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IFC Chapter 6 - Tax and Retirement Planning

Terms in this set (78)

How are the best tax advantages gained?
By planning early and often
What does tax avoidance include?
full utilization of allowable deductions

conversion of non-deductible expenses into tax-deductible expenditures

postponing the receipt of income

splitting income with other family members when handled properly

selecting investments that provide a better after-tax rate of return
What are the two provinces that the federal government does not collect provincial income taxes from?
Quebec and Alberta
How long must the corporate taxation year be?
53 weeks
Income tax is calculated by...
all sources of income from employment, business and investments

making allowable deductions to arrive at taxable income

Calculating the gross or basic tax payable on taxable income

claiming various tax credits and calculating the net tax payable
How is employment income taxed and what are employees allowed to deduct?
gross receipt basis: they cannot deduct expenses of carrying out their job. They can deduct a few related expenses such as union dues, pension contributions, child care expenses and other items
Dividends and interest are considered income from capital ____________________.
property
Business income is calculated on a ___________ income basis meaning that the expenses of carrying out the business are included in the income tax calculation.
net
what is the income tax rate on the first $49020 of income in Canada?
15%
The marginal tax rate is the ____________________ rate plus the ______________________ rate. This is the rate that would have to be paid on any additional dollars of ____________ income earned.
provincial; federal; taxable
To minimize taxes and select securities for the portfolio that offer the investor a higher after-tax rate of return, what must be done given the marginal tax rate?
tax consequences of certain investment decisions can be estimated
There are three types of income that can be earned through mutual fund investments. What are they?
Interest income. Dividend income on preferred or some common shares. Capital gains.
Interest income is taxed as ________________ income.
regular
dividend income receives preferential tax treatment. What does this entail?
the amount included in the taxpayer's income equals approximately what the corporation would have earned before tax. The taxpayer then receives a tax credit that offsets the amount of tax the corporation paid
Dividends are grossed up by __% then the taxpayer receives a credit of ____% on this amount.
38%; 15.02%
If an individual receives 300$ worth of dividends from a company and the income tax rate they receive is 26%, how much would they pay on that tax?
1.38*300 = 414 (amount taxpayer declares)
414*0.1502 = 62.18 (tax credit)
414*0.26 = 107.64 (pre-credit tax amount)
107.64-62.18 = $45.46 is the net tax payable on the $300
Only __% of capital gains are taxable. If the individual is in the 3rd income tax bracket of 26% in Canada, how much would they pay if they received 300$ of capital gains income?
3000.50.26 = 150*0.26 = 39
Foreign dividends and interest income are generally treated as __________________ income.
regular
What two forms are mutual fund holders with non-registered accounts sent?
T3 and T5 which outline the types of income distirbuted that year - foreign income and Canadian interests, dividends and capital gains including dividends that have been reinvested.
What are the three ages you can start receiving CPP and QPP? What is the age where you would receive the highest amount of monthly payments?
60, 65 and 70. 70.
What is "clawback?"
The ITA or Income Tax Act previses that higher income Canadians must repay all or part of the social benefit they receive in any year.
RPPs are what?
Employer sponsored pension plans
Defined benefit plans are predetermined based on ________________, ___________________ and ____________________
years of service; income level and other variables
DCP (defined contribution plan) or money purchase plans are what?
predetermined and the benefits at retirement will depend on how the contributions were invested
Flat benefit plan is calculated how?
an arbitrary 15$ per month for 30 years of service. Therefore 15*30 = $450 per month
What are some of the advantages of Defined contribution plans?
Popular with employers as it is easy to understand, easy to administer and has fixed annual costs

regulations are not as onerous as those of defined benefit plans

employees can choose the investment vehicles
What are some of the disadvantages of DCPs?
the final pension amount is unknown until retirement

the final pension may be smaller than expected if the investment performance has been poor

members retiring under similar circumstances may receive substantially different pensions depending on investment return over the life of the plan
Tax deferral plans
reduces taxes paid during high earning (and high taxpaying) years. Tax payment is deferred until retirment years when income and tax rates are normally lower
What are some examples of tax deferred plans?
RRSP, TFSA
RRSP spefcial features include:
withdrawls are subject to a graduated withholding tax adn must be included as income in the year withdrawn

