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CHAPTER TEN

CHAPTER TEN. Individuals: Determination of Taxable Income and Taxes Payable I. Determination of Taxable Income II. Capital Gains Exemption III. Loss Carry-Overs I V . Loss Utilization – Impact on Decision Making V. Calculation of Tax for Individuals. CHAPTER EXCLUSIONS.

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CHAPTER TEN

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  1. CHAPTER TEN • Individuals: Determination of Taxable Income and Taxes Payable • I. Determination of Taxable Income • II. Capital Gains Exemption • III. Loss Carry-Overs • IV. Loss Utilization – Impact on Decision Making • V. Calculation of Tax for Individuals Acct 409 Spring 2005

  2. CHAPTER EXCLUSIONS • Credit for employ o/s of Canada pg 540 • Refundable GST/CTB/Med exp pg 541/542/543 • Tax reduction on Retro Lump Sum pg 547 • Minimum tax pg 551 • Credits for Part time and Non-Residents pg539 Acct 409 Spring 2005

  3. From Net To Taxable Income Division C Deductions Taxable Income Acct 409 Spring 2005

  4. From Net To Taxable Income • Specified Deductions • Employee Stock Options • Deductions For Payments ie WCB/Social Assistance • Home Relocation Loan (Interest benefit on 1st $25,000) • Lump Sum Payments(Income averaging) • Lifetime Capital Gains Deduction • Residing In Prescribed Zone (Northern Residents) • Losses Deductible Acct 409 Spring 2005

  5. III. Loss Carry-Overs • Loss carry-overs are losses from other years that were restricted by the aggregating formula. • Since they are a reduction of net income for tax purposes, losses incurred in the current year must be deducted first as part of the net income calculation. Acct 409 Spring 2005

  6. Net Capital Losses • Unused allowable capital losses are classified as net capital losses and can be carried back three years and forward indefinitely but they continue to be only deductible against capital gains. • However, upon the death of an individual, the unused losses may be utilized as a deduction against any other type of income earned in the year of death or in the preceding year. Acct 409 Spring 2005

  7. Net Capital Losses (cont) • If inclusion rate in year of loss is not current rate of inclusion you must adjust for the rate change by the following formula to calculate the amount of taxable capital gain you can offset • Losses deductible= Net cap loss *current inclusion rate/original inclusion rate • Assume $100 capital loss originally when rate was 75% leads to Loss carry forward of $75 • Now rate is 50% Lcf= 75 * 50%/75%= $50 Acct 409 Spring 2005

  8. Non-Capital Losses • Unused business, property and employment losses and ABILs are classified as non-capital losses and can be carried back three years and forward ten against any source of income. (10 yrs for taxation yrs after March 22, 2004) • When a non-capital loss that was created by an ABIL is unused after the ten-year carry-forward period, that unused loss is reclassified as a net capital loss and can be carried forward indefinitely to be used against future capital gains. Acct 409 Spring 2005

  9. Farm Losses and Restricted Farm Losses • Farm losses concern taxpayers whose chief source of income is farming or fishing. • Farm losses are treated the same as business losses except that the carry forward period is ten years. Acct 409 Spring 2005

  10. Restricted Farm Losses • Restricted farm losses are losses from a “hobby farm”. • The annual deductible loss from a hobby farm can be no more than $2,500 plus one-half of the next $12,500. • To the extent that losses are limited by the formula, they are classified as restricted farm losses. • These unused losses can be carried back three years and forward ten years but can only be deducted to the extent that farming income was earned in those years. Acct 409 Spring 2005

  11. IV. Loss Utilization – Impact on Decision Making • The organizational structure chosen to carry on an active business has an influence on loss utilization. • When an individual chooses a corporate structure over a proprietorship or partnership, the risk of not being able to use a loss for tax purposes is increased. • The risk of loss expiration can be minimized by making decisions that create taxable income or reduce deductible expenses, thereby permitting a greater amount of the loss carry-over to be used. • ie, actual expenses should be deferred for tax purposes when possible, and accrued gains should be realized more sooner than later. Acct 409 Spring 2005

  12. V. Calculation of Tax for Individuals • Income tax is imposed by the federal government and all 10 provinces: • Federal tax - % of taxable income • Provincial tax - % of taxable income Acct 409 Spring 2005

  13. Federal Tax Rates Acct 409 Spring 2005

  14. B.C. Provincial Tax Rates Acct 409 Spring 2005

  15. Tax Credit System • Credits Before “Basic Federal Tax” Personal Spousal Eligible Dependant Caregiver Infirm Dependants Over 17 EI, CPP Pension Disability Tuition - Education Transfers: Tuition, Education, Other Spousal Medical Expenses Charitable Donations Political Contributions OAS Clawback Acct 409 Spring 2005

  16. Overhead Tax Credit Rates Acct 409 Spring 2005

  17. 2005 Personal Tax Credits • Individuals 15% of $8,649=$1,297 • Spouse Or Common-Law Partner – ITA 118(1)(a) • Includes common-law and same sex • [(15%)(($7,345) - (Income > $735))] • Maximum = $1,175 Acct 409 Spring 2005

