Chapter Objectives

1
Chapter Objectives

• Be able to
• Identify other sources of income and deductions.
• Explain the benefits of RRSPs and the related
  retirement options.
• Calculate RRSP contribution limits.
• Identify and apply the special rules in
  determining net income.

2
Other Sources of Income and Deductions

• Other is a catch-all for all income items that
  are not included in one of the four primary
  sources and listed in sections 56-59.1of the ITA.
• Examples are pension benefits from RPPs, RRSPs,
  RRIFs, OAS, CPP, payments from DPSP RESP,
  E.I. benefits, scholarships, research grants, and
  receipt of alimony maintenance.
• Other is a catch-all for all deduction items that
  are not included in one of the four primary
  sources and listed in sections 60-66.8 of the
  ITA.
• Examples are RRSP contributions, payment of
  alimony maintenance, moving expenses, and child
  care expenses.
• The other deductions category is important since
  it is the last test in the income tax scheme for
  determining the deductibility of an expenditure.

3
Registered Retirement Savings Plans

• They offer a significant benefit to taxpayers
  since contributions to an RRSP and returns on
  accumulated funds are not taxed until withdrawn
  from the plan during retirement. However, there
  are annual contribution limits.
• If an individual does not belong to an employers
  RPP or DPSP, the annual contribution limit will
  be the lesser of 18 of earned income and the
  stipulated maximum for that year.
• If an individual does belong to an employers RPP
  or DPSP, the annual contribution limit will be
  the lesser of 18 of earned income and the
  stipulated maximum for that year and, from that
  result, less a pension adjustment. This pension
  adjustment is how RRSPs are integrated with RPPs
  and DPSPs. The amount of the pension adjustment
  will depend on circumstances, such as whether the
  RPP is a money-purchase plan or a defined-benefit
  plan.

4
Registered Retirement Savings Plans (continued)

• Unused contribution limits are carried forward
  indefinitely and are added to the future annual
  contribution limits.
• In general terms, earned income is employment
  income excluding RPP contributions, rental
  income, royalty income, alimony maintenance
  income, and research grants net of expenses less
  employment losses, rental losses, and alimony
  maintenance payments.
• It is mandatory to convert the accumulated funds
  in an RRSP to a retirement income vehicle before
  December 31 of the year that an individual
  reaches 69. Retirement income vehicles available
  are RRIFs, guaranteed fixed term annuity, and
  life annuity.
• From an individuals total contribution limit,
  contributions can be made to his/her own plan and
  a spousal plan.
• The long-term benefit to spousal contributions is
  that the withdrawals from the spousal plan will
  included in the spouses taxable income.

5
Special Rules for Net Income Determination

• All items that are deductible from any source of
  income are only deductible to the extent that the
  expenditure is considered reasonable in the
  particular circumstances.
• The CCRA has the ability to allocate or
  reallocate the total price amongst the assets
  included in a group purchase in accordance with
  the apparent fair market values of the individual
  properties.
• When related parties are involved in a
  transaction, there are special rules that apply
  to prevent the elimination or reduction of tax by
  selling at a price other than fair market value.
• Although salaries can be accrued when incurred,
  they must be paid within 180 days of the fiscal
  year-end in order to be deductible.
• Special rules apply when a property has been
  disposed of in satisfaction of a debt
  (foreclosure) or there is a gain on the
  settlement of debt (such as in extreme financial
  difficulty).

6
Attribution Rules

• Property transferred to a child is deemed to have
  been sold for fair market value, except for farm
  property. However, property transferred to a
  spouse is deemed to have been sold for its cost
  amount.
• Subsequent income received by a spouse on
  transferred property must be attributed back to
  the original owner. These attribution rules do
  not apply if the transfer was made in a manner
  equivalent to an arms length transfer.
• Subsequent income, except capital gains and
  losses, received by a child under 18 on
  transferred property must be attributed back to
  the original owner.
• These attribution rules also apply to other
  minors such as nieces and nephews.