Byrd & Chen's Canadian Tax Principles 2024-2025 Edition PDF

Byrd & Chen’s Canadian Tax Principles 2024–2025 Edition Chapter 1 Introduction to Federal Taxation in Canada Copyright © 2026 Pearson Canada Inc. 1-1...

Byrd & Chen’s Canadian Tax Principles 2024–2025 Edition Chapter 1 Introduction to Federal Taxation in Canada Copyright © 2026 Pearson Canada Inc. 1-1 The Canadian Tax System – Introduction (4 of 4) How is income tax payable determined for an individual? – Step 1: Net income  Add all income & deduct all available expenses/other deductions – Step 2: Taxable income  Tax base upon which income tax liability or refund is based – Step 3: Gross tax  Apply various tax rates to taxable income – Step 4: Personal tax credits  Determine personal tax credits & subtract from gross tax – The result is the net tax payable or refund Copyright © 2026 Pearson Canada Inc. 1-5 Parts of the ITA The parts of the ITA are numbered I through XX Part I (titled “Income Tax”) contains Sections 2 through 180 – encompasses approximately 62% of the ITA sections Parts I.01 through XX cover a variety of special taxes & rules related to administration, enforcement & interpretation Copyright © 2026 Pearson Canada Inc. 1 - 35 Other Income Tax Legislation (1 of 2) Draft Legislation and Explanatory Notes – Not uncommon for budgetary announcements to take effect on budget date – Taxpayers encouraged to follow new or revised law even though not in force (i.e., has not received royal assent) – Explanatory notes provide simplified explanation of new or amended legislation Income Tax Regulations (ITR) – Look for words “prescribed” or “regulation” in ITA provision to determine if ITR applicable Copyright © 2026 Pearson Canada Inc. 1 - 43 Other Sources of Information (1 of 3) Electronic library resources (e.g., 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 & procedural information) – Guides – CRA News Releases, Tax Tips, and Fact Sheets – Advance Income Tax Rulings and Technical Interpretations – CRA Income Tax Audit Manual  Note: refer to textbook for links to websites for above publications Copyright © 2026 Pearson Canada Inc. 1 - 45 Liability for Part I Income Tax – Overview (1 of 2) Two sets of general rules establish liability for tax 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 only subject to Part I tax if they are  (1) employed in Canada,  (2) carry on business in Canada, or  (3) have disposed of “taxable Canadian property” Copyright © 2026 Pearson Canada Inc. 1 - 48 Part I Liability for Canadian Residents (1 of 3) ITA 2(1) Tax payable by persons resident in Canada An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.  Person: individuals, corporations, or trusts, whether or not exempt from tax [ITA 248(1)] Note: In the U.S., individuals are taxed on citizenship, without regard to residence. In Canada, individuals are taxed on residence, without regard to citizenship. Copyright © 2026 Pearson Canada Inc. 1 - 50 Part I Liability for Canadian Residents (3 of 3) 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 [ITA 249.1]: period cannot exceed 53 weeks – GRE  Arises at time of individual’s death & can continue for up to 36 months after death  A non-calendar-based taxation year can be used Copyright © 2026 Pearson Canada Inc. 1 - 52 Part I Liability for Non-Residents – ITA 2(3) (4 of 5) Dispositions of “taxable Canadian property” by non- residents – Taxable Canadian Property [ITA 248(1)]:  Real property (e.g., land and buildings)  Some capital property and inventories of a business carried on in Canada  Some listed and unlisted shares in corporations, interest in partnership or trust – These entities hold significant amounts of Canadian real property, Canadian resource properties and timber resource properties Copyright © 2026 Pearson Canada Inc. 1 - 56 Principles of Tax Planning (1 of 3) Note: general understanding provided here; more detail to follow Tax avoidance or reduction – Permanently avoid payment of some amount of tax – Limited possibilities:  Capital gains deduction on dispositions of qualified farming or fishing property & qualified small business corporation shares  Private health care – employer can provide tax free  Employee discounts on employer’s products – Other sophisticated & complex tax planning