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66 Cards in this Set
- Front
- Back
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Alternative Minimum Tax (AMT) |
Introduced to ensure high-income and low-tax individuals pay a calculated minimum amount of tax 1) $40K exemption and AMT only applies to income greater than $40K 2) AMT can be carried forward for 7 years 3) AMT carry forward balance indicates a client was required to pay a minimum tax 4) Occurs when tax deductions exceed a set threshold |
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How to Calculate AMT |
1. Start with regular income 2. Add back deductions that reduced taxpayer's income 3. Add back 60% of taxable capital gains 4. Deduct gross-up portion of Canadian dividends 5. Deduct AMT exemption of 40K 6. Calculate federal tax at 15% 7. Deduct personal tax credits => Arrive at minimum tax payable => If AMT>Regular FTP, must pay AMT taxes |
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Home Office Rules (Self-Employed) |
Can deduct all expenses if home is used to generate business income except mortgage principal |
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Home Office Rules (Employees) |
Can only deduct rent, utilities and repairs if home is used to generate business income |
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Home Office Rules (Commissioned Salespersons) |
Can deduct same as self-employed except mortgage interest/principal and CCA are not allowed if home is used to generate business income |
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Determining Reasonable Proportion (Home Office Deduction) |
1. According to floor space 2. According to the number of rooms in the home |
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According to Floor Space |
If a person is using a 400 square foot home office in a 4000 square foot house, then 400/4000 of eligible expenses are deductible |
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According to the Number of Rooms in the Home |
If a person uses 1 room in a home that has 7 rooms in total, a ratio of 1/7 can be used |
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Standby Charge |
A taxable benefit when a vehicle is used for business is less than 90% of total use or if personal use of the car is more than 1000km/month |
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Standby Charge (if car is owned by the employer) |
SBC = 2% * (# of months vehicle is available for use) * (total original cost of vehicle) - employee reimbursements |
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Standby Charge (if car is leased by the employer) |
SBC = 2/3 * (monthly lease cost - car insurance) * (# of months vehicle is available for use) - employee reimbursements |
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Reduced Standby Charge Criteria |
1. Employer must specify vehicle is used for business 2. 50% or more of the vehicle is used for business 3. Personal use of vehicle must average less than 1667km/month or 20004km/year |
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Proportional Standby Charge Reduction |
PSBCR = km of personal use / maximum km driven annually |
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Reduced Standby Charge Formula |
RBSC = (basic standby charge) * [(personal use/maximum km driven annually)] |
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Operating Benefit |
Employee must calculate an operating benefit using 2 options 1. $0.25 per KM for personal use 2. If the car is used more than 50% for business, the operating benefit can be 1/2 of the reduced standby charge |
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Operating Benefit Formula |
OB = $0.25 * Personal Use Driven or OB = 1/2 * Reduced Standby Charge |
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Sole Proprietorship |
-Fastest/quickest way to set up a business -Owner owns all assets of the business -Personally liable for all debts -Unlimited liability |
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Unlimited Liability |
Creditors with a claim against a sole proprietor has the right to make a claim against all of his assets whether its business or personal |
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General Partnerships |
An agreement with 2 or more persons to combine their resources in a business -taxation is based on the partnership's year end |
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Liability in General Partnerships |
All members share the management of a business and each partner is liable for all the debts and obligations of the business |
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Limited Partnerships |
A partnership in which one or more of the partners has limited liability for the debts and liabilities of the partnership |
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Corporations |
A legal entity that is separate from its owners and no shareholders are personally liable for the debts and obligations of the corporation |
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Private Corporation |
Formed by one or more people and cannot sell shares or securities to the general public |
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Public Corporation |
A corporation that offers its securities to the public |
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Trusts |
Allows the holding or managing of assets on behalf of beneficiaries |
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Franchises |
-A business operated in multiple locations by different franchisees or owners selling the same products and services at predetermined prices -The franchisor has developed a formula for operating the business |
