canadian tax principles copyright © 2013, clarence byrd inc.1 chapter 4 taxable income and tax...

Canadian Tax Principles

Copyright © 2013, Clarence Byrd Inc. 1

Chapter 4

Taxable Income and Tax Payable For Individuals



From Net To Taxable IncomeFrom Net To Taxable Income

Taxable IncomeDivision C

Deductions

EmploymentIncome

Business AndProperty Income

Net TaxableCapital Gains

Other SourcesOf Income

Other DeductionsFrom Income



Available DeductionsAvailable Deductions

• Employee Stock Options (Chapter 3)Employee Stock Options (Chapter 3)• Deductions For PaymentsDeductions For Payments• Home Relocation LoanHome Relocation Loan• Lump Sum PaymentsLump Sum Payments• Lifetime Capital Gains (Chapter 11)Lifetime Capital Gains (Chapter 11)• Northern Residents DeductionsNorthern Residents Deductions• Loss Carry Overs (Chapter 11)Loss Carry Overs (Chapter 11)



Deduction For PaymentsDeduction For Payments

• Tax treaty exemptionsTax treaty exemptions• WorkerWorker’’s compensations compensation• Social assistance paymentsSocial assistance payments

No Intention To Tax



Home Relocation Loan DeductionHome Relocation Loan Deduction

Example: An employee receives a $100,000, interest free loan from his employer on July 1, 2012. During the remainder of the year, assume the relevant prescribed rate is 2 percent.

ITA 80.4 Benefit [(2% - Nil)($100,000)(6/12)] $1,000 ITA 110(1)(j) Deduction [($1,000)($25,000/$100,000)] ( 250)Net Benefit $ 750

Available for 5 years onlyCan use rate at inception or go quarter to quarter



Tax Payable - The Basic SystemTax Payable - The Basic System

• 2012 Rates2012 Rates– 1st $42,707 @ 15%1st $42,707 @ 15%– $42,708 to $85,414 @ 22%$42,708 to $85,414 @ 22%– $85,415 to $132,406 @ 26%$85,415 to $132,406 @ 26%– Over $132,406 @ 29%Over $132,406 @ 29%– Full Indexing Each YearFull Indexing Each Year



The Basic SystemThe Basic System

• ExampleExample For 2012, an individual has Taxable Income of $132,406 and For 2012, an individual has Taxable Income of $132,406 and only his basic personal tax credit of $1,623 [(15%)($10,822)].only his basic personal tax credit of $1,623 [(15%)($10,822)].

15% of $42,70715% of $42,707 $ 6,406$ 6,406

22% of ($85,414 - $42,708)22% of ($85,414 - $42,708) 9,395 9,395

26% of ($132,406 - $85,415)26% of ($132,406 - $85,415) 12,219 12,219

Total Before CreditTotal Before Credit $ 28,020$ 28,020• After creditAfter credit

($28,020 - $1,623)($28,020 - $1,623) $ 26,397$ 26,397



Provincial Tax PayableProvincial Tax Payable

• All Provinces Except Alberta Apply Progressive Rates To Taxable All Provinces Except Alberta Apply Progressive Rates To Taxable IncomeIncome– Minimum = (5.05 + 15.0) 20.06% CombinedMinimum = (5.05 + 15.0) 20.06% Combined– Maximum = (21.0 + 29.0) 50.00% CombinedMaximum = (21.0 + 29.0) 50.00% Combined– Provincial SurtaxesProvincial Surtaxes– Alberta Has Flat Tax @ 10%Alberta Has Flat Tax @ 10%



Tax Credit SystemTax Credit System

• Refundable Vs. Non-Refundable.Refundable Vs. Non-Refundable.

• In general, minimum rate applied to a base (15 percent for 2012).In general, minimum rate applied to a base (15 percent for 2012).

• Some have income threshold.Some have income threshold.

• Provinces have similar credits.Provinces have similar credits.



