Income Tax Basics Quiz

Canadian Tax Principles - Chapter 1

• Byrd & Chen's Canadian Tax Principles, 2024-2025 Edition, Volume 1
• This chapter introduces federal taxation in Canada.

Determining Income Tax Payable

• Step 1: Net Income
  • Add all income
  • Deduct all available expenses and deductions
• Step 2: Taxable Income
  • The tax base.
  • Income tax liability or refund is based on this.
• Step 3: Gross Tax
  • Apply tax rates to the taxable income.
• Step 4: Personal Tax Credits
  • Determine personal tax credits and reduce gross tax
  • This yields net tax payable or refund.

Income Tax Act (ITA) Parts

• Part I (Income Tax)
  • Contains sections 2 through 180
  • Comprises approximately 62% of the ITA sections.
• Parts 1.01 through XX
  • Cover special taxes and rules related to administration, enforcement, and interpretation.

Other Income Tax Legislation

• Draft legislation and explanatory notes are often used to clarify new or revised tax laws.
• Taxpayers should follow the latest announcements even if the law isn't yet in effect.

Other Information Resources

• Electronic library resources (example: FITAC)
• CRA website: www.Canada.ca/en/services/taxes
• CRA Publications
  • Interpretation Bulletins (being phased out)
  • Income Tax Folios (replacing interpretation bulletins)
  • Information Circulars (administrative and procedural)
  • Guides
  • CRA News Releases, Tax Tips, and Fact Sheets
  • Advance Income Tax Rulings and Technical Interpretations
  • CRA Income Tax Audit Manual
  • Note: textbook provides links to websites for these publications.

Liability for Part I Income Tax - Overview

• Two sets of rules determine liability under Part I:
  • ITA 2(1): Residents of Canada are subject to Part I tax on their worldwide income.
  • ITA 2(3): Non-residents of Canada are subject to Part I tax only if they are employed in Canada, carrying on business in Canada, or have disposed of taxable Canadian property.

Part I Liability for Canadian Residents

• ITA 2(1): Every person resident in Canada at any time during the relevant taxation year is subject to income tax on their taxable income.
• Note that the US system taxes individuals based on citizenship regardless of residence.

Part I Liability for Canadian Residents (Additional details)

• Division C: Converts net income to taxable income.
• Taxation year (ITA 249(1)):
  • Individuals & Trusts (except "Graduated Rate Estates" (GRE)): calendar year
  • Corporations: fiscal period (must not exceed 53 weeks)
  • GRE (Graduated Rate Estate): arises at the time of an individual's death and can continue for up to 36 months after death.

Part I Liability for Non-Residents (ITA 2(3))

• Dispositions of taxable Canadian property by non-residents.
• Taxable Canadian Property (ITA 248(1)):
  • Real property (land/buildings)
  • Capital property of a business in Canada
  • Certain shares, interests in corporations/partnerships/trusts.

Principles of Tax Planning

• Tax avoidance/reduction
  • Permanent avoidance of some amount of tax is limited.
  • Examples include:
    • Capital gains deductions (qualified farming/fishing properties, small business corporations)
    • Private health care (employer-provided benefits)
    • Employee discounts
    • Advanced/complex tax planning involving trusts, partnerships, private corporations.

The CRA - Mandate, Structure, Administration, and Enforcement

• Administer tax, benefits, and related programs
• Ensure compliance for all governments in Canada
• Responsible for administering the Income Tax Act (ITA), Employment Insurance Act (ETA) and legislation related to CPP & EI.
• Department of Finance writes legislation and develops appropriate tax policies.
• The CRA follows tax policy objectives.

Returns and Payments - Individuals

• Filing situations:
  • Taxes payable
  • Refunds
  • CRA demands to file
  • Realized taxable capital gains
  • Disposition of capital property (including principal residence)
  • Pension income splitting
  • CPP or EI payments
  • Eligible for benefits

Returns and Payments - Individuals (Additional details)

• Service rebranded to "SimpleFile."
• Filing income tax returns using phone allows for accessible filing.
• Expansion in summer 2024 to include "SimpleFile Digital" & "SimpleFile by Paper."
• Designed for low- and fixed-income individuals.

Income Tax Withholdings – ITA 153

• Info returns required from persons making payments described in ITA 153(1) to CRA.
• Forms such as T4 (employment), T4A (pension/retirement/annuity/other), and others.

Instalment Payments for Individuals

• Methods:
  • Current year estimate (current year tax divided by 4)
  • First preceding year (previous year actual tax divided by 4)
  • Second and first preceding year approach (a more complex calculation combining elements of both of the above).