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Advantages of Franchises |
1. Established operational procedures 2. Established suppliers and distribution channels 3. Established name |
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Disadvantages of Franchises |
1. Payment of franchise fee to franchisor 2. Lack of autonomy 3. Limited scope for growth |
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Qualified Small Business Corporation (QSBC) Requirements |
1. Can qualify for a small business deduction (SBD) to reduces taxes payable on first $500K of active business income 2. Must be a CCPC throughout the entire year 3. Must be operating in Canada for at least 2 years 4. Must have more than 50% of FMV of assets in active business income 5. Must have more than 90% of FMV of assets in active business income at time of sale 6. Favourable tax rate of approximately 15% on first $500K of active business income |
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Small Business Deduction (SBD) |
1. A reduction in corporate taxes for CCPCs 2. Reduces taxes payable on up to $500K of active business income 3. Net tax rate is 15% for corporations |
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Capital Dividend Account (CDA) |
1) A special account which gives shareholders tax-free capital dividends 2) The non-taxable portion of a capital gain will be credited to the CDA |
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Part IV Tax |
1. Imposes temporary tax on dividend income received by a CCPC 2. Used to prevent shareholders of CCPCs to defer tax 3. Tax is refundable as a dividend refund to the corporation when the corporation pays dividends to its shareholders 4. 33.3% tax is applied to dividends |
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Refundable Dividend Tax on Hand Account (RDTOH) |
1) Canadian Corporations do not qualify for a dividend gross-up or DTC 2) Imposes a 33.3% tax for Canadian corporations that receive dividends and is credited to the RDTOH account 3) When a corporation pays out taxable dividends to shareholders, the tax is refunded to the corporation => It's almost as if the Part IV tax is completely negated once the shareholder receives the dividend money |
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Buy-Sell Agreement |
1. A legal agreement that transfers ownership of one owner to the others on pre-agreed terms and conditions. 2. Can be used under circumstances of death, disability or the desire of an owner to leave the business 3. Eliminate the need for the deceased's estate to seek purchasers or valuations at a time when it is vulnerable and busy with other issues |
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Types of Buy-Sell Agreements |
1. Criss-cross agreement 2. Corporate buy back agreement |
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Why should you have a buy-sell agreement? |
1. Ensures surviving shareholder has the right and capital to purchase shares at a pre-determined price 2. Prevents other family members who are not involved in the business from becoming shareholders 3. Provides a valuation of the business now instead of later at death which may result in disputes 4. CRA can deem the FMV of shares without reference to the amount specified in the agreement for non-arm's length shareholders (rule to remember) |
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What is included in a buy-sell arrangement for reasons other than death? |
1. If a shareholder becomes disabled, bankrupt or retires. Can include shot-gun or non-compete clause. 2. Management issues that arise if there is a disagreement between shareholders 3. Handling of 3rd party offer or entrance of a new shareholder |
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Criss-cross Agreement |
Requires the partners or shareholders to purchase each other's interest. Each partner purchases a life insurance policy on the lives of the other. |
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Corporate Buy Back Agreement |
Requires the corporation to buy the shares. The corporation takes out the life insurance, pays the premium and is the beneficiary of the policy |
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Advantages/Disadvantages of Corporate Owned Life Insurance |
Advantages: 1. Premiums will be more fair if there is big difference between age and health between 2 shareholders 2. Lower after-tax cost of premiums (i.e. corporations have lower tax rates than personal income tax rates) 3. More flexible in use of buy-sell arrangements (i.e. promissory note/share purchase agreement) 4. More assurance that there are funds available to pay for premiums and that the premiums will be paid regularly Disadvantages: 1. Insurance proceeds may be subject to corporate creditors 2. Complex and can lead to more complicated record keeping 3. Possible loss of QSBC status and the potential use of the CGE because CSV of policy is considered passive asset of corporation |
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Business Valuation |
-A process used to estimate the economic value of an owner's interest in a business -Valuation is used by financial market participants to determine the price they are willing to pay or receive for a sale of a business |
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Business Valuation Methods |
1. Discounted Cash Flow Method 2. Multiple of Earnings or Sales Method 3. Liquidation Value Method |
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Discounted Cash Flow Method |
Requires the valuator to estimate future cash flows (or earnings) and an appropriate discounting rate that reflects the riskiness associated with the possibility of achieving the predicted cash flow |