2012 Personal Tax Credits2012 Personal Tax Credits

• Individuals Individuals • ITA 118(1)(a): If MarriedITA 118(1)(a): If Married• ITA 118(1)(c): If SingleITA 118(1)(c): If Single• [(15%)($10,822)] = $1,623[(15%)($10,822)] = $1,623




• Spouse Or Common-Law Partner – Spouse Or Common-Law Partner – ITA 118(1)(a)ITA 118(1)(a)– Includes common-law and same sexIncludes common-law and same sex– (15%)($10,822 – Net Income Of Spouse)(15%)($10,822 – Net Income Of Spouse)– Gets The $2,000 Family Caregiver Amount if infirmGets The $2,000 Family Caregiver Amount if infirm– Maximum = $1,623 or $1,923 (If FCA)Maximum = $1,623 or $1,923 (If FCA)




• Amount For Eligible DependantAmount For Eligible DependantITA 118(1)(b)ITA 118(1)(b)– Same amount as spouse or common-law partnerSame amount as spouse or common-law partner



• Conditions: you are single, divorced, separated, or widowed and Conditions: you are single, divorced, separated, or widowed and you supported a dependant:you supported a dependant:

• who is under 18 (unless parent, grandparent, or infirm)who is under 18 (unless parent, grandparent, or infirm)• living with the individualliving with the individual• related by blood, marriage, or adoptionrelated by blood, marriage, or adoption• resident of Canada (except child)resident of Canada (except child)• dependent on individual for supportdependent on individual for support

Amount For Eligible DependantAmount For Eligible Dependant




• Child Tax Credit Child Tax Credit – ITA 118(1)(b.1)– ITA 118(1)(b.1)

• [(15%)($2,191)] = $329[(15%)($2,191)] = $329

– Gets The $2,000 Family Caregiver Amount if infirmGets The $2,000 Family Caregiver Amount if infirm

• [(15%)($4,191)] = $629[(15%)($4,191)] = $629

– For each child under 18 at end of yearFor each child under 18 at end of year

– No income thresholdNo income threshold

– Can take eligible dependant and this credit for the same Can take eligible dependant and this credit for the same child.child.



CaregiverCaregiver

• ConditionsConditions

– Maintain Household With Dependant Over 17Maintain Household With Dependant Over 17

– Resident Of Canada (Unless Child Or Grandchild)Resident Of Canada (Unless Child Or Grandchild)

– Infirm (Unless Parent Or Grandparent 65 Or Older)Infirm (Unless Parent Or Grandparent 65 Or Older)

– Not Available If Eligible Dependant Credit AvailableNot Available If Eligible Dependant Credit Available



CaregiverCaregiver

• ValueValue– [(15%)($4,402)][(15%)($4,402)]

• Maximum = $660Maximum = $660

– Gets The Family Caregiver Amount if infirmGets The Family Caregiver Amount if infirm• [(15%)($4,402 + $2,000)] to maximum of $960[(15%)($4,402 + $2,000)] to maximum of $960

– Reduced By 15% Of Dependant’s Income In Excess Of Reduced By 15% Of Dependant’s Income In Excess Of $15,033$15,033



Infirm Dependant Over 17 Infirm Dependant Over 17 – ITA 118(1)(d) – ITA 118(1)(d)

• Dependants: Dependants: – ChildChild– GrandchildGrandchild– Parent Parent – Grandparent Grandparent – BrotherBrother– SisterSister

– SisterSister– AuntAunt– UncleUncle– NieceNiece– Nephew Nephew

[ITA 118(6)][ITA 118(6)]



Infirm Dependant Over 17 Infirm Dependant Over 17 - ITA 118(1)(d)- ITA 118(1)(d)

• ConditionsConditions

– Reach 18 Before End Of YearReach 18 Before End Of Year

– Mentally Or Physically Infirm Mentally Or Physically Infirm

• (15%)($6,402) = $960(15%)($6,402) = $960

• Always includes the Family Caregiver AmountAlways includes the Family Caregiver Amount