involving trusts, partnerships & private corporations available Copyright © 2026 Pearson Canada Inc. 1 - 97 The CRA – Mandate, Structure, Administration, and Enforcement The CRA mandate is to – Administer tax, benefits, & related programs – Ensure compliance on behalf of governments across Canada The CRA is responsible for administration of I TA & ETA & legislation relating to C PP & EI Department of Finance writes legislation & develops appropriate tax policies – The CRA interprets ITA & ETA in a manner consistent with tax policy objectives developed Copyright © 2026 Pearson Canada Inc. 2-2 Returns and Payments – Individuals (1 of 3) Situations that require filing of an income tax return:  Taxes payable  Claiming a refund  CRA demand to file  Realized a taxable capital gain  Disposition of capital property (including principal residence)  Pension income splitting  CPP or EI amounts payable  Eligible for benefits Copyright © 2026 Pearson Canada Inc. 2-3 Returns and Payments – Individuals (2 of 3) CRA has rebranded its free filing service (“File My Return”) service to “SimpleFile” beginning Feb. ‘24 – Allows eligible Canadians the opportunity to file their income tax returns with a phone call – Service to be expanded in the summer of 2024 to add “SimpleFile Digital” and “SimpleFile by Paper” – Note: the purpose of these services is to encourage low-or fixed-income individuals to file a tax return to receive certain benefits (e.g., Child Tax Benefit, Canada Carbon Rebate) Copyright © 2026 Pearson Canada Inc. 2-4 Income Tax Withholdings – ITA 153 (2 of 2) Requirement to File Information Returns – ITR 200(1) requires that any person making a payment described in ITA 153(1) must file an information return to the CRA  T4, T4A, or other information slip  T4 slip details employment-related withholdings  T4A slips applies to “pension, retirement, annuity, and other income” Copyright © 2026 Pearson Canada Inc. 2-9 Instalment Payments for Individuals (1 of 4) Instalment amounts – alternatives (1, 2, 3): 1. Current Year: estimated net tax owing for current year ÷ 4 2. First Preceding Year: actual net tax owing for preceding year ÷ 4 3. Second and First Preceding Year:  Q 1 & 2: actual net tax owing for 2nd preceding year ÷ 4  Q 3 & 4: (actual net tax owing for preceding year minus payments made for quarters 1 & 2) ÷ 2  Note: CRA’s instalment reminder is based on alternative #3 Copyright © 2026 Pearson Canada Inc. 2 - 11 Prescribed Interest Rates (1 of 2) Base rate: – applicable for all purposes except amounts owing to and from CRA  Base rate is calculated each quarter based on 3-month G OC treasury bills (e.g., In 2023 for employment benefits & shareholder loans: 1st quarter = 4%, 2nd , 3rd & 4th quarters = 5%) Base rate + 2%: – used to calculate interest on refunds to individuals & trusts (N/A to corporations) Copyright © 2026 Pearson Canada Inc. 2 - 16 Late Filing Penalty Interest – 1st offence: – Base rate + 4% 5% + 1% per month – Assessed only if tax (maximum 12 payable months); maximum penalty = 17% – 2nd offence: 10% + 2% per month (maximum 20 months); maximum penalty = 50% Copyright © 2026 Pearson Canada Inc. 2 - 18 Instalments – General Rules Example: Publicly listed corporation with: – 2022 taxes payable of $96,000 – 2023 taxes payable of $126,000, and – 2024 taxes payable (estimated) of $153,000. Instalments: 1. $153,000/12 $12,750/month 2. $126,000/12 $10,500/month 3. 2 instalments: $96,000/12 $ 8,000/month 10 instalments: ($126,000 - $16,000)/10 $11,000/month Copyright © 2026 Pearson Canada Inc. 2 - 21 Book and Records and the CRA Books and Records – General rule: 6 years from taxation year to which records relate  Note: the 6-year count starts with the year following the year in which the record is no longer relevant to the business – Prescribed retention period for certain corporate records: 2 years from dissolution date – ITA 231.1 contains authority that allows the CRA to audit books & records Copyright © 2026 Pearson Canada Inc. 2 - 31 Disputes and Appeals (3 of 4) Rules for large corporations – I TA 165(1.11) – Federal government introduced a restriction for certain large corporations when filing a NoO  Must specifically identify and address each issue to be decided,  Dollar amount of relief sought for each issue, and  