Unformatted text preview: Other Deductions, etc. 1 Overview of Course to Date
Employment (Lectures 2-3) Business (Lecture 4) Property (Lecture 6) Other Income (Lecture 8) s.3(a) Income from all sources s.3(b) +Taxable capital gains (Lectures 6 & 7) s.3(c) - subdivision e deductions s.3(d) - Loss from employ, bus, prop, ABIL Division B net income -Division C deductions Taxable Income
2 Other Deductions 60(a) 60(a) 60(b) 60(e) 60(i) 60(j.1) 60(o) Capital element of Annuity Capital Support payments CPP payments on selfemployed earnings RRSP contributions Retiring Allowance Legal & accounting fees re: Legal income tax objection or appeal 3 Deductible Repayments 60(v.1) - EI benefit repayment. 60(w) - OAS “claw-back” (Part I.2 tax) 60(w)
• 15% (net income before 60(w) - $66,733). • Cannot exceed OAS received. 60(x) - CESG repayment. 4 Moving Expenses Deductible if an “eligible relocation”:
• • • New business location. New employment location. Attend university or college. New residence 40 km closer to new work/school New 40 location. location. Deduction limited to income for the year from the Deduction limited new location. new Excess carried forward one year. Excess one
5 Moving Expenses Travel costs, including meals & lodging for Travel members of the household. members Transporting & storing household effects. Temporary lodging & meals near the old or new Temporary residence (max 15 days). residence Cost of canceling the lease on old residence. Selling costs for old residence. 6 Legal fees & land transfer tax on purchase of new Legal residence (only if sold former residence). residence Cost of maintaining former vacant residence (max Cost $5,000) when reasonable efforts are being made to sell it (mortgage interest, property tax, insurance, utilities). Revising legal documents. Connecting & disconnecting utilities. Food incurred as moving (not subject to 50% rule in section 67.1)
• Simplified method - no receipt required • Travel: $17 X 3 meals = $51 max per day/person Vehicle = 54 cents per km (Ontario).
7 Child Care Expenses
– the cost of babysitting, day care, or lodging at a boarding school (caregiver must be 18 years old or older) – children 16 years of age or less (unless infirm dependant), – if incurred so taxpayer could pursue employment, business, or research activities. Limited to the lesser of:
– $4,000 per child 7 to 16, $7,000 per child under 7, $10,000 for a child with a serious mental or physical disability, – 2/3 of the taxpayer’s earned income for the year, and – Actual amount paid.
8 What is “Earned Income”
Employment income (before s. 8 deductions) + Scholarships, research grants & bursaries Scholarships, + Business income (actively engaged) Business + CPP disability pension CPP = Earned Income 9 Child Care - Amounts Paid
Restrictions/Limits: Not paid to the child’s mother, father, relative Not under age 18. under Boarding school or overnight camp limited to Boarding $250/week for child with disability, $175/week for child under age 7, and $100/week for child 7-16. child 10 Child Care Expenses Must be claimed by lower-income spouse
• Exceptions – student, infirm, prison, separated. Claim by higher-income spouse limited to $175/ week for child under age 7 and $100/week for week child 7-16. [periodic child care amount ] child 11 Registered Retirement Savings Registered Plans Plans Private, tax-sheltered retirement program. Investments in an RRSP:
• Are not taxed until withdrawn and therefore generate higher return because they permit investment of pre-tax earnings. 12 Why Invest Through an RRSP?
In an RRSP
Invest $6,000 Earn 10% 600 Tax Payable in interest 0 After year 1 $6,600 Year 2 interest 660 Outside an RRSP
Invest Earn 10% Tax Payable @ 45% Value Yr 1 Year 2 interest $ 6,000 600 (270) $ 6,330 633 Note: this ignores the tax savings from contributing $27 less 13 2010 RRSP Deduction Limits
Lesser of: (i) 2010 RRSP dollar limit $22,000, and (i) 2010 (ii) 18% x 2009 earned income - 2009 Pension earned Adjustment (PA). Adjustment + Unused RRSP deduction room at the end of Unused 2009. 2009. Note: Unused deduction room can be carried Note: forward indefinitely [s.146(1)(l)]. [s.146(1)(l)] forward
14 “Earned Income”
Employment income [before s.8(1)(m) RPP ded’n], + Business income (loss), actively engaged, + Rental income (loss), + Royalties earned by author or inventor, + Support payments received (paid), + CPP disability benefits. = Earned Income (RRSP) Earned 15 Contribution Room – an example
Annual limit for 2010 lesser of: • Salary – 2009 $150,000 x 18% • 2010 limit $27,000 $22,000 Assume a carry-forward of unused RRSP contributions from prior years of $4,000. What is the maximum RRSP deduction available?