– Not Available If Eligible Dependant Or Caregiver Credits Not Available If Eligible Dependant Or Caregiver Credits AvailableAvailable



Age - ITA 118(2)Age - ITA 118(2)

• Reach 65 In The YearReach 65 In The Year• $1,008 = [(15%)($6,720)]$1,008 = [(15%)($6,720)]• ReductionReduction

– 15% Of Income > $33,88415% Of Income > $33,884– $78,684 - $33,884 = $44,800$78,684 - $33,884 = $44,800– [($44,800)(15%)] = $ 6,720[($44,800)(15%)] = $ 6,720



Pension Income – ITA 118(3)Pension Income – ITA 118(3)

• Amount = 15% Of 1st $2,000 = $300Amount = 15% Of 1st $2,000 = $300



Pension Income – ITA 118(3)Pension Income – ITA 118(3)

• Qualifying AmountsQualifying Amounts– Age 65 Or Older At End Of YearAge 65 Or Older At End Of Year

• Most Non-GovernmentMost Non-Government– < Age 65 At End Of Year< Age 65 At End Of Year

• Life AnnuitiesLife Annuities• Amounts Resulting From Death Of SpouseAmounts Resulting From Death Of Spouse

– No CPP, OAS, Or Provincial (QPP)No CPP, OAS, Or Provincial (QPP)



Canada Employment – ITA 118(10)Canada Employment – ITA 118(10)

• 15 percent of the lesser of $1,095 or employment income.15 percent of the lesser of $1,095 or employment income.

• Maximum = $164Maximum = $164



Adoption Expenses – ITA 118.01Adoption Expenses – ITA 118.01

• Up to $1,716 [(15%)($11,440)]Up to $1,716 [(15%)($11,440)]



Adoption Expenses – ITA 118.01Adoption Expenses – ITA 118.01

• Eligible ChildEligible Child– Has not attained age 18Has not attained age 18– Issued adoption orderIssued adoption order

• Eligible ExpensesEligible Expenses– Fees to agencyFees to agency– Court and legal feesCourt and legal fees– Other reasonable expensesOther reasonable expenses



Public Transit Passes – ITA 118.02Public Transit Passes – ITA 118.02

• 15% of cost15% of cost– IndividualIndividual– Spouse and children under 19Spouse and children under 19– Qualifying passQualifying pass

• Unlimited travel for 28 daysUnlimited travel for 28 days• 5 day passes if they cover 20 out of 28 days5 day passes if they cover 20 out of 28 days• Electronic cards with at least 32 one-way trips.Electronic cards with at least 32 one-way trips.



Child Fitness – ITA 118.03Child Fitness – ITA 118.03

• 15% of up to $500 of costs15% of up to $500 of costs– Maximum $75Maximum $75

– Child under 16Child under 16

– Eligible expensesEligible expenses

– Does not includeDoes not include• travel, food, or lodgingtravel, food, or lodging• child care costschild care costs



ChildrenChildren’’s Arts – ITA 118.031s Arts – ITA 118.031

• 15% of up to $500 of costs15% of up to $500 of costs– Maximum $75Maximum $75

– Child under 16Child under 16

– Eligible expensesEligible expenses

– Does not includeDoes not include• travel, food, or lodgingtravel, food, or lodging• child care costschild care costs



First Time Home BuyerFirst Time Home Buyer’’s Tax Credits Tax Credit

• $750 [(15%)($5,000)]$750 [(15%)($5,000)]

• Can be claimed by individual or spouseCan be claimed by individual or spouse

• No home purchase in preceding four yearsNo home purchase in preceding four years



Volunteer FirefighterVolunteer Firefighter’’s – ITA 118.06s – ITA 118.06

• 15% of $3,00015% of $3,000– Requires 200 hour of volunteer firefightingRequires 200 hour of volunteer firefighting– Cannot claim if paid for services by same departmentCannot claim if paid for services by same department