Facts and reasons relied on by corporation in respect of each issue  Note: this level of detail is not required for other NoO Copyright © 2026 Pearson Canada Inc. 2 - 41 Promoters of Abusive Tax Shelters & Tax Planning Arrangements Misdeeds include – Participating in a misrepresentation, – Making or furnishing false or misleading statements, and – Being involved with the development of an “abusive” tax shelter Acceptance of a fee for a transaction that would be considered tax avoidance under the G AAR may be subject to the reportable transaction rules – RC312 form required (severe penalties apply if not filed) Copyright © 2026 Pearson Canada Inc. 2 - 51 Employment Income Defined Employment income in the ITA – Section 5: descriptions of receipts considered part of a source of employment income – Section 6: expands list of inclusions in employment income – Section 7: rules for employer-provided stock options – Section 8: specific deductions employee may be entitled to reduce employment income Copyright © 2026 Pearson Canada Inc. 3-3 Employment Losses – ITA 5(2) (2 of 2) Employment loss from a source is included in I TA 3(d) – Excess employment deductions from one employment source cannot be deducted against employment income from a different source – The net employment loss can be deducted in the year if other sources of income available otherwise excess becomes non-capital loss Copyright © 2026 Pearson Canada Inc. 3 - 13 Making the Distinction: Employee vs. Self-Employed (2 of 2) Common facts supporting independent contractor relationship include: – Registering for GST/HST – Working for other clients – Advertising services – Covering own overhead (including phone service, letterhead, equipment and supplies) – Preparing periodic invoices (preferably on irregular basis) – Having lawyer prepare independent contractor agreement Copyright © 2026 Pearson Canada Inc. 3 - 23 Legislative Guidance – Common Employee Benefits (2 of 10) Cell Phone and Internet Benefits (Cellular phone and Internet se rvices - Canada.ca) – Cell phone provided by employer to employee to carry out employment duties:  if based on primary beneficiary concept, no taxable benefit despite incidental personal use  CRA position is to establish benefit based on personal use – Internet service:  difficult to establish the use is primarily employment related  CRA position is to establish benefit based on personal use Copyright © 2026 Pearson Canada Inc. 3 - 33 Tax Planning Considerations (2 of 2) Considerations: – Benefits deductible to employer & non-taxable to employee are preferrable compensation (e.g., employer contributions to PHSPs) – Deferral of taxation (e.g., RPP contributions not taxed until benefits (i.e., pension income) received – Complication with benefits that are not taxed to employee, but employer denied deduction – Employer cost not matched to employee benefit Copyright © 2026 Pearson Canada Inc. 3 - 43 Inclusions – Automobile Benefits Employees and Automobiles – Definitions:  Motor vehicle: “automotive vehicle designed or adapted to be used on highways and streets”  Passenger vehicle: “automobile” generally acquired after June 17, 1987; relevant definition for CCA system – 2024: Includes “luxury vehicles” (non-zero-emission costing $37,000 or more or zero emission costing $61,000 or more)  Automobile: motor vehicle with seating capacity of no more than 9 people including driver (exceptions apply; e.g., ambulances, fire trucks, police cars) Copyright © 2026 Pearson Canada Inc. 3 - 45 Personal Travel (1 of 2) Personal use (both Employment use Employment use trips) (both trips) Driving from home at start of day to a Driving to & from client/customer/supplier one’s work Driving from home to of employer then to one’s work one’s work location location & a location & back client/customer/ supplier of Driving from one’s work employer location at end of day to client/customer/supplier of employer & then back to one’s home Copyright © 2026 Pearson Canada Inc. 3 - 48 Reduced Standby Charge Main or principal use is for employment purposes (meaning – personal use is less than ½ the time) Multiply regular standby charge by: Personal-Use Kilometers (cannot exceed denominator) ÷ 1,667 kilometers x # months of availability Average monthly personal use