AFM 202 Tax Tutorial Slides Week 2_2014 (3).pptx

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AFM 202 Tax Tutorial Sept. 19, 2014

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AFM 202 Tax TutorialSept. 19, 2014

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In this tutorial

• Personal Income Tax Administration

• Capital vs. Income

• Identical Shares• Capital ains !eserve

• Personal "se Propert# 

• $mplo#ment Income

• $mplo#ed vs. Sel% $mplo#ed• $mplo#ee Stoc& 'ptions

• (ividends

• Inte)ration

• $mplo#ment ded*ctions

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Personal Income Tax Admin

• Income is calc*lated on a calendar #ear +asis-an*ar# to (ecem+er

• /ilin) deadline April 0 -*ne 1 %or sel%3emplo#ed

• Penalties %or lateinacc*rate %ilin)s

5 6ate7 8 o% *npaid tax 18 o% *npaid tax each mth5 /alse statement7 )reater o% a :100 + 08 o% tax

other;ise paid

5 /ail*re to disclose7 :100 penalt# %or each %ail*re

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Capital vs. Income• Taxpa#ers pre%er capital treatment %or a

disposition rather than an income treatment

5 'nl# hal% taxa+le 08• $xample7

5 Sellin) inventor#7 +*siness income

5 Sellin) +*siness e<*ipment7 capital )ain

• 6oo& at taxpa#er=s intention at time o% disposal

>at*re o% asset

Taxpa#er=s +*siness andtransaction in

<*estion

Taxpa#er=s +ehavio*r

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Solution – Example Date Type # of shares Price/share Total Cost

-an12014 P*rchase 20 100

/e+12014 P*rchase 10 0 00Total 1 40012 400

@ar12014 Sale 2 1B

'*tstandin) B 2 21

Proceeds 24

 AC? 1B 2

C B 2431B

TC 29 B08

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Capital !ains "eserve

• Applies ;hen #o* have a capital )ain +*t #o*havenDt act*all# received the mone# #et

• Can ded*ct a reserve %or C realiEed this #ear

• Calc*lation is7 6essor o% 5  A proceeds #et to +e received total proceeds

C5 ? F3 n*m+er o% #ears doneG C

• Add reserve +ac& into income next #ear

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Personal #se Propert$• >o C6 on personal *se propert# 

• C on P"P

• Special r*les %or 6isted Personal Propert# 5 $xamples7 art, He;eller#, rare +oo&s, stamps, coins

5 Capital losses on 6PP can +e *sed to o%%set capital )ains on 6PP

• Proceeds75

I% :1,000, Proceeds5 I% J:1,000, :1,000

• AC?75 I% :1,000, AC?

5 I% J:1,000, :1,000

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Simple P#P Examples

• Cost7 :00

• Proceeds7 :1,000

• C:1,0003:1,0000

• Cost7:1,100

• Proceeds7:00• C:1,0003:1,100:1000

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Emplo$ment Income• Tests7

5 $conomic realit# 

Control, ';nership o% tools, chance o% pro%itloss5 Inte)ration

5 Speci%ic !es*lts

5 Contract

• $mplo#ed7

5 Speci%ic ded*ctions

5 CPP7 4.98 salar# *p to 2,003 ,00

5 $I7 1.BB8 salar# *p to 4B,K00

• Sel% $mplo#ed7

5 (ed*ct all reasona+le +*siness expenses %rom income

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Stoc% &ptionsPublic CCPC

• rant date3 no tax

conse<*ences

• $xercise date3

5 $mplo#ment income priceat exercise L price at )rant

M o% options exercised5  Add this to the AC? o% shares

• Sale date3

5 Capital )ainloss proceeds 3

 AC?

• rant date3 no tax conse<*ences

• $xercise date3 no taxconse<*ences

• Sale date3

5 $mplo#ment income priceat exercise L price at )rant M o% options exercised

5  Add this to the AC? o% shares

5 Capital )ainloss proceeds 3

 AC?

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'ividends

• rossed *p ;hen received as individ*alsconcept o inte)ration

• P*+lic eli)i+le7 B8 )ross *p5 /ederal (TC7 K11 o% )ross *p

5 Provincial (TC7 11 o% )ross *p

• CCPC ineli)i+le7 28 )ross *p5 /ederal (TC7 11B o% )ross *p

5 Provincial (TC7 1B o% )ross *p

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Example ( – 'ividends

• -oe received a :1000 dividend %rom ?lac&+err#p*+lic compan# and a :1000 dividend %rom6ocal compan# CCPC. Ohat amo*nt sho*ld +erecorded on the tax ret*rn and ;hat is the (TCto +e reported %or each

• Ass*me mar)inal tax rate o% 4K8

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Solution ( – 'ividends Pro)lemEligible Ineligible

(ividend 1,000 1,000

ross *p B8 B0 28 20

Total (ividendIncome

1,B0 1,20

/ed Q Prov Tax 4K8 K 4K8

/ederal (TC K11 20 11B 1B1Prov (TC 11 1 1B K9

Total Credits B0 20

Taxes Pa#a+le 2 2

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Inte*ration

• Point is so +*sinesses and individ*als pa# thesame amo*nt o% tax

• Seen thro*)h7 (ividend )ross *p and (TC,di%%erent tax rates %or individ*als andcorporations, S?(

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Emplo$ment 'eductions•  @ost o% the time incl*ded on 6ine 229 o% the - %orm

