CHAPTER TEN

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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

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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

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From Net To Taxable Income
Division C Deductions
Taxable Income
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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

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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

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Federal Tax Rates
Taxable Income Range (2005) Rate
Up to 35595 15
35,595 - 71,190 22
71,190 - 115,739 26
Over 115,739 29
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B.C. Provincial Tax Rates
Taxable Income Range (2005) Rate
Up to 33,061 6.05
33,062 - 66,123 9.15
66,124 - 75,917 11.7
75,918 - 92,185 13.7
Over 92,186 14.7
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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

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Overhead Tax Credit Rates
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2005 Personal Tax Credits

• Individuals 15 of 8,6491,297
• Spouse Or Common-Law Partner ITA 118(1)(a)
• Includes common-law and same sex
• (15)((7,345) - (Income gt 735))
• Maximum 1,175

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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

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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 gt 5,460) Maximum Of
  577

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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 Dependants Income In Excess Of
  13,141
• Not In Addition To Equivalent To Spouse Or Infirm
  Dependant Over 17

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Age - ITA 118(2)

• Reach 65 In The Year
• (15)(3,979) 597
• Reduction
• 15 Of Income gt 29,619
• 55,204 - 29,619 25,585
• 25,585(15) 3,838
• An Erosion Of Universality

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Pension Income ITA 118(3)

• Amount 15 Of 1st 1,000 150
• Qualifying Amounts
• Age 65 At End Of Year
• Most Non-Government
• lt Age 65 At End Of Year
• Life Annuities
• Amounts Resulting From Death Of Spouse
• No CPP, OAS, Or Provincial (QPP)

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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 individuals year of death and preceding
  year
• Plus 25 percent of capital gains on gifts
• Plus 25 percent of recapture on gifts

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Medical Expenses ITA 118.2

• 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

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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

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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

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Tuition Fees - ITA 118.5(1)

• Tuition
• 15 Of Actual
• Post-Secondary
• Cost gt 100
• Outside Canada Must Be Full Time Or Commuting
  To U.S.
• No Upper Limit
• Unlimited Carry Forward

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Education Deduction 118.6(2)

• Education
• 15 Of 400 Per Month Of Full Time Attendance
• 15 Of 120 Per Month Of Part Time Attendance
• Unlimited Carry Forward By Student

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Interest on Student Loans

• 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

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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

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Transfer Of Credits

• Tuition/Education - ITA 118.9
• N/A If Students 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

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Political Contributions

• 3/4 First 400
• 1/2 Next 350
• 1/3 Next 525
• Max 650 For 1,275

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Labour Sponsored Funds

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

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Dividend Tax Credit

• 16 2/3 of Gross up is the Federal Credit
• Or 13 1/3 of Taxable Dividend

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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