RRSPs cannot be used as collateral for loan purposes
the maximum annual tax-deduictible contributions to RRSPs an individual can make is the lesser of:
18% of the previous year's earned income and the RRSP dollar limit for the year ($27830 for 2021)
Individuals can "carry forward" unused contribution limits indefinitely. What is the unused contribution limit?
The contribution room leftover between what you contributed and the RRSP dollar limit for the year
What does "earned income" for the purpose of RRSP contributions include?
total employment income
net rental income and net income from self-employment
royalties from publications or patents or research grants
alimony or maintenance payments ordered by a court
disability payments from CPP or QPP
Supplementary employment insurance benefits like top up payments by an employer or EI.
What is amount you can over contribute by before 1% per month will be charged in penalty for over-contribution?
2000$
What is a contribution in kind?
When there is capital gain on securities already owned to an RRSP. This is included in the income tax for the year of contribution.
Any withdrawl from a spoussal RRSP is taxable to the spouse, not the _______________________.
contributor.
If the spouse not registered to the RRSP makes contributions during the year of withdrawl or two years before the withdrawl, they are ______________________ to the contributor
taxable
What are some of the options for your RRSP once you turn 71?
withdraw as fully-taxable lump sum.

use the proceeds to purchase a life annuity

use to purchase a fixed term annuity providing benefits to a specified age

RRIF which provides an annual income

combination of the above
Once the annuitant turns 71, what do RRIFs, fixed term annuities and life annuities all have in common?
permit the taxpayer to defer taxation of the proceeds from de-registered RRSPs
What is the best advantage of an RRSP?
Deferral of income taxes until later years when the holder is presumably in a lower tax bracket
Can the dividend tax credit on Canadian companies be collected on securities within an RRSP?
No
If the planholder dies, where does the income in his RRSP go?
First to a spouse or dependent child or grandchild (tax-free if transferred to their RRSPs), and if not then subject to tax as income of the deceased.
The income that you contribute to a TFSA is taxable, but the income earned within the TFSA is ____________.
not
You can invest in __________________ investments in TFSAs or RRSPs (self-directed)
qualified
You can withdraw amounts from TFSAs at __________ time and there will be _____________ tax on withdrawls. That being said, if you withdraw and you are at your contribution room limit, you cannot contribute any more until the ______________ year.
any; no; next
What is the best part of a TFSA?
It is a flexible and tax free way to save. You can do almost anything with the funds.
What is the maximum amount you can contribute to an RESP per beneficiary and what is the maximum amount of time you have to use the funds within?
$50000. 35 years.
If the beneficiary does not attend post secondary, when must all the funds be transferred out of the RESP to the contributor's RRSPs?
February of the following year.
CESGs stand for what and how do they work?
Canadian Education Savings Grants and they contribute 20% of the family's contribution per year plus 20% on the first 500 contributed.
PRPPs stands for what and how do they differ from RPPs?
Pooled registered pension plans. THey are designed to address the gap in employer pension plan coverage by providing Canadians with accessible, large scale and low cost pension plan.
What is one move that can reduce taxes and improve after tax yield?
A shift from interest bearing investments to dividend paying Canadian corporations
Spousal RRSPs are a great way to _________________ the couple's retirement incomes and _________________ the amount of tax that Ted would have otherwise paid.
even out; reduce
What are some investment related tax deductable fees?
interest paid on funds borrowed to earn investment income such as interest and dividends

fees for certain investment advice

fees paid for management admin safe custody

accounting fees paid for the recording of investment income
What are some investment related fees that are not tax deductable?
interest paid on funds borrowed to buy investments that can generate capital gains only

brokerage fees or commissions paid to buy or sell securities. Instead, these fees or commissions affect the cost base of the investment.