Charitable Donations – ITA 118.1Charitable Donations – ITA 118.1

• General RulesGeneral Rules– 15% (1st $200) + 29% Of Excess15% (1st $200) + 29% Of Excess




• General RulesGeneral Rules– Limit: 75% Of Net Income Limit: 75% Of Net Income

(100% in individual’s year of death and preceding year), plus(100% in individual’s year of death and preceding year), plus– 25% of taxable capital gains on gifts of capital property 25% of taxable capital gains on gifts of capital property

(See Chapter 11), plus(See Chapter 11), plus– 25% of recapture on gifts of capital property 25% of recapture on gifts of capital property

(See Chapter 11)(See Chapter 11)




• General RulesGeneral Rules– Carry Forward: 5 YearsCarry Forward: 5 Years– Subject to the same limitationsSubject to the same limitations



Medical Expenses – ITA 118.2Medical Expenses – ITA 118.2

• General RulesGeneral Rules– 15% of eligible costs15% of eligible costs– Reduced by the lesser ofReduced by the lesser of

• 3% of Net Income3% of Net Income• $2,109 (3%)($70,300)$2,109 (3%)($70,300)

– Any 12 month period ending in the yearAny 12 month period ending in the year




• Spouse And Minor DependantsSpouse And Minor Dependants– No Additional ReductionNo Additional Reduction

• Dependants Over 17 Years Of AgeDependants Over 17 Years Of Age– Calculated For Each DependantCalculated For Each Dependant– Each Dependant’s Medical Expenses, Reduced By The Lesser Each Dependant’s Medical Expenses, Reduced By The Lesser

Of:Of:• $2,109$2,109• 3% Of dependant’s Net Income3% Of dependant’s Net Income




Example: An individual with income > $100,000 and medical expenses of $2,500. His Example: An individual with income > $100,000 and medical expenses of $2,500. His 20 year old child has medical expenses of $10,000 and net income of $9,000.20 year old child has medical expenses of $10,000 and net income of $9,000.

Taxpayer’s ExpensesTaxpayer’s Expenses $ 2,500$ 2,500ThresholdThreshold ( 2,109)( 2,109)SubtotalSubtotal $ 391 $ 391 Dependant Expenses - $10,000 Reduced By Lesser Of:Dependant Expenses - $10,000 Reduced By Lesser Of:• (3%)($9,000) = $270(3%)($9,000) = $270• $2,109$2,109 9,730 9,730Allowable Amount Of Medical ExpensesAllowable Amount Of Medical Expenses $ 10,121$ 10,121

Credit (15%)Credit (15%) $ 1,518$ 1,518



Refundable Medical Expense Refundable Medical Expense Supplement – ITA 122.51Supplement – ITA 122.51

• QualifyingQualifying– Age 18 or overAge 18 or over– Earned income > $3,268Earned income > $3,268




• Refundable SupplementRefundable Supplement– Lesser of:Lesser of:

• $1,119$1,119• 25/15 Of The Medical Expense Tax Credit25/15 Of The Medical Expense Tax Credit

Then Reduced By 5% Of Family Income > $24,783Then Reduced By 5% Of Family Income > $24,783




• Refundable Supplement ExampleRefundable Supplement Example

Ms. Forbes has medical expenses of $3,500 and earned income of Ms. Forbes has medical expenses of $3,500 and earned income of $22,000.$22,000.

– Medical Expense Credit = $426 [(15%)($3,500 - $660)]Medical Expense Credit = $426 [(15%)($3,500 - $660)]

– [(25/15)($426)] = $710[(25/15)($426)] = $710

– Refundable amount = $710, less Nil [(5%)($22,000 - $24,783)] Refundable amount = $710, less Nil [(5%)($22,000 - $24,783)]

= $710= $710



Disability Amount – ITA 118.3Disability Amount – ITA 118.3

– Must Be Severe And ProlongedMust Be Severe And Prolonged• Significantly Restricts Basic Living ActivitiesSignificantly Restricts Basic Living Activities• A Continuous Period Of At Least 12 MonthsA Continuous Period Of At Least 12 Months