can’t exceed 1,667 km. – this means the fraction cannot exceed “1”  if denominator & numerator are the same, no reduction in standby charge Copyright © 2026 Pearson Canada Inc. 3 - 53 Employee Life Insurance Benefits Life insurance premiums paid by employer – taxable benefit – ITA 6(4) Lump-sum amounts paid on death of employee – not taxable Copyright © 2026 Pearson Canada Inc. 3 - 63 Inclusions – Stock Option Benefits (3 of 8) Stock Option Benefit Rules (I TA 7) – Employees Only – ITA 6(1)(a) normally applies to add the FMV of the right to purchase the shares but is overridden by ITA 7(5)  ITA 7 determines the value for employee stock options  No benefit is added to employment income when stock options granted  If stock options are granted to an employee/shareholder in the capacity of shareholder, ITA 7 does not apply – Benefit treated as income from property Copyright © 2026 Pearson Canada Inc. 3 - 73 Rules for CCPCs Benefit = – Excess of FMV of shares on exercise date minus price paid to acquire shares as per the option price [ITA 7(1) (a)]  Note: benefit included in employment income when shares are sold [ITA 7(1.1)] Stock option deduction [I TA 110(1)(d),(d.1)] – Available if, at time options were granted,  option price was equal to or greater than FMV of shares at that time, or  if shares held for 2 years after acquisition Copyright © 2026 Pearson Canada Inc. 3 - 83 Salesperson expenses – ITA 8(1)(f) (1 of 3) Available to employees involved in the selling of property or negotiating of contracts – Conditions:  required to pay own expenses  required to ordinarily work away from employer’s place of business  paid in part by commissions  must not receive tax-free allowance  signed Form T2200 by employer Copyright © 2026 Pearson Canada Inc. 3 - 93 Byrd & Chen’s Canadian Tax Principles 2024–2025 Edition Chapter 4 Taxable Income and Tax Payable for Individuals Copyright © 2026 Pearson Canada Inc. 4-1 2024 Personal Tax Credits – ITA 118(1) Copyright © 2026 Pearson Canada Inc. 4 - 11 Single Persons (BPA) – ITA 118(1)(c) For individuals who do not have a spouse, common- law partner, eligible dependant – A basic personal tax credit can be claimed:  15% x BPA Copyright © 2026 Pearson Canada Inc. 4 - 21 Pension Income Tax Credit – ITA 118(3) (3 of 3) The pension credit is not allowed for amounts received from the following: – CPP, OAS – Certain provincial pension plans – Salary deferral arrangements – Retirement compensation arrangements – Employee benefit plans – Death benefits Copyright © 2026 Pearson Canada Inc. 4 - 31 Charitable Donations Tax Credit – ITA 118.1 (3 of 4) General Rules – Limit: 75% of net income1 (100% in individual’s year of death and preceding year), plus – 25% of taxable capital gains on gifts of capital property (See Chapter 11), plus – 25% of recapture on gifts of capital property (See Chapter 11)  1if donations exceed 75% limit, a choice can be made to not claim all donations in year & carry forward (5 years but 10 years for ecological gifts) Copyright © 2026 Pearson Canada Inc. 4 - 41 Example – Medical Expenses (2 of 2) Subtotal from previous slide $2,241 Amount D, where E - F E: Dependant medical expenses $10,000 F: Reduced by lesser of: (3%)($9,000) $ 270 2024 threshold 2,759 (270) 9,730 Allowable amount of medical expenses $11,971 Medical expense tax credit [(15%)($11,971)] $ 1,796 Copyright © 2026 Pearson Canada Inc. 4 - 46 Other Credits and Deductions Related to Disabilities (1 of 2) Individual, or supporting person, can claim either (not both at the same time): – the disability credit, or – full-time attendant care costs as medical expense tax credits The disability tax credit can be claimed if a medical tax credit is claimed for part-time attendant care 1 – 1defined as expenses claimed of less than $10,000 for year ($20,000 in year of death) Copyright © 2026 Pearson Canada Inc. 4 - 51 Canada Pension Plan (CPP) Tax Credit – ITA 118.7 (2 of 3) The $4,056 contribution is split between a basic tax credit & other deduction – Maximum base for credit = $3,218 – Maximum tax credit = $483 [(15%)($3,218)] – Difference of $838 ($4,056 - $3,218) is an “”other deduction from an individual’s net income [ITA 60(e.1)] Copyright © 2026 Pearson Canada Inc. 4 - 61 Political Contributions Tax Credit – ITA 