AFM 202 Tax Tutorial

Oct. 3, 2014

Agenda
Principle Residence Exemption
Attribution
Taxation for Corporations

Net Income
Taxes Payable and Taxes Owing
Small Business Deduction
General Rate Reduction

Overall Review

Principle Residence Exemption

Exemption from capital gains on the disposition of a
principal residence
Created because homes usually appreciate in value
over time
In any year, you can only designate one property for
this exemption at a time
Formula:
Capital gain on the disposition of a principal residence *
[(number of years that the residence is designated +1) /
number of years the residence was owned by tax payer)

Problem
Tim owned a house and a cottage that he
ordinarily inhabited throughout his years of
ownership. He sold both in 2014
Home

Cottage

Ownership

2007-2014

2012-2014

Proceeds

500,000

80,000

Original cost

400,000

70,000

What amount of TCGs should be reported for

both properties?

Solution
1. Draw a Timeline
2. Calculate gain/year
1. House: (500,000-400,000)/(7+1)= 12,500
2. Cottage: (80,000-70,000)/(2+1)=3,333

3. Designate the property with the higher gain/year:

House
4. Calculate TCG
1.
2.
3.
4.

House: 100,000* (7+1)/8 =100,000 exempt

Cottage: 10,000* (1+1)/3=6,667 exempt
The rest (10,000-6,667) =3,333 is taxable
TCG = 3,333*0.5 = 1,667

Attribution
Designed to stop tax payers from income
splitting (higher income person transferring
income to a lower income person in hopes of
paying less tax)
Spouse

Minors (inl.
Niece/nephews)

Receive at:

ABC

FMV

Attribution on Income

Yes

Yes

Attribution on Capital
Gains/CL

Yes

No

Other

Once >18yrs, no
attribution

Taxation for Corporations

Tax returns are due 6 mos. from the fiscal year
end
If not filed on time, same penalties as individuals
Taxes owing have to be paid within 2 months (3
months for CCPC) after filing

Schedule 1
Net Income (Loss) for Tax Purposes
Net Income after tax for Accounting
Purposes
+ Non-deductible items expensed for
accounting (ex. income tax, depreciation)
- Deductible items not expensed for
accounting (ex. CCA)
Net Income for Tax Purposes

Schedule 1 Common Addbacks

Accounting provision for income taxes
Interest & penalty on taxes (Ex. assessment interest,
late filing penalties)
Amortization of tangible & intangible assets for
accounting purposes
Taxable Capital gains
Accounting loss on sale of assets
Charitable donations & gifts (from Schedule 2
deduction later)
Non-deductible club fees and dues
Non-deductible meals & entertainment expenses

Schedule 1 Common Deductions

Accounting gain on sale of assets
Capital cost allowance (CCA from sch 8)
Cumulative eligible capital deduction (sch 10)

Taxes Payable for a Corporation

Basic Corporate Tax Rate 38%
Less: Abatement (10%)
Less: Small Business Deduction (17%) :Less:
General Rate Reduction: 13% Least of:
Equals: Net Taxes Payable (for now)

Small Business Deduction

Note: SBD is only for CCPC
Associated Corporations have to share the
$500,000 business Limit
Apply this first before the GRR
17% Least of:
Corporations Canadian Active Business Income
Business Limit: 500,000

General Rate Reduction

Available to all corporations
13% of eligible taxable income
Eligible means income that has not already got some kind
of other preferential tax treatment such as the SBD

Example: Taxable income=700,000

ABI: 300,000 Limit:500,000
Amount Eligible for GRR= 700,000300,000=400,000

Thats it for this weeks

content!

Review!

Things Learned in the Course

Basics of Tax Returns + Run through of basic return

Non-monetary Transactions, Foreign Currency, and Elections
Business & Property Income
Capital Gains
Personal Income Tax Administration
Capital vs. Income
Identical Shares
Capital Gains Reserve
Personal Use Property

Employment Income
Employed vs. Self Employed

Continued

Employee Stock Options

Dividends
Integration
Other Income
Tax deferred plans (RPP, RRSP, RESP, etc.)

Deductions
RRSP contribution
Moving expenses
Childcare expenses

Tax Payable & Tax Credits

Medical or disability credit

Property Income
Schedule 4
Interest/dividends from Canada typically on T3
and T5 slips, sometimes T5013
Whats the difference between the T3 and T5?

Foreign interest/dividends also taxable, typically

entered on FOREIGN
Deductions available:
Interest used to earn income
Investment fees

Special: vacant land expenses added to ACB

Business Income
Start with accounting net income, reconcile to
taxable income
Examples of differences between accounting & tax
treatment

Yacht, camp, lodge, golf course not deductible

Meals and entertainment 50% deductible
Up to 2 conventions deductible
Fines, tax interest & penalties not deductible
Reserves not deductible unless specially allowed
Life insurance not deductible

CCA: Example using class 10 (30%)

UCC opening is $10,000
Case 1:
Bought a car for $20,000
Sold old car (original cost $25,000) for $2,000
Case 2:
Sold old car (original cost $25,000) for $2,000
No other asset in class 10
Case 3:
Sold old car (original cost $25,000) for $11,000
No other asset in class 10

Case 4:
Same as case 3 but sold old car for $26,000

CCA Example Solution

Class 10 (30%)

Case 1

Case 2

Case 3

Case 4

UCC (opening)

10,000

10,000

10,000

10,000

Additions

20,000

Disposals (LOCP)

(2,000)

(2,000)

(11,000)

(25,000)

Total

28,000

8,000

(1,000)

(15,000)

Less: net additions

(9,000)

UCC for CCA

19,000

8,000

(1,000)

(15,000)

CCA available

(5,700)

N/A

Add: net additions

9,000

Recapture

N/A

N/A

1,000

15,000

Terminal loss

N/A

(8,000)

N/A

N/A

UCC End

22,300

Capital Gain

N/A

N/A

N/A

1,000

Example: Capital Gains

Jenny bought shares of Apple for $1,500 in
2012. Transaction cost of $50.
Jenny sold the same shares of Apple for $2,000.
Transaction cost of $50.