funds borrowed to contribute to registered savings plans

administration counselling and trustee fees for registered accounts

FP fees for advice as well

safety deposit box fees
The taxpayer may deduct tax on interest paid to borrow to purchase securities if...
the taxpayer has a legal obligation to pay the interest

the purpose of borrowing the funds is to EARN income

the income produced from the securities purchased with the borrowed funds is not already tax exempt (being a part of a registered fund).
What year's income, PA (pension adjustment), and PSPA (past service pension adjustment) must you use to calculate the RRSP contribution room for 2021?
2020 income
2020 PA
2021 PSPA
Capital losses can be used to offset or reduce other ___________________. They can be carried back ________ years and carried forward indefinitely.
capital gains; 3
What are the four steps involved in calculating tax payable for dividends on a Canadian company?
Gross up the dividend by 38%
Calculate the tax owing
Calculate the amount of the tax credit which is 15.02% of the grossed up amount
the net amount is actually paid

"Get Tax Credits Now"
LIF versus a RRIF?
Money is transferred from an RRSP into a RRIF. Money is transferred from a locked-in RRSP to a LIF. RRIFs have an annual minimum withdrawal requirement but no maximum
LIFs have a minimum and maximum withdrawal amount.
If someone leaves their employer but received an RPP (registered pension plan) from their employer, what type of registered plan must it be?
locked-in RRSP
What is the marginal tax rate?
the rate you would pay on the next dollar earned
What is the difference between dividends from US companies and Canadian companies in how they are taxed?
With Canadian companies, there is a 15.02% tax break whereas with US companies, you are taxed with your income bracket
What is your taxable capital gain?
50% of the actual capital gain amount. This is taxed as income.
Why Don't Really Rich Athletes Retire Sooner is an acronym for "earned income" in calculating RRSP contribution room. What does it stand for?
Wages
Disability from CPP
Royalties
Rental income
Alimony
Research grants
Supplementary EI benefits (not regular EI)
What are the two main tax advantages to an RRSP?
Contributions reduce your taxable income per year

Any income earned within the RRSP account grows tax sheltered
What is the maximum amount of CESG that a child can earn in their RESP?
7200
What percentage of your earned income do you use when calculating your RRSP contribution room?
18%
If John makes 30000 this year and is projected to make 80000 next year, when would be the most tax efficient time to contribute 10000 to his RRSP?
next year because he would be avoiding paying tax on 10000 more while in a higher tax bracket.
Lucas wants to know how much he would be able to contribute to his TFSA if he withdrew 2000 last year and contributed 5000 the year before under the assumed 6000 yearly contribution limit.
6000+6000+6000 = 18000
5000-2000 (withdrawl) = 3000
18000-3000 = 15000
How do you calculate the over-contribution limit?
earned income (employment + supplemental EI) - spousal support. That is earned income * 18%.

Take this number and subtract PA from the previous year and PSPA from the current year.

Take this number and add it to this year's contribution limit plus the lifetime over contribution limit.
When is the RRSP contribution deadline for a given tax year?
Within the calendar year or 60 days after the end of the year (March 1s or February 28th depending on leap year)
What is a LIRA? If you have pension funds from your previous employer and you are under 71, you must transfer them to a ___________.
Locked-in retirement account. LIRA.
If Leanne contributes 25000 to her son's RESP and CESG benefits amount to 5000 and the amount grows to 38500 by the time her child turns 22, but he decides not to pursue post-secondary education, how much can she roll over to her RRSP. How much can she with draw tax-free?
8500. 25000 (because this was her original investment).
Capital losses that occur within an RRSP have ____________ tax consequences, whereas capital losses that occur outside an RRSP can be used to ____________ or ____________ tax from other capital gains.
no; reduce; offset
What is a contribution in kind and how is it taxed?
Contribution in kind is a transfer of shares from a non-RRSP account to an RRSP. The value of the shares are calculated at the market value of the time of the transfer and any capital gain must be taxed but no taxable capital loss.
You can potentially write off the interest on the loan if the loan proceeds are used to earn _________________ income. This does not include income earned within __________ or ____________.
taxable; RRSPs; TFSAs
With a contribution in kind, the amount that you contribute is tax ___________________ but you must pay the ____________________ received before the contribution in kind.
deductible; capital gains
For income between 49020 and 98040, how much CESGs do families get?
30% on the first 500 and 20% on the next 2000. If a family decides to contribute 4000 every year for the next 3 years.

500*0.3 = 150
2000*0.2 = 400
150+400=550
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