madura ch4 tax

Chapter Using Tax Concepts for Planning Copyright © 2012 Pearson Canada Inc Edited by Laura Lamb, department of economics, TRU Chapter Objectives • Explain the importance of taxes for personal financial planning • Explain when you have to file a tax return • Outline the steps involved in completing a tax return • Describe the major deductions available to a taxpayer Chapter Objectives (cont’d) • Show how tax credits can be used to lower tax payable • Describe the difference among tax planning, tax evasion, and tax avoidance • Describe tax planning strategies that can be used to reduce tax payable The origin of the Canadian Income Tax System • Canada’s income tax system was implemented in 1917 to raise funds to finance its efforts in World War I Since that time the system has evolved and become quite complicated with tax law presently consisting of about 2500 pages • Taxes are the single largest expenditure for most families • For this reason, knowledge and consideration of the tax system is important to personal financial planning Background on Taxes • Taxes are paid on – earned income – consumer purchases – capital assets – property The Federal and Provincial Income Tax Structure • The Canadian income tax system is progressive meaning that the tax rate rises as income rises • Most income tax systems are progressive Why? Consumption taxes Background on Taxes • Excise taxes: special taxes levied on certain consumer products such as cigarettes, alcohol, and gasoline • Taxes Paid on Capital Assets • Capital asset: any asset that is acquired and held for the purpose of generating income You Have to File a Return if • You have to pay tax for a calendar year • CRA sent you a request to file a return • You & spouse split pension income • You received working income tax benefit(WITB)advance payments • You disposed of property or realized a taxable capital gain • You have to repay any OAS or EI benefits • You have not repaid withdrawals from RRSP, HBP , or LLP 10 Tax Credits(cont’d) • Tuition, Education, and Textbook Amount • Claim the amount you paid for full-time tuition • Full-time students: claim an education amount of $400, and a textbook amount of $65 for each month of full-time enrolment in a qualifying education program • Part-time students: claim an education amount of $120, and a textbook amount of $20 for each month of full-time enrolment in a qualifying education program 42 Tax Credits (cont’d) • Medical Expenses Amount • To qualify, total medical expenses must be greater than either percent of your net income of $2024, whichever is less • In general: • net federal tax = tax payable – non-refundable tax credits 43 Tax Credits (cont’d) • Transferable tax credits are credits that can be transferred to other individuals • Transferable Tax Credits: • Tuition, education, and textbook amount • Pension income amount • Age amount • Disability amount 44 Tax Credits (cont’d) • Certain tax credits may be carried forward by the taxpayer • Tax Credits Eligible for Carry Forward: • Medical expenses amount • Tuition, education, and textbook amount • Charitable contribution amount 45 Tax Credits (cont’d) 46 Step 8: Refund or Balance Owing • Tax refund: amount of total tax payable is less than the amount of total tax already paid • Tax owing: amount of total tax payable is greater than the amount of total tax already paid 47 Reducing Your Taxes • Focus on Ethics: Reducing Your Taxes • Tax planning: involves activities and transactions that reduce or eliminate tax • Tax avoidance: a term used to describe the process of legally applying tax law to reduce or eliminate taxes payable in ways that the CRA considers potentially abusive of the spirit of the Income Tax Act 48 Reducing Your Taxes (cont’d) • Tax evasion: occurs when taxpayers attempt to deceive the CRA by knowingly reporting less tax payable than what the law obligates them to pay 49 Tax Planning Strategies • Types of Income • Interest income is earned on investments such as savings accounts, term deposits, GICs, and CSBs • Dividends are classified as eligible or noneligible • Tax payable on eligible dividend income is reduced through an enhanced dividend gross-up and dividend tax credit • Only 50 percent of capital gain is taxable 50 Tax Planning Strategies (cont’d) 51 Tax Planning Strategies (cont’d) • Sources of Income • Since 2006, student income from scholarships, bursaries, and fellowships is not taxable • Contributions by the subscriber to an RESP are received tax-free by the student who receives an educational assistance payment 52 Tax Planning Strategies (cont’d) • Sources of Income • Tax-free savings account (TFSA): a registered investment account that allows you to purchase investments, with after-tax dollars, without attracting any tax payable on your investment growth • Contributions are not tax deductible • Contributions and any growth can be withdrawn taxfree • Unused contribution room is carried forward 53 Tax Planning Strategies (cont’d) • Any money you withdraw, contributions plus growth, is added back to your contribution room for the following calendar year • Proceeds can be used for any purpose • RRSP Contributions • Tax deduction is based on your highest marginal tax bracket 54 Tax Planning Strategies (cont’d) • Record Keeping • Maintain a record of the purchase transaction for capital assets, such as stock, in order to make the future calculation of capital gains or losses easier • Maintain a record of the non-refundable tax credits that can be carried forward: the medical expenses amount, the tuition, education, and textbook amount, and the charitable contribution amount • At minimum, retain copies of your completed tax forms along with receipts for a period of seven years 55 Tax Planning Strategies (cont’d) • Are Big Refunds a Good Thing? 