Prescribed Interest Rates

• Base rate: Base rate calculation based on 3-month Government of Canada Treasury bills varies quarterly.
• Base rate + 2%: Used to determine interest on refunds to individuals and trusts (not corporations).

Late Filing Penalty & Interest

• Penalty:
  • 1st offence: 5% + 1%/month until maximum 17%
  • 2nd offence: 10% + 2%/month until maximum 50%
• Interest: Base rate + 4% (assessed only if tax payable)

Instalments - General Rules (Example)

• Example of instalment calculation for a publicly listed corporation with different tax years (2022, 2023, 2024).

Books and Records and the CRA

• General rule: 6 years from the tax year in which records relate.
• 6-year period begins in the year following a business ceasing to use a relevant record.
• Prescribed retention period: 2 years from corporate dissolution.
• ITA 231.1 : CRA audit authority over books and records.

Disputes and Appeals

• ITA 165(1.11): Specific restrictions for large corporations in disputes.
• Detailed identification, dollar amount and rationale required for relief in disputes.

Promoters of Abusive Tax Shelters & Tax Planning Arrangements

• Misdeeds: Misrepresentation, false info, abusive tax shelters.
• Fees for tax avoidance activities may subject to reportable transaction rules.
• RC312 form is required (with penalties if not filed).

Employment Income Defined

• ITA Section 5: Defines receipts considered employment income.
• ITA Section 6: Expands the list of inclusions in employment income.
• ITA Section 7: Rules for employer-provided stock options.
• ITA Section 8: Specific deductions employees can use to reduce employment income.

Employment Losses – ITA 5(2)

• Excess employment deductions from one employment source cannot reduce income earned from other sources.
• The net employment loss, if applicable, can be deducted.
• Net employment loss becomes non-capital loss if other income sources are available.

Making the Distinction: Employee vs. Self-Employed

• Factors that support an independent contractor relationship rather than an employee relationship:
  • Registering for GST/HST
  • Working for other clients
  • Advertising services
  • Covering own overhead (e.g., phone, letterhead, equipment)
  • Preparing periodic invoices
  • Having independent contractor agreement prepared by lawyer.

Legislative Guidance – Common Employee Benefits

• Cell phone and internet benefits provided by employer:
  • No taxable benefit if primarily employment related.
  • CRA focuses on personal use for determining benefit based on personal use of benefit.

Tax Planning Considerations

• Better employer-provided benefits are not taxed to the employee.
• Benefits deductible to employer & not taxable to employee are preferred.
• Deferral of taxation, like RPPs, contribute to reduced taxation of retirement benefits earned.
• Employer costs not directly matched to employee benefits can complicate tax deductions.

Inclusions - Automobile Benefits

• Motor vehicle (for use on highways/streets) definition for CCA systems in 2024.
• Includes luxury vehicles
• Automotive vehicles with seating capacity of 9 or fewer people.

Personal Travel

• Personal use and employment use of travel expenses are separately defined.

Reduced Standby Charge

• Primarily for employment use.
• Personal use (less than half of total time).
• Specific formula to calculate adjusted standby charge.

Employee Life Insurance Benefits

• Life insurance premiums paid by employer are taxable benefits (ITA 6(4)).
• Lump-sum amounts paid upon employee death are not taxable.

Inclusions - Stock Option Benefits (ITA 7)

• FMV of stock option rights is added to employment income.
• Overridden by ITA 7(5)
• Stocks' options granted to employees/shareholders as employees rather than shareholders are accounted for differently. Benefit treatment is distinguished.

Rules for CCPCs

• Benefit calculation for stock options.
• Stock option deduction conditions (ITA 110(1)(d),(d.1)).
• Shares held for two years post acquisition.

Salesperson Expenses (ITA 8(1)(f))

• Expenses for employees involved in selling/negotiating contracts are deductible.
• Specific conditions must apply (e.g., expenses, business location, commissions and no tax-free allowances) for deductibility.

2024 Personal Tax Credits – ITA 118(1)

• Relevant tax credits for 2024.

Single Persons (BPA) – ITA 118(1)(c)

• Basic personal amount.

Pension Income Tax Credit – ITA 118(3)

• Pension credit does not apply to CPP, OAS, certain provincial plans, salary deferral arrangements, retirement compensation arrangements, employee benefits plans, and death benefits.

Charitable Donations Tax Credit – ITA 118.1

• Charitable donation limits, calculations and relevant chapters.

Example – Medical Expenses

• Total medical expenses amount, reduction and allowable amount examples.

Other Credits and Deductions Related to Disabilities

• Tax credits associated with disabilities, such as disability credits or full-time attendant care costs.
• Considerations for a medical tax credit eligibility.