127(3) Credit calculation: Contributions Credit Rate Tax Credit First $ 400 3/4 $ 300 Next 350 1/2 175 Next 525 1/3 175 Maximum credit $1,275 $ 650 Copyright © 2026 Pearson Canada Inc. 4 - 66 Refundable Medical Expense Supplement – ITA 122.51 (1 of 5) Eligibility: – Must be 18 or over on December 31, 2024 – Must have earned income (employment or business) of at least $4,275 Copyright © 2026 Pearson Canada Inc. 4 - 71 Canada Carbon Rebate Credit/Payment – ITA 122.8 (2 of 3) The refundable credit varies by province – Anticipated quarterly 2024 payments for a single adult:  Alberta: $225  Manitoba: $150  Saskatchewan: $188 – Varies by family size (Ontario quarterly payments = $122 for a single adult, second adult in couple or first child of single parent = $61, each child under 19 = $30.50) – Not dependent on income level – 10% additional supplement for individuals who reside outside a Census Metropolitan Area (CMA) – How much you can get - Canada Carbon Rebate (CCR) for individ uals - Canada.ca. Copyright © 2026 Pearson Canada Inc. 4 - 81 Introduction – Chapter 9 (2 of 2) “Rules relating to the computation of income”- Subdivision f (ITA 67 – 80.6) – Rules that set out how certain transaction, events & circumstances change income tax outcome – Examples:  Reasonableness of expenses (ITA 67)  50% limitation on meals and entertainment (ITA 67.1)  Non-arm’s length transactions (ITA 69)  Transfers of property between spouses (ITA 73) Copyright © 2026 Pearson Canada Inc. 9-3 Other Deductions – Subdivision e Deductions (2 of 2) For self-employed individual (2024): – Must pay both halves of CPP - $8,111 {7735 [(2) (5.95%)($68,500 - $3,500)] + CPP2 of $376 [(2)(4.0%) ($73,200 – $68,500]}  ITA 118.7: Personal tax credit base is $3,218 [(4.95%) ($68,500 - $3,500)]  Deduction for $838 [ITA 60(e.1)]  Deduction for $4,056 (equivalent to what employer would have paid) – ITA 60(e) Copyright © 2026 Pearson Canada Inc. 9 - 13 Other Deductions – Subdivision e Deductions – Child Care Expenses (ITA 63) (5 of 8) Supporting Person: – Child’s parent – Spouse of child’s parent – Individual who can claim tax credit for child (eligible dependant or Canada caregiver)  Note: to qualify as supporting person, individual must have resided with individual claiming child care expenses at some time during the relevant year or within 60 days of following year Copyright © 2026 Pearson Canada Inc. 9 - 23 Related Inclusions and Deductions – Pension Income Splitting Pension Income Potential Issues Splitting – Clawback of OAS – Can transfer up to payments 50% – Loss or reduction of – Transferee includes tax credits: under ITA 56(1)(a.2)  Spousal – Pensioner deducts  Age under ITA 60(c)  Medical expense – Can create pension – Tax software needed tax credit for for optimizations transferee Copyright © 2026 Pearson Canada Inc. 9 - 33 Registered Savings Plans (3 of 4) Chapter 10 will cover the following plans: – Registered Pension Plans (RPPs) – Registered Retirement Savings Plan (RRSP) – Registered Retirement Income Funds (RRIFs) – Deferred Profit Sharing Plans (DPSPs) Copyright © 2026 Pearson Canada Inc. 9 - 43 Registered Education Savings Plans (RESPs) – ITA 146.1 (5 of 12) Canada Education Savings Grants (CESG) – Additional CESG for low-income families = 10% to 20% of first $500 of contributions  At 20% if 2024 family income is $55,867 or less (maximum $100);  At 10% if 2024 family income between $55,868 & $111,733 (maximum of $50); and  0% if 2024 family income > $111,733 Copyright © 2026 Pearson Canada Inc. 9 - 53 Registered Education Savings Plans (RESPs) – ITA 146.1 (10 of 12) Education Assistance Payments (EAP) – Student in qualifying educational program (at least 10 hours per week)  $8,000 as of Mar. 28/23 for first 13 weeks  No limit thereafter provided student continues to qualify  EAP threshold limit (2024) = $28,122 – Student in specified educational program (at least 12 hours per month) & at least 16 years old  $4,000 as of Mar. 28/23 for 1st 13-week period whether or not student enrolled in program throughout period Copyright © 2026 Pearson Canada Inc. 9 - 58 Non-Arm’s-Length Transactions – Introduction (1 of 5) When property sold in transaction between persons there is assumption the price reflects FMV – Key feature of FMV is parties to transaction