56 [...]... Calculate Taxable Income • Taxable income: = net income – some additional deductions • Net income is used to make adjustments to certain benefits • Taxable income is used to calculate net federal and provincial income tax 31 Step 4: Calculate Net Federal Tax Payable • Marginal tax rate: the percentage of tax you pay on your next dollar of taxable income • Average tax rate: the amount of tax you pay... 4: Calculate Net Federal Tax Payable (cont’d) 33 Tax Credits • Tax credits: specific amounts used directly to reduce tax liability • Refundable tax credit: the portion of the credit that is not needed to reduce your tax liability may be paid to you (e.g GST credit) 34 Tax Credits (cont’d) • Non-refundable tax credit: the portion of the credit that is not needed to reduce your tax liability will not be... education, and textbook tax credits can be: • transferred to another taxpayer (a parent or grandparent), or • carried forward to another tax year • You will create RRSP room for future contributions 13 Do You Have to File a Return? (cont’d) • Filing Your Return • Tax year end is December 31 for federal income taxes • Individual income taxes and tax returns must be paid and filed by April 30th of the following... individual have until June 15th to file income tax returns, although taxes owing must be paid by April 30th 14 Background on Taxes (cont’d) • Filing Your Return (cont’d) • An interest penalty may be payable if any of these deadlines are missed • Penalty (if taxes are owing) 15 Background on Taxes (cont’d) • Filing Your Return (cont’d) • Two ways to file a tax return: mail and e-mail • Once your return... portion of the credit that is not needed to reduce your tax liability will not be paid to you and cannot be carried forward to reduce your tax liability in the future • Most tax credits are considered non-refundable 35 Tax Credits(cont’d) • Examples of non-refundable tax credits: • Basic Personal Amount • Spousal or Common-Law Partner Amount 36 ... File Tax Returns • You may be eligible for a refundable GST/HST credit • Eligibility criteria: • You are 19 years of age or older • You have, or previously had, a spouse or common-law partner • You are, or previously were, a parent and live, or previously lived, with your child 12 Do You Have to File a Return? (cont’d) • If you do not have any tax payable, your tuition, education, and textbook tax credits... governments • Tax is due on interest in the year it is earned, not in the year it is received 21 Step 1: Calculate Total Income (cont’d) Dividend income: income received from corporations in the form of dividends paid on stock or on mutual funds that hold stock • A dividend adjustment calculation reduces the income tax payable by shareholders • Consists of a dividend gross-up and dividend tax credit 22... dividend tax credit (discussed later in this chapter) 23 Step 1: Calculate Total Income (cont’d) • Capital gain: money earned when you sell an asset at a higher price than you paid for it • Capital loss: occurs when you sell an asset for a lower price than you paid for it • A taxable capital gain is currently equal to 50 percent of the capital gain 24 Step 1: Calculate Total Income (cont’d) • A taxable... is currently equal to 50 percent of the capital loss 25 Step 1: Calculate Total Income (cont’d) 26 Step 2: Subtract Deductions • Deduction: an item that can be deducted from total income to determine taxable income 27 Common deductions • Registered Pension Plan (RPP) contributions • RRSP contributions • union/professional dues • child care expenses • support payments • carrying charges • moving expenses... receive a Notice of Assessment from the government • Confirms your calculations or provides corrections • Outlines your RRSP contribution limits for the following year 16 Overview: Completing an Income Tax Return 17 Step 1: Calculate Total Income • Total income: all reportable income from any source 18 Step 1: Calculate Total Income (cont’d) • Wages and Salaries • If you work full-time, probably your ... how tax credits can be used to lower tax payable • Describe the difference among tax planning, tax evasion, and tax avoidance • Describe tax planning strategies that can be used to reduce tax. .. Income Tax Structure • The Canadian income tax system is progressive meaning that the tax rate rises as income rises • Most income tax systems are progressive Why? Consumption taxes Background on Taxes... Taxes are the single largest expenditure for most families • For this reason, knowledge and consideration of the tax system is important to personal financial planning Background on Taxes • Taxes