  18. Personal Tax Credits - ITA 118 • Amount For Eligible Dependant • Same amount as spouse or common-law partner • Conditions: you are single, divorced, separated, or widowed and you supported a dependant: • who is under 18 (unless parent, grandparent, or infirm) • related by blood, marriage, or adoption • resident of Canada (except child) • dependent on individual for support Acct 409 Spring 2005

  19. Infirm Dependant Over 17 - 118(1)(d) • Dependants: Child, Grandchild, Parent, Grandparent, Brother, Sister, Aunt, Uncle, Niece, Nephew [ITA 118(6)] • Conditions • Reach 18 Before End Of Year • Mentally Or Physically Infirm • [(15%)($3,848) - (Income > $5,460)] = Maximum Of $577 Acct 409 Spring 2005

  20. Caregiver • Maintain Household With Dependant • Over 18 • Resident Of Canada (Unless Parent Or Grandparent) • Infirm (Unless Parent Or Grandparent 65 Or Older) • Value = $577 [(15%)($3,848)] • Reduced By 15% Of Dependant’s Income In Excess Of $13,141 • Not In Addition To Equivalent To Spouse Or Infirm Dependant Over 17 Acct 409 Spring 2005

  21. Age - ITA 118(2) • Reach 65 In The Year • [(15%)($3,979)] = $597 • Reduction • 15% Of Income > $29,619 • $55,204 - $29,619 = $25,585 • $25,585(15%) = $3,838 • An Erosion Of Universality Acct 409 Spring 2005

  22. Pension Income – ITA 118(3) • Amount = 15% Of 1st $1,000 = $150 • Qualifying Amounts • Age 65 At End Of Year • Most Non-Government • < Age 65 At End Of Year • Life Annuities • Amounts Resulting From Death Of Spouse • No CPP, OAS, Or Provincial (QPP) Acct 409 Spring 2005

  23. Charitable Donations – ITA 118.1 • General Rules • 15%(1st $200) + 29% Of Excess • If you cannot use in year you can carryover for 5 years • General Limitation • Limit: 75% Of Net Income • 100% in individual’s year of death and preceding year • Plus 25 percent of capital gains on gifts • Plus 25 percent of recapture on gifts Acct 409 Spring 2005

  24. General Rules 15% of eligible costs or Spouses Reduced by the lesser of 3% of Net Income $1,813 (3%)($60,433) Any 12 month period ending in the year Dependants expenses can be used if low income Medical Expenses – ITA 118.2 Acct 409 Spring 2005

  25. Disability Amount – ITA 118.3 • Must Be Severe And Prolonged • Restricts Basic Living Activities • A Continuous Period Of At Least 12 Months • Requires Form T2201 Acct 409 Spring 2005

  26. Disability Amount – ITA 118.3 • No Claim If • More Than $10,000 For Full Time Attendant Care Or Costs Of Nursing Home Are Claimed • Can Be Transferred To Individual Making Claim Under 118(b) Or (d) • 15% Of $6,596 = $989, No Income Test Acct 409 Spring 2005

  27. Tuition Fees - ITA 118.5(1) • Tuition • 15% Of Actual • Post-Secondary • Cost > $100 • Outside Canada: Must Be Full Time Or Commuting To U.S. • No Upper Limit • Unlimited Carry Forward Acct 409 Spring 2005

  28. Education 15% Of $400 Per Month Of Full Time Attendance 15% Of $120 Per Month Of Part Time Attendance Unlimited Carry Forward By Student Education Deduction – 118.6(2) Acct 409 Spring 2005

  29. Interest On Student Loans 15% Of Amounts Paid Loans Under The Canada Student Loans Act, the Canada Student Financial Assistance Act, Or A Provincial Statute Interest on Student Loans Acct 409 Spring 2005

  30. CPP And EI - ITA 118.7 • 15% Of Actual Payments • Maximums For 2005 • CPP = [(4.95%)($41,100 - $3,500) = $1,861 15% of $1,861 = $279 • EI = [(1.98%)($39,000)] = $772 15% of $772 = $116 Acct 409 Spring 2005

  31. Tuition/Education - ITA 118.9 N/A If Student’s Spouse Claims Credit Unused After CPP, EI, And Disability To Parent Or Grandparent Max = 15%($5,000) = $750 Carry Forward By Student If Unused Spouse- ITA 118.8 Eligible Age Pension Disability Tuition Education After Personal, CPP, And EI Used Transfer Of Credits Acct 409 Spring 2005

  32. Political Contributions • 3/4 First $400 • 1/2 Next $350 • 1/3 Next $525 • Max = $650 For $1,275 Acct 409 Spring 2005

  33. 15 Percent Of Cost First Registered Holder Maximum Of $5,000, Or Credit Of $750 Labour Sponsored Funds Acct 409 Spring 2005

  34. 16 2/3 of Gross up is the Federal Credit Or 13 1/3% of Taxable Dividend Dividend Tax Credit Acct 409 Spring 2005

  35. Foreign Tax Credit • Lessor of: • Non-business foreign income tax paid and • Non business foreign income under Division B ------------------------------------------------------------- * tax Total Income under Division B net of certain adjustments Cannot exceed actual Canadian tax payable Acct 409 Spring 2005

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