– Requires Form T2201Requires Form T2201



Disability Amount – ITA 118.3Disability Amount – ITA 118.3

– 15% Of $7,546 = $1,132, No Income Test15% Of $7,546 = $1,132, No Income Test

– No Claim If:No Claim If:

• More Than $10,000 For Full Time Attendant Care Or More Than $10,000 For Full Time Attendant Care Or

• Costs Of Nursing Home Are ClaimedCosts Of Nursing Home Are Claimed

– Can Be Transferred To Individual Can Be Transferred To Individual Making Claim Under ITA 118(b), (c.1) Or (d)Making Claim Under ITA 118(b), (c.1) Or (d)



Disability SupplementDisability Supplement

• If under 18 at end of year:If under 18 at end of year:– 15% Of $4,402 = $66015% Of $4,402 = $660

– Combined Provides $1,792 [(15%)($7,546 + $4,402)]Combined Provides $1,792 [(15%)($7,546 + $4,402)]

– The $4,402 is reduced by child and attendant care costs in The $4,402 is reduced by child and attendant care costs in excess of $2,578excess of $2,578



Tuition Credit - ITA 118.5Tuition Credit - ITA 118.5

• TuitionTuition– 15% Of Actual15% Of Actual– Post-SecondaryPost-Secondary– Cost > $100Cost > $100– No Upper LimitNo Upper Limit



Tuition Credit - ITA 118.5Tuition Credit - ITA 118.5

• TuitionTuition

– Includes all ancillary if mandatoryIncludes all ancillary if mandatory

– Includes $250 of ancillary fees if not mandatoryIncludes $250 of ancillary fees if not mandatory

– Includes examination feesIncludes examination fees

– Unlimited carry forward by studentUnlimited carry forward by student



Education Credit – 118.6(2)Education Credit – 118.6(2)

• EducationEducation– 15% of $400 per month of Full Time attendance ($60)15% of $400 per month of Full Time attendance ($60)– 15% of $120 per month of Part Time attendance ($18)15% of $120 per month of Part Time attendance ($18)– Unlimited carry forward by studentUnlimited carry forward by student



Textbook CreditTextbook Credit

• Available for each month of education credit eligibility:Available for each month of education credit eligibility:– Full time attendance = $10 [(15%)($65)]Full time attendance = $10 [(15%)($65)]– Part time attendance = $3 [(15%)($20)]Part time attendance = $3 [(15%)($20)]



Interest on Student LoansInterest on Student Loans

• Interest On Student LoansInterest On Student Loans– 15% Of Amounts Paid15% Of Amounts Paid– Loans Under The Loans Under The Canada Student Loans ActCanada Student Loans Act, the , the Canada Canada

Student Financial Assistance ActStudent Financial Assistance Act, Or A Provincial Statute, Or A Provincial Statute



CPP And EI - ITA 118.7CPP And EI - ITA 118.7

• 15% Of Actual Payments15% Of Actual Payments• Maximums For 2012Maximums For 2012

– EI = [(1.83%)($45,900)] = $840EI = [(1.83%)($45,900)] = $840

15% of $840 = $12615% of $840 = $126

– CPP = [(4.95%)($50,100 - $3,500)] = $2,307CPP = [(4.95%)($50,100 - $3,500)] = $2,307

15% of $2,307 = $34615% of $2,307 = $346



Transfer Of CreditsTransfer Of Credits

• Spouse - ITA 118.8Spouse - ITA 118.8

– EligibleEligible• Child tax creditChild tax credit• AgeAge• PensionPension• DisabilityDisability• Current year tuition, education, and textbook Current year tuition, education, and textbook

– After Personal, CPP, And EI UsedAfter Personal, CPP, And EI Used



Transfer Of CreditsTransfer Of Credits

• Tuition/Education/Textbook - ITA 118.9Tuition/Education/Textbook - ITA 118.9

– N/A If Student’s Spouse Claims CreditN/A If Student’s Spouse Claims Credit

– Unused Amount After Personal, CPP, EI, And DisabilityUnused Amount After Personal, CPP, EI, And Disability

