax Return Determine whether you are required to file a return Students should file even if they do not expect a return to get GST/QST refunds and housing refunds Which form best serves your needs? Are you required to submit additional schedules or supplementary forms? Do You Need to File? You must file a return if any of the following situations apply: You have to pay tax for the year CRAsent a request You and your Spouse (or CL) elected to split pension income Received Working Income Tax Benefit advance payments in the year Disposed of capital property You have to repay any of your OAS or EI benefits You owe under HBP or LLP You have to contribute to CPP You are paying EI premiums on self-employment Should You File? You want to claim a refund Want to claim WITB Want to apply for GST/HST credit You or your spouse (or CL) want to continue to receive Canada Child Tax Benefit payments Want to carry forward or transfer unused part of your tuition, education, and textbook amounts Want to report income for which your could contribute to an RRSP to keep your RRSP deduction limit for future years up to date You receive the Guaranteed Income Supplement benefits under OAS program Learning Objective # 2 Illustrate how federal income taxes are computed by completing a federal income tax return. Income Tax Fundamentals Taxable Income is the net amount of income after allowable deductions on which income tax is computed. Step 1: Determining Total Income Total Income consists of five main components Employment income (remuneration for personal effort) Net business income Investment income Taxable capital gains Other income – retirement income, Old Age Security, child support payments, education-related payments Income Tax Fundamentals Step 2: Calculating Net Income Net Income total income reduced by certain deductions Contributions to RRSP& RPP Union and professional dues Child care expenses Disability support deductions Moving expenses Other deduction – business investment loss, spousal and child support payments, interest paid on loans, employment expenses Income Tax Fundamentals Step 3: Calculating Taxable Income Additional deductions and losses carried forward from prior years Security options deduction Capital gains deduction Net capital loss of prior years Other deductions Income Tax Fundamentals Step 4: Calculating Federal Taxes Owing Taxable income is basis for computing amount of your income tax owing Tax rates and tax credits are used to compute taxes payable Marginal Tax Rate (MTR) Is rate of tax paid on the next dollar of taxable income Average Tax Rate (ATR) Total tax due divided by total income Income Tax Fundamentals Step 5: Net Federal Tax Tax Credit an amount subtracted directly from the amount of taxes owing Non-refundable tax credits are subtracted from the amount of taxes owed but can never reduce federal tax below zero Refundable tax credits are refunded to individuals if they qualify even if their tax liability is zero Income Tax Fundamentals Basic personal amount AgeAmount (65 or older) Infirm Dependant (over 18 years old) Spousal (equivalent-to spouse) amount Contributions to CPP / EI Caregiver Amounts Disability amount Tuition and education expenses / interest on student loans Medical expenses Charitable donations Medical Expenses – Tax Credit Which medical expenses are eligible? http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl- eng.html Authorized medical practitioners by province or territory for the purposes of claiming medical expenses http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/ampp- eng.html Making Tax Payments Source Withholding Employees withhold from source to pay income tax, CPP and Employment Insurance contributions Reported to you on your T4 Can reduce source withholding Installment Payments Deadlines & Penalties Must file byApril 30 of each year Automatic 5% penalty on balance owing if late Learning Objective # 3 Select appropriate tax strategies for different financial and personal situations. Tax-Planning Strategies Tax planning is the use of legitimate methods to reduce one’s taxes Tax Evasion is the use of illegal actions to reduce one’s taxes To maximize after tax cash flow some strategies should be considered Tax-Planning Strategies How should you receive income? If paid commission may deduct expenses from your employment Some employee benefits receive more favourable tax benefits Take bonus after end of tax year Tax concerns for small business owners Tax-Planning Strategies Tax Free SavingsAccount (TFSA) Can contribute up to $5500 annually (as of 2013) Regardless of amount contributed to RRSP/RSP Unused room can carry forward Contributions grow tax free Withdrawals are tax free as well Withdrawals create contribution room for future years Gains/withdrawals not considered when determining eligibility for federal income tax benefits (OAS) or credits TFSAis subject to same investment restrictions as RRSP/RSP For more information visit http://www.cra-arc.gc.ca Tax-Planning Strategies Maximizing the benefits of deductions and tax credits Be aware of current tax laws and regulations Use contributions to retirement plans to defer taxes on income Maximize your contribution each year Child support and payments are no longer deductible Interest on funds used to earn taxable income is tax deductible Capital losses incurred can be subtracted from capital gains Tax-Planning Strategies Maximizing the benefits of deductions and tax credits Be aware of the tax treatment of stock options, capital losses and gains and lifetime capital gains exemptions All people qualify for basic personal deduction amount and income tax credit Also can claim for eligible dependants Interest paid on student loans Tuition fees and education amounts Medical expenses Charitable contributions Tax-Planning Strategies Tax Deferral Techniques Defer taxation of income until a later date when combined average tax rate will be lower During deferral period investment income earned can be reinvested tax free Registered Retirement Savings Plans Registered Pension Plans Individual Pension Plan Deferred Profit Sharing Plan Investing in capital assets Registered Education Savings Plan Tax-Planning Strategies Income Splitting Techniques Unlawful to invest in name of lower income earning spouse or minor child to have income taxed at lower rate Legal means of income splitting include; Contributions to spousal RRSP Splitting CPP/QPP benefits with spouse High income spouse pays living expenses and lower income spouse invests Transfer assets used to generate business income Tax-Planning Strategies Income Splitting Techniques Legal means of income splitting include; Open Registered Education Savings Plans (RESP) Set up in-trust investment account for minor child(ren) Invest in federal Child Tax benefit Transfer asset to adult child Tax-Planning Strategies Ensuring that your portfolio is tax efficient Interest income fully taxed at marginal tax rate Hold such investments in RRSP Dividends and capital gains are taxed less heavily Interest for loans made for investment purposes are tax deductible (subject to certain conditions) Tax-Planning Strategies Tax issue important to students Learn how to report income from scholarships, bursaries, fellowships, grants and RESPs Get common deductions such as moving expenses, child care expenses and interest paid on student loans Non-refundable tax credits such as tuition and education amounts Other tax credits such as GST/HST credit and Canada Child Tax Benefit Canada RevenueAgency Students and Income Tax Credits (NR) Tuition Tax Credit - $100+ 15% Fed. Tax credit & 10%AB Tax credit Education Tax Credit $400/month FT Students $120/month PT Students Textbook Tax Credit $65/month FT Students $20/month PT Students Student Loan Interest 15% Fed. tax credit & 10%AB Prov. tax credit Calculation of: Alberta Tax Credits for Students ClaimingAlberta tuition and education amounts Unused Alberta tuition and education amounts from 2012 Eligible tuition fees paid for 2013 + PT months x $205 (Education amount) + FT months x $68
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