2004 mcgraw-hill ryerson ltd. kapoor dlabay hughes ahmad prepared by cyndi hornby, fanshawe college...
TRANSCRIPT
2004 McGraw-Hill Ryerson Ltd.
Kapoor Dlabay Hughes Ahmad
Prepared by Cyndi Hornby, Fanshawe College
Chapter 3Planning Your Tax
Strategy
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Learning Objectives – Chapter 31. Describe the importance of taxes
for personal financial planning.2. Prepare federal and provincial
income tax returns by calculating taxable income and the amount owed for federal and provincial taxes.
3. Select appropriate tax strategies for different financial and personal situations.
4. Identify tax assistance sources. 3-2
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Learning Objective # 1
Describe the importance of taxes for personal financial planning.
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Taxes and Financial PlanningAbout one-third of each dollar you earn goes to pay taxes.An effective tax strategy is vital for successful financial planning.Understanding tax rules and regulations can help you reduce your tax liability.To help you cope with the many types of taxes you should...
Know current tax laws as they affect you.Make purchase and investment decisions that reduce your tax liability.Maintain complete tax records. 3-4
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Four Types of Taxes
Taxes on purchases.Sales tax & excise tax.
Taxes on property.Real estate tax.Personal property tax.
Taxes on wealth.Estate taxes.Capital gains (losses).
Taxes on earnings.Income tax. 3-5
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Filing Your Federal & Provincial Income Tax Return
Determine whether you are required to file a return
Students should file even if they do not expect a return to get GST/QST refunds and housing refunds
Which form best serves your needs?Are you required to submit additional schedules or supplementary forms?
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Learning Objective # 2
Prepare federal & provincial income tax returns by calculating taxable income and the amount owed for federal & provincial income taxes.3-7
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STEP 1: Determining Total IncomeTaxable Income is the net amount of
income, after allowable deductions and expenses are deducted, on which income tax is computed. Most, but not all, of income is taxable.
Types of Income Employment Income Investment Income Passive Income Other Income
Scholarships, bursaries, study grants, etc. 3-8
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Computing Your Total Income
Total income is affected by exclusions.• Amounts not included in gross income.• Also referred to as tax-exempt income, which is
income not subject to income tax.
Total income is also affected by tax-deferred income. This is income that will be taxed at a later date, such as earnings from a Registered Retirement Savings Plans (RRSP) or Registered Pension Plan (RPP).Tax Shelter – an investment that provides immediate tax benefits and a reasonable expectation of future profit
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STEP 2: Calculating Net Income and Taxable Income
Net income is total income after certain reductions have been madeDeductions are expenses that can be deducted from total incomeCommon deductions include;
Contributions to registered deferred income plans (RRSP, RSP)Medical expensesInvestment counseling feesUnion and professional duesChild care expensesCertain employment related expenses
Capital Gains exemptions 3-10
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STEP 3: Calculating Taxes Owed
Taxable income is basis for computing amount of your income taxTax rates and tax credits are used to compute taxes payableMarginal Tax Rate (MTR)
Is rate of tax paid on last, and next, dollar of taxable income
Average Tax Rate (ATR)Total tax due divided by gross income
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Tax Credits Tax credits are an amount subtracted directly from the amount of taxes owed
Basic personal amountSpousal (equivalent-to spouse) amountContributions to CPP / EIDisability amountTuition and education expensesMedical expensesCharitable donations 3-12
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Making Tax PaymentsSource Withholding
Employees withhold from source to pay income tax, CPP and Employment Insurance contributionsReported to you on your T4Can reduce source withholding
Installment PaymentsDeadlines & Penalties
Must file by April 30 of each yearAutomatic 5% penalty on balance owing if late
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Learning Objective # 3
Select appropriate tax strategies for different financial and personal situations.
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Tax-Planning Strategies
Tax planning is the use of legitimate methods to reduce one’s taxes
Accelerate deductionsDelay receipt of incomeDelay deductionsAccelerate receipt of income
Tax Evasion.Illegally not paying all thetaxes you owe, such as not reporting all income. 3-15
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Tax-Planning StrategiesConsumer Purchasing: some buying decisions
directly affect taxesOwning a home is one of the best tax shelters because it is exempt from capital gains as long as it qualifies as your principal residenceHome Buyers Plan: first time buyers can withdraw from their RRSP for down-paymentStudent Loans: can claim tax credit on interest on student loansEmployment related expenses: home based business
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Investment DecisionsTax exempt investments – capital gain exemptions on certain small businesses and farm propertyTax deferred investments – income taxed at a later dateSelf-employmentChildren’s InvestmentsRegistered Retirement Savings PlansRegistered Pension PlansIndividual Pension PlansDeferred Profit Sharing Plan 3-17
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Learning Objective # 4
Identify tax assistance sources.
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Tax Information Sources
Tax information sources and assistance can be found at:
Canada Customs and Revenue AgencyLibraries and BookstoresInternet sitesTax publicationsTax preparation software and electronic filingTax preparation services
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What if your return is audited?
A tax audit is a detailed examination of your return for Canada Customs and Revenue Agency
More information is requestedKeep detailed records; receipts,
cancelled cheques, evidence to prove amounts claimedAvoid common filing errors
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Types of AuditsDesk Audit
Inquiry mailed asking you to clarify or document
Field AuditAgents visit to have access to recordsMay request only specific informationYou should seek assistance from a professional advisorGenerally not cause for alarm
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