Example solution
Proceeds

$2,000 in proceeds

$2,000

ACB

$1,500+$50=$1,550

($1,550)

Selling costs

$50

($50)

Capital Gains/Capital
Losses

$2,000-$1,550$50=$400

$400

Taxable Capital
Gains/Allowable Capital
Losses

$400*50%=$200

$200

Employment Income
Tests:
Economic reality
Control, Ownership of tools, chance of profit/loss

Integration
Specific Results
Contract

Employed:
Specific deductions
CPP: 4.95% * (salary up to 52,500- 3,500)
EI: 1.88% * (salary up to 48,600)

Self Employed:
Deduct all reasonable business expenses from income

Stock Options
Public

CCPC

Grant date- no tax

consequences

Grant date- no tax consequences

Exercise date Employment income = (price

at exercise price at grant ) *
# of options exercised
Add this to the ACB of shares
Sale date Capital gain/loss = proceeds ACB

Exercise date- no tax

consequences
Sale date Employment income = (price
at exercise price at grant ) *
# of options exercised
Add this to the ACB of shares
Capital gain/loss = proceeds ACB

Dividends
Grossed up when received as individuals
(concept o integration)
Public: 38% gross up
Federal DTC: 6/11 of gross up
Provincial DTC: 5/11 of gross up

CCPC: 18% gross up

Federal DTC: 13/18 of gross up
Provincial DTC: 5/18 of gross up

Tax Planning

Moving Expenses
We placed it always on the
individuals with the higher
marginal tax rate

Childcare expenses
We placed it on the individual
with the lower income

Tax Planning
Pension There are instances where spouses can share
Splitting the burden especially if the spouse has a
lower MTR

The government may pay of the CPP

benefits to one spouse and have them be taxed
on it as taxable income PENSION sharing
Spouses can also split income that allows them
to receive the pension credit this would
mean one spouse takes a deduction and the
other spouse includes it as taxable income

Tax Planning

Decisions to be made

Whether
Transfers
Spousal
certain
between
Transfer
credits
child and
amounts should be
parent
C/F.

Question #1

What is an RRSP?
What is an RRSP contribution limit?
What is the contribution limit based on?
Why is the contribution limit important?
If the husband contributes some money to his
wifes RRSP, where do we record this amount?
If the wife withdraws money from her RRSP
what happens and how do we treat this
situation?

Question #2 Solution
a) An RRSP is a registered retirement savings plan. It is a method through
which individuals can save up for retirement without being taxed on any
amounts that are contributed to the plan; however, any amounts that are
withdrawn are automatically taxable
b) There is a maximum amount that can be contributed to an RRSP in a
given year. This amount cannot be exceeded. The amount of the limit is
based on:
Current Year RRSP contribution limit (as per your institution in most
questions it is given)
Less: Deduction Taken in the current year
Plus: The lesser of: a) 18% * Earned income
b) $23,820
Less: Un-deducted RRSP contributions carried forward
Will also be impacted by pension adjustments

Question #2 Solution
c) The RRSP contribution limit is based on:
1. Prior Years limit
2. The amount contributed
3. The amount that was deducted in the current year
4. Did we over- contribute or not?
d) The RRSP limit is important because if we go over the limit, there
are penalties that are applied for every amount that remains in the
account.
e) Husbands contributions to wifes RRSP would be recorded on
husbands return and we would make note of the fact that it is going to
a spousal RRSP
f) The wifes withdrawals would be considered income and therefore
would be taxed.

Business/Corporate Tax
We have business income
There are deductions/Inclusions
The amount earned
Taxable Income
that is earned by the
business we can do
taxation for
corporations using the
format outlined per
section 3

Just like an individual

tax return there are
amounts that we would
add back and deduct
off the net income
noted on the financial
statements this is
known as the
reconciliation

We have credits for

corporations as well
and then we have our
federal tax and
provincial tax payable
Know that this exists,
might be a question
somewhere.

Capital Gains
Taxed at 50% ONLY of CG =
TCG
There can be allowable capital losses
applied against TCGs
There must be a distinction between
business and capital

Capital Gains

No capital gains on principle residence

Capital gains do exist for the purposes of a secondary house
Reported on line 127 takes you to schedule 3
Section 3 of Schedule 3: sale of publicly traded companies
Section 4 of Schedule 3: sale of real estate
Section 7 of Schedule 3: personal property sales

1) If total ACL > TCG carry back at least 3 years use form
T1A
2) If there are no TCG when looking at the past, carry forward
until there are TCG for the ACL to be applied against.

Capital versus Business

Capital

Business

Gain to be made for when the

property was held
There are badges of trade or
specific criteria that are used to
determine if the transaction is
classified in one or the other

Intention was to earn income as a

resale
This will be considered to be
income and taxed fully was this
a normal component of the
companys operations?

QUESTIONS?
GOOD LUCK