16 RRSP – Overcontribution RRSP Overcontribution Contributions exceeding the annual limit are subject to a penalty tax of 1% per month on excess [s.204.1(2.1) & s.204.2(1.1)] [s.204.1(2.1) Permitted to overcontribute up to $2,000. Overcontribution can be carried forward and deducted in a future year. 17 Transfer of Retiring Allowance to Transfer RRSP s.60(j.1) RRSP $2,000 x no. of years or part years employed by $2,000 employer before 1996. employer + $1,500 x no. of pre-1989 years or part years $1,500 for which employer RPP contributions did not vest (or employee was not a member of RPP). vest These contributions are not subject to the These not annual contribution limit discussed earlier. annual 18 Qualified Investments for RRSP Restricted to certain types of investments. Qualified investments includes:
• • • • • • • cash deposits in banks or other financial institutions, term deposits, government-insured or guaranteed bonds, bonds and debentures of public corporations, shares of public corporations, mutual finds, and mortgages on real estate. 19 Retirement Options Funds accumulated in an RRSP can be paid out in a lump sum or gradually over a period of time in the form of a pension. To receive regular payments from an RRSP, the plan must be converted into a pension vehicle.
• Life annuity – risk vehicle
• After 65 - Can transfer up to ½ of RRSP to a spouse for income splitting. • Guaranteed fixed term annuity – full funds are paid out. • Registered retirement income fund (RRIF) – minimum amount of withdrawal required.
• Provides greatest flexibility.
20 Investing in RRSP’s – Important Investing Points Points Interest paid on an RRSP loan is not deductible
[s.18(11)]. Administration fee on RRSP and RRIF is not deductible [s.18(1)(u)]. Contribution of property - cannot claim capital loss under section 40(2)(g)(iv). Contributions must be made to taxpayer’s plan Contributions within 60 days after the end of year. within RRSP’s must be transferred to RRIF by age 71.
21 Spousal RRSP An individual can contribute all or any part of his/ her contribution limit to the RRSP of a spouse. Contributor - entitled to tax deduction. Allows for income splitting:
• Allows for income to be taxed in the spouse’s hand rather than that of the contributor. Limitations – withdrawals from the spousal plan within two taxation years of the contribution year are included in the contributor’s income.
22 RRSP & Death Contribution for year of death can be made after Contribution death to a spousal plan – up to 60 days after end of year. end Tax on RRSP at death can be deferred if the Tax beneficiary is the spouse or a financially dependent child [s.60(l)]. dependent 23 Registered Education Savings Registered Plans Plans Primary purpose is to provide funding for post secondary education. Can contribute to an RESP prior to child turning 31 years old. $50,000 lifetime contribution limit. Earn income on tax deferred basis:
• Income is taxed when funds are withdrawn from the plan. Contributions are not tax deductible:
• Differs from RRSP contribution.
24 RESP and the CESG Canada Education Savings Grant CESG:
• Children under 18 can receive the grant. • Annually – 20% of contribution up to $2,500 – max grant $500 per year.
• May be increased to $1,000 if maximum grant was not received in prior years. • Lifetime – maximum grant $7,200. • Child must pursue post-secondary education
• If not, CESG must be returned.
25 Withdrawals from RESP Educational Assistance Payments (EAPs)
• To support studies at post secondary education First 13 weeks of consecutive studies:
• Full-time studies - Max of $5,000 per year. • Part-time - Max of $2,500 per year. After that – no limit to the amount of EAP’s. 26 RESP Funds Returned to RESP Contributor Contributor Original contributions – not taxable. Earnings – two levels of tax:
• Income taxed at usual levels. • Additional tax of 20%
• To remove the deferral benefit. Rollover to RRSP avoids both levels of tax
• Must have contribution room. 27 27 RESP – Benefits Summarized
1. Investment returns accumulate in plan on tax deferred basis
• • • • Similar to RRSP Due to compounding of interest Investment returns are taxed in child’s hands Usually a lower income levels resulting in lower overall tax.
28 2. Allows for maximum growth 3. Income Splitting Benefits Lifelong Learning Plan Lifelong
[s.146.02] [s.146.02] Can withdraw $10,000/yr ($20,000 cumulative Can max over 4 years) RRSP funds tax-free for fullfulltime post-secondary education (at least 3 months). Repayable over 10 years after graduation. 29 Home Buyers Plan [s.146.01] [s.146.01] Home Use your RRSP to purchase a home. Maximum withdrawal per person is $25,000. Available to first-time home buyers and buyers who have not owned a house within the past 5 years. Repayment over 15 years, in equal instalments. First payment due in second calendar year, subject to the regular RRSP contribution deadlines for that year.
30 Tax-Free Savings Accounts
[s.146.2] [s.146.2] Contributions are limited to $5,000 (indexed) per Contributions year per individual. year Can contribute individual and/or spouses plan
• No attribution on contribution to spouse’s TFSA. Not tax deductible. Can be carried forward indefinitely. Excess contribution subject to 1% penalty per Excess month. month.
31 Tax-Free Savings Accounts (TFSA) Earnings and Withdrawals are tax free! Earnings tax Withdraws added to accumulated contribution Withdraws limit: limit:
• Means can withdraw funds and replaced later.
• Unlike RRSP. 32 ...
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- Spring '08
- Registered Retirement Savings Plan, RRSP, Registered Retirement Income Fund, Overcontribution RRSP Overcontribution