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Multiple of Earnings or Sales Method |
Requires the valuator to estimate, possibly by comparison to other recent transactions, a multiple that will be applied to net earnings or gross sales to estimate a fair purchase price |
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Liquidation Value Method |
Attempts to value a business by summing the values at which the assets of the business could be sold |
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Non-cash Gifts and Awards |
1) Less than $500 given annually to an arm's length employee is non-taxable
2) More than $500 given annually to an arm's length employee is taxable |
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Use of Employer's Recreational Facilities |
1) When an employer makes available a recreational facility (i.e. exercise room, swimming pools, gym) to all employees, it is considered a non-taxable benefit 2) If the recreational activities are provided only to a select group, it is considered to be a taxable benefit to the individuals in the select group |
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Professional/Union Dues |
Fully tax-deductible if they are required to maintain the taxpayer's professional status |
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Club Dues |
1) If an employer pays an employee's membership fee to a social or athletic club where membership is primarily for the employer's advantage, the fee is not a taxable benefit to the employee 2) If the club is not a primary benefit for the employer, the club dues paid by the employer will be a taxable benefit for the employee |
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Financial Planning Benefits |
1. Not taxable to the employee if the employer pays for services in respect to re-employment or retirement 2. Taxable benefit to the employee if the employer pays for regular financial or tax preparation |
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Canada Child Benefit (CCB) |
Provides a tax-free maximum annual benefit of $6400 per child under 6 and $5400 per child ages 6-17. 1. Benefit is clawed back when net family income > $30K and again when net family income > $65K 2. CCB provides additional Child Disability Benefit (CDB) up to $2730 per child of any age that is eligible to receive the DTC |
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Working Income Tax Benefit (WITB) |
A refundable tax credit for low income Canadian residents that are 19 years old or older and not a full-time student 1. Must earn income of at least $9000/year 2. WITB is clawed back once you earn $16 000/year for an individual 3. Refundable tax credit of approximately $1400/year |
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Dividends from Taxable Canadian Corporations |
1) Eligible Dividends 2) Non-eligible Dividends |
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Eligible Dividends |
1. Public Canadian Corporations qualify for a 38% dividend gross-up and a 15% dividend tax credit 2. Active business income beyond the $500K threshold can also pay eligible dividend from GRIP |
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Non-eligible Dividends |
1. CCPCs qualify for the 16% gross-up and 10% dividend tax credit 2. Active business income below the $500K threshold can pay non-eligible dividend from LRIP |
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Carrying Charges and Interest Expense |
Costs to earn income from a business or property is a deductible expense, 1. Interest Expense 2. Guarantee Fees 3. Safety Deposit Box (no longer deductible) |
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Capital Property |
Non-depreciable and depreciable property and the disposition of this property results in a capital gain/loss or recapture of depreciation or a terminal loss, 1) Personal-Use Property 2) Listed Personal Property 3) Other Property |
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Personal-Use Property |
Property used for personal use or enjoyment (i.e. automobile, boats, cottage, principal residence) |
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Listed Personal Property |
1. Items/collection of personal items including works of art, jewellery, rare book, stamp and coins 2. Capital losses can be carried back 3 years and forward for 7 years |
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De minimus Rule |
ACB and FMV is set to a minimum of $1000. Capital gains are only subject to amounts greater than $1000 |
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Other Property |
Capital property for the purpose of earning income (i.e. bonds, securities, rental property, equipment) |
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Factual Resident |
A person resident in Canada who normally lives in Canada |
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Deemed Resident |
A person deemed a resident of Canada by statute, typically a person that spends at least 183 days (not consecutive) can be a deemed resident |
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Dual Resident |
A resident of more than one country |
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Non-Resident |
1. A person who no longer lives in Canada 2. Non-residents are still taxed on income earned in Canada from employment earnings, business carried in Canada and capital gains of Canadian property |
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How much should you set aside for an emergency fund?
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Typically 3 months of living expenses |