are “acting at arm’s length” – Arm’s length refers to an agreement made between 2 parties freely & independently of each other without some special relationship, control, or influence by one of the parties The transaction price is susceptible to manipulation with the purpose of reducing income tax (e.g., selling property to family members at below FMV) Copyright © 2026 Pearson Canada Inc. 9 - 63 Inadequate Consideration – ITA 69 (6 of 10) ITA 69 – Example 1 (Donation) Used car owned by individual is donated to local charity. The car is a personal-use property with a cost of $10,000 and a current FMV of $1,500. Analysis - Car deemed sold for $1,500. No resulting tax implications. Individual is entitled to charitable donation credit (assuming charity is registered) - Charity acquires car for $1,500. Copyright © 2026 Pearson Canada Inc. 9 - 73 Non-Arm’s-Length Transfers of Depreciable Property – ITA 13(7)(e) (1 of 3) The problem: The non-taxable portion of the capital gain on transfer becomes deductible for CCA claims to transferee – Note: ITA 13(7)(e) does not apply when disposition results on death The solution: For UCC, transferee is limited to old cost + amount of difference included in income [ITA 13(7)(e)] – Formula: A + [(1/2)(B - A)]  A = transferor’s capital cost  B = transferee’s cost Copyright © 2026 Pearson Canada Inc. 9 - 83 Income Attribution – Overview (2 of 2) Attribution rules: – If a transfer of investment-type property owned by one individual to another family member,  the income from the investment property is redirected (i.e., attributed) back to the transferor Tax on split income (TOSI) rules: – Passive income (e.g., dividends) taxed at highest federal tax rate (i.e., 33%) if it can be traced back to an underlying source of income where a close family member involved  Note: TOSI takes precedence over attribution rules Copyright © 2026 Pearson Canada Inc. 9 - 93 Tax on Split Income (TOSI) – ITA 120.4 Income splitting arrangements the federal government considered offensive  Dividend sprinkling  Management services structures Prior to the TOSI rules, the federal government unsuccessfully challenged income splitting in court Copyright © 2026 Pearson Canada Inc. 9 - 103 Applying the TOSI – Specific Exclusions Overview (3 of 7) Excluded business – A business in which the specified individual is actively engaged on a regular, continuous, and substantial basis – Active engagement in any 5 years (current & preceding; do not need to be consecutive; can include year prior to the 2018 start of TOSI) – Average of 20 hours per week during time business is in operation – Active engagement depends on facts & circumstances in each case Copyright © 2026 Pearson Canada Inc. 9 - 113 TOSI Example – Analysis (1 of 2) 1. Is there an individual resident in Canada? YES 2. Has individual received split income? YES [In this case the trust taxation rules flow through taxable dividend to Child 1.] 3. Do any of the listed general exceptions apply? NO 4. Is there a related business? YES [Child 1’s parent is actively involved in Opco business. The business is a related business.] 5. Is there an excluded business? NO [Child 1 has never worked in the Opco business.] Copyright © 2026 Pearson Canada Inc. 9 - 123 Retirement Savings (3 of 3) TFSAs, RESPs, RDSPs (covered in Chapter 9): – RESPs – provide savings for educational pursuits – TFSAs – provide current savings – REDPs – provide for financial needs once supporting parents have passed away – contributions are not deductible Retirement savings plans: – Contributions made by individuals reduce net income – Some contributions made by employer are not taxable employment benefits Copyright © 2026 Pearson Canada Inc. 10 - 5 RRSPs – ITA 146: Basic Operations (5 of 5) Capital gains and dividend problem – When capital gains & eligible dividends earned by RRSP, no Part I tax applies – On withdrawal, full amount is taxable to annuitant  This is somewhat mitigated by RRSP deduction for contribution which allows for a larger contribution Financing costs – not deductible [ITA 18(11)] Copyright © 2026 Pearson Canada Inc. 10 - 15 Undeducted RRSP Contributions General rules: – No requirement that contributions be deducted when made but need to be aware of excess contributions Excess contributions – Penalty of 1% per month on “cumulative excess” – “Cumulative excess” is  Undeducted contributions > sum of unused RRSP deduction room at end of previous year, RRSP deduction limit, plus a $2,000 cushion – Penalty can be waived if result of reasonable error & steps taken to remove excess as soon as possible Copyright © 2026 Pearson Canada Inc. 10 - 25 RRSP Withdrawals & Voluntary Annuity Conversions (4 of 4) Conversion to RRIF – RRSP funds transferred to RRIF trust on rollover basis (i.e., no income inclusion) Copyright © 2026 Pearson Canada Inc. 10 - 30 RRSP – Home Buyers’ Plan (HBP) – ITA 146.01 (3 of 5) Repayment – Annual repayments over 15-year period beginning in  second calendar year following withdrawal year – RRSP contributions made during year, or first 60 days of following year designated as HBP repayment  Designated amounts not deductible – No upper limit for repayment – Minimum as per formula – If payment less than minimum, deficiency included in net income Copyright © 2026 Pearson Canada Inc. 10 - 35 Tax-Free First Home Savings Account (FHSA) (3 of 5) Eligibility – Individuals 18 & over & resident of Canada if do not live in a home they owned in the year the FHSA is first opened or in the preceding 4 calendar years FHSA required to terminate on Dec. 31 of year that is earlier of – (1) the 15th anniversary of opening of the FHSA or – (2) the year the individual turns 71 Maximum of $8,000 annual contribution, accumulating to a maximum $40,000 lifetime limit Penalty for overcontribution is 1% per month Copyright © 2026 Pearson Canada Inc. 10 - 40 Lifelong Learning Plan (LLP) – ITA 146.02 (3 of 3) Repayment rules – No later than the 5th year after year of first LLP withdrawal  Begins in 2nd year in which individual not enrolled in qualifying educational program – Minimum repayments over 10 years (straight-line) – Deficient repayments treated same as HBP Copyright © 2026 Pearson Canada Inc. 10 - 45 Death of the RRSP Annuitant (3 of 4) Exceptions – Unmatured RRSP - Spouse is sole beneficiary  No income tax consequences to deceased or spouse if transfer to RRSP with spouse as annuitant – Matured RRSP (in form of annuity) - Spouse is sole beneficiary  No income tax consequences to deceased  Spouse includes annuity payments in net income – Estate is Beneficiary  If spouse is beneficiary, same rollover results achieved as above through elections Copyright © 2026 Pearson Canada Inc. 10 - 50 Pooled Registered Pension Plans (PRPPs) – ITA 147.5 Problem: Many individuals do not save for retirement Proposed Solution – Pooled RPPs – Money purchase plans sponsored by a financial institution capable of taking on fiduciary role – Employers responsible for enrolling employees in a plan, determining level of contributions, & collecting contributions – Self-employed individuals can participate – Limits and other rules like RRSPs – Plans are generally portable – Legislation allows interested jurisdictions to require mandatory participation for employers Copyright © 2026 Pearson Canada Inc. 10 - 55 Registered Retirement Income Funds (RRIFs) – ITA 146.3 (2 of 3) Death of RRIF Annuitant – FMV of RRIF assets will be included in final tax return Exceptions: rollovers available  RRIF payments will continue to spouse  If RRIF left to deceased’s estate, similar rollover elections as for RRSP available  To a dependent child or grandchild if infirm Copyright © 2026 Pearson Canada Inc. 10 - 60 Employee Profit-Sharing Plans (EPSPs) – ITA 144 (2 of 2) Evaluation – EPSP income retains its character – May have motivational benefits – No tax deferral – Overall, not popular  Note: Penalty tax (Part XI.4) on excess contributions for specified employees (i.e., employees who own more than 10% of shares of corporate employer or do not deal at arm’s length with employer) Copyright © 2026 Pearson Canada Inc. 10 - 65 Salary Deferral Arrangements (SDAs) The Problem – Arrangements established to defer taxation to year in which the bonus is received The Solution – Tax employee when benefits are earned if payment is more than 3 years after payor’s year end  Note: the definition of SDA excludes bonus arrangements where amount is paid within 3 years of end of calendar year in which employee provided services Copyright © 2026 Pearson Canada Inc. 10 - 70