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ch11so - Chapter 11 Computation of Taxes Payable...

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Chapter 11 Computation of Taxes Payable — Individuals Questions 11-1 Assuming that Barry will have the appropriate business insurance and other  sources of income during the start-up phase of his juice stand, he should  consider operating his business as a proprietorship. This would minimize the  risk by being able to utilize any losses incurred during the first year or so of  operation. Any such losses could be used to offset Barry’s other sources of  income. When the business becomes profitable, the business could then be  transferred to a corporation. 11-2 The union member’s analysis is at least partially correct. Her average federal  tax rate of 26% is greater than the 15.5% federal tax credit received on the  CPP contributions by the union member. Even though the marginal tax  bracket of a taxpayer increases, the amount of tax credit stays at 15.5%.  Many argue that this is unfair because the taxpayer is not getting a credit  equal to her marginal tax rate. It could be argued that higher-income earners  will   receive   more   in   CPP   receipts   upon   retirement   than   lower-income  earners and this is a vehicle for the redistribution of wealth equitably. With  current government debt, the debate regarding the government’s ability to  make CPP payments in the future remains in question. 131
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132 TAXATION   IN   CANADA 11-3 The federal tax credits equally reduce the basic federal tax for all taxpayers,  regardless   of   which   province/territory   they   live   in.   As   the  provincial/territorial tax is calculated using the TONI system, the federal tax  credit does not affect provincial taxes. 11-4 Higher-income   earners   favour   deductions   as   these   are   realized   at   their  marginal tax rates. On the other hand, lower-income earners tend to favour  tax credits, or to be indifferent, as the credit is usually based on the lowest  tax bracket rate, which is the bracket they are in. The tax credit provides  more relative value to the lower-income earner. Changing the child care  deduction to a non-refundable tax credit would make the tax recovery the  same for all taxpayers. 11-5 Victor’s marginal tax rate, assuming a territorial tax rate of 15.4%: = Marginal federal tax rate + provincial rate = 22% + 15.4% = 37.4% Note: Victor’s taxable income of $38,200 puts him in the 22% marginal  federal tax rate bracket. 11-6 Donna will be able to claim a bad debt expense of $7,000 in the current year  to  offset  interest income accrued in  previous years.  Paragraph 20(1)( p allows this deduction to the extent that debts are established to be “bad , as  opposed to merely “doubtful
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