Canada Pension Plan (CPP) Tax Credit – ITA 118.7

• Basic tax credit and other deductions for CPP contribution amounts.

Political Contributions Tax Credit – ITA 127(3)

• Calculation, maximum contribution, and related credit amounts.

Refundable Medical Expense Supplement – ITA 122.51

• Eligibility Requirements for tax deductible medical expenses such as age, income and medical expenses.

Canada Carbon Rebate Credit/Payment – ITA 122.8

• Refundable quarterly 2024 credit/payments for single adult by province.

Introduction – Chapter 9

• Rules relating to the computation of income (Subdivision f of the ITA).
• Examples like reasonableness of expenses, 50% limitation on meals/entertainment, and non-arm's length transactions apply.

Other Deductions – Subdivision e Deductions

• Deduction conditions for self-employed individuals for 2024 including CPP, other deductions associated with employed individuals.

Other Deductions – Subdivision e Deductions – Child Care Expenses

• Deductions for child care expenses and the conditions to claim them.

Related Inclusions and Deductions – Pension Income Splitting

• Overview of potential issues/outcomes, like clawbacks and tax credits.

Registered Savings Plans

• Plans such as RPPs, RRSPs, RRIFs, and DPSPs.

Registered Education Savings Plans (RESPs)

• Canada Education Savings Grants (CESG) eligibility and contributions calculation.
• Education Assistance Payments (EAP) for qualifying programs with hour/time requirements
• Specific amounts based on income and time.

Non-Arm's-Length Transactions

• Transactions between parties with special relationship, control or influence.
• Circumstances for transactions to avoid tax manipulation.

Inadequate Consideration – ITA 69

• Example involving car donation to charity
• Tax implications of donation, if any and associated charitable donation credit.

Non-Arm's-Length Transfers of Depreciable Property - ITA 13(7)(e)

• Deductibility of non-taxable capital gain.
• Solution for UCC transfers in instances of death and the related formulas.

Income Attribution – Overview

• Transfer of investment-type property to another family member.
• Tax on split income (TOSI) rules
• Rules for passive income (e.g., dividends) taxed at highest federal rate if traced back to close family members.

Tax on Split Income (TOSI) – ITA 120.4

• Income splitting arrangements challenged/considered.
• Examples of dividend sprinkling.

Applying the TOSI – Specific Exclusions Overview

• Definition of business for TOSI exclusion
• Conditions (eg. regular engagement, consecutive/non-consecutive years).

TOSI Example Analysis

• Questions to assist in determining the applicability of TOSI rules.

Retirement Savings

• Types of retirement savings plans (TFSAs, RESPs, RDSPs).
• Contributions, and deductible nature.

RRSPs – ITA 146

• Capital gains and dividend issues.
• Full amounts on withdrawals are taxable.
• Mitigation through RRSP contributions.
• Financing costs - non-deductible.

Undeducted RRSP Contributions

• Rules, penalties, and cumulative excess calculation
• Methods to remove excess contributions.

RRSP Withdrawals & Voluntary Annuity Conversions

• Rollovers to RRIF trust are not included in income.

RRSP – Home Buyers' Plan (HBP) – ITA 146.01

• Repayment terms - 15 years - amounts not deductible for initial contributions made during certain periods - upper limits - calculations - minimum repayments.

Tax-Free First Home Savings Account (FHSA)

• Eligibility and contributions limits
• Termination conditions for FHSA.

Lifelong Learning Plan (LLP) – ITA 146.02

• Repayment periods - educational qualifications / enrollment status
• Minimum repayment periods - relation to HBP.

Death of the RRSP Annuitant

• Exceptions for unmatured and matured RRSPs when spouse is sole beneficiary.

Pooled Registered Pension Plans (PRPPs)

• Problem for those who don't save for retirement
• Money purchase plan sponsorship by financial institutions.

Registered Retirement Income Funds (RRIFs) – ITA 146.3

• FMV of RRIF assets in final tax returns.
• Exceptions for rollovers when spouse is sole beneficiary, or related to estate or other beneficiaries
• Dependent child or grandchild if infirm can qualify for consideration when allocating resources.

Employee Profit-Sharing Plans (EPSPs) – ITA 144

• Evaluation and character of EPSP.
• Benefits/motivations and absence of tax deferral.

Salary Deferral Arrangements (SDAs)

• Background and problem of taxation of bonus payment.
• Solution where payment more than 3 years past payor's year end.

Test your knowledge on the fundamental concepts of income tax calculation and the Income Tax Act (ITA). This quiz covers key terms, deductions, and classifications relevant to individual taxpayers. Challenge yourself with matching components and identifying tax implications for employment situations.