– To Parent Or GrandparentTo Parent Or Grandparent

– Max = 15%($5,000) Max = 15%($5,000) = $750= $750

– Carry Forward By Student If UnusedCarry Forward By Student If Unused



Political ContributionsPolitical Contributions

• 3/4 First $4003/4 First $400• 1/2 Next $3501/2 Next $350• 1/3 Next $5251/3 Next $525

• Max = $650 For $1,275Max = $650 For $1,275

• Not Allowed For CorporationsNot Allowed For Corporations



Political ContributionsPolitical Contributions

• Federal Accountability ActFederal Accountability Act– Individuals limited to $1,100 forIndividuals limited to $1,100 for

• registered partyregistered party• candidate or leadership contestantcandidate or leadership contestant• nomination contestantnomination contestant

– CorporationsCorporations• Totally bannedTotally banned



Labour Sponsored FundsLabour Sponsored Funds

• 15 Percent Of Cost15 Percent Of Cost• First Registered HolderFirst Registered Holder• Maximum Of $5,000, Or Credit Of $750Maximum Of $5,000, Or Credit Of $750



Refundable GST CreditRefundable GST Credit

• $260 Individual$260 Individual• $260 Qualified Relation$260 Qualified Relation• $260 Eligible Dependant$260 Eligible Dependant• $137 Qualified Dependant$137 Qualified Dependant• Less: 5% Of Family Income > $33,884Less: 5% Of Family Income > $33,884



Working Income Tax BenefitWorking Income Tax Benefit

• The problem: At minimum wage, an individual may be better off The problem: At minimum wage, an individual may be better off not workingnot working– Reductions in social assistanceReductions in social assistance– Loss of subsidized housingLoss of subsidized housing– Other low income benefitsOther low income benefits




• Benefit for single individual – Lesser of:Benefit for single individual – Lesser of:

– 25% of working income in excess of $3,00025% of working income in excess of $3,000

– Max = $970Max = $970

• Reduced by 15 percent of income in excess of $11,011Reduced by 15 percent of income in excess of $11,011




• Benefit for couples – lesser of:Benefit for couples – lesser of:

– 25% of family working 25% of family working income in excess of $3,000income in excess of $3,000

– Max = $1,762Max = $1,762

• Reduced by 15 percent of family working income in excess of $15,205Reduced by 15 percent of family working income in excess of $15,205



Child Tax Benefit SystemChild Tax Benefit System

• BasicBasic

– $1,405/Year For Each Qualified Dependant$1,405/Year For Each Qualified Dependant

– +$98/Year For Each Dependant Over Two+$98/Year For Each Dependant Over Two

– Eroded when family income exceeds $42,707Eroded when family income exceeds $42,707

• SupplementSupplement

– $2,177/Year for 1$2,177/Year for 1stst child child

– $1,926/Year for 2$1,926/Year for 2ndnd

– $1,832/Year for 3$1,832/Year for 3rdrd and subsequent and subsequent

– Eroded when family income exceeds $24,863Eroded when family income exceeds $24,863



Clawback of EIClawback of EI

• Applicable if EI recipientApplicable if EI recipient’’s net income s net income exceeds $57,375exceeds $57,375

• 30 percent of the lesser of:30 percent of the lesser of:– EI benefits receivedEI benefits received– Excess of net income over $57,375Excess of net income over $57,375



Clawback of OASClawback of OAS

• Lesser OfLesser Of– Payments ReceivedPayments Received– 15% Of Income In Excess Of $69,56215% Of Income In Excess Of $69,562

• Disappears At $112,772Disappears At $112,772

• OAS Not Paid If Income Is High In Previous Two YearsOAS Not Paid If Income Is High In Previous Two Years

canadian tax principles copyright © 2013, clarence byrd inc.1 chapter 4 taxable income and tax...

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