• This is %or other emplo#ment expenses

• The %orm has a +*nch o% di%%erent thin)s that can +eded*cted %rom income

• The - %orm does not speci%ic ded*ctions s*ch as!!SP ded*ctions

• $nter on /orm T

• Some expenses are not ded*cti+le *nless the# ;erere<*ired %or the p*rpose o% emplo#ment m*st

complete %orm T2200

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Emplo$ment Expenses

• In the process o% earnin) income, there are someexpenses that can +e ded*cted

• $xpense ded*ctions are %oc*sed in section B o% theincome tax act

• There are di%%erences in the treatment dependin)on i% the individ*al is a Rcommissioned or re)*laremplo#ee

!elevant Sections to &no;7 B1+imshh.1H

% %or the income tax act

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Examples o+ deductions

'ther ded*ctions

Incl*des thin)s s*ch as7

entertainment costs, meals

Pro%essional %ees, le)al %ees

restricted etc.

ome '%%ice $xpenses@*st +e prorated %or the amo*nt o%

space in ho*se

Incl*des7 heatin), electricit#,

telephone etc.

 A*tomo+ile $xpensesCCA ded*ction i% o;ned +# #o* Costs associated ;ith car

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Commissioned versus re*ular

• Pro%essional H*d)ment is re<*ired to determinei% certain items sho*ld +e ded*cted *nder

speci%ic sections o% the income tax act• (etermine i% the amo*nt o% ded*ctions )iven *p

some;here else are )oin) to +e made *p in

)reater amo*nts in another sectionThe per%ect example ;o*ld +e B1% vers*s B1h h.1

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"e*ular ,on-Commissioned Emplo$ee

• Can ded*ct le)al costs to retrieve salar# not paid

• Pro%essional mem+ership %ees

• Trade *nion d*es• !PP contri+*tions

• Travellin) expenses other than vehicle expenses5 /or example meals have special restrictions on them  

m*st +e a;a# %or 12 ho*rs or more and onl# 08 isded*cti+le

• A*tomo+ile expenses that are not capital in nat*res*ch as )as, maintenance and lease costs T A*to

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Commissioned Emplo$ees

• The# %all *nder B 1 %

• Commissions are sho;n *nder the T4 in +ox 42

• $mplo#ee did not have an allo;ance %or travelexpenses

• B 1 % is capped at the commission income

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Taxprep and Emplo$ment Expenses• /orms that are important to remem+er are7

1. T2200 (eclaration o% Conditions o% $mplo#ment5 The %orm notes i% there are certain expenses the

emplo#er is )ivin) permission the emplo#ee can ded*ct5 Certain criteria incl*de7

a Oas the emplo#ee s*ppose to pa# %or certain expenses

 + (id the Ho+ re<*ire the emplo#ee to +e o*t o% to;n %or

certain periods o% timec (id the emplo#ee have speci%ic allo;ances related to

coverin) speci%ic t#pes o% expenses

6ets loo& at this %orm on taxprep

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Taxprep and Emplo$ment Expenses/orm -229 'ther emplo#ment income

• 6in&ed to T Statement o% $mplo#ment $xpenses5 Thin& o% this as the %orm that a))re)ates ever#thin)

5 There are speci%ic %orms associated ;ith speci%ic t#pes o%expenses s*ch as7 TA  a*tomo+ile, enter all the eli)i+le a*tomo+ile expenses

here

TCCA 

 i% #o* o;n the a*tomo+ile, #o* can ded*ct a portiono% this

!$@$@?$! A66 T$S$ $UP$>S$S @"ST ?$ P!'!AT$(/'! ?"SI>$SS "S$

(ed*cti+ilit# o% expenses is dependent on i% there ;as an

allo;ance provided to the individ*al lets ta&e a loo& at the

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Example

Pro%essor Timoth# is an ed*cational cons*ltantand he creates co*rses on taxation at the

"niversit# o% Oaterloo to second and %o*rth #earst*dents. is contract states that he has to pa#certain expenses related to his emplo#ment. edoes not possess an o%%ice and nor does he receivean# allo;ances.

'n a theoretical level, ;hat expenses can thePro%essor ded*ct %rom his emplo#ment income

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Solution 1. ome '%%ice $xpenses

There is a test %or home o%%ice expenses75 The individ*al m*st spend more than 08 o% their time

 ;or&in) %rom there

5 There m*st +e a constant stream o% meetin)s at the locationand it is %or the p*rposes o% earnin) emplo#ment income

5 These expenses do need to +e prorated +ased on the spaceat the ho*se

2.  A*tomo+ile expenses5 Potential thin)s he ma# +e a+le to claim incl*de7 ins*rance,

)as, CCA maintenance etc. ?*t these need to +e prorated %or +*siness *se

 OV

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Example /-ane is the Nice President o% @ar&etin) at A?CCompan#. er salar# is :12,000 and she received a

:0,000 commission d*e to ro+*st sales attri+*ted toher tremendo*s mar&etin) campai)n.

 Ohat are the options %or -ane in re)ards toded*ctions Thin& o% the income tax act sections

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Example • -ane is a sales person and she ;as re<*ired to pa# the %ollo;in)

expenses %rom her poc&et75 Telephone costs :00 all %or +*siness

5 -ane ;or&s %rom home and approximatel# occ*pies 08 o% the ho*se

%or ;or&. She inc*rred the %ollo;in) expenses related to this7 @ort)a)e interest o% :2000

Ins*rance o% :21

Propert# Tax o% :124

$lectricit# o% :42K

eatin) o% :215  A*tomo+ile costs as W :1000, @aintenance at :20, 6icense

costs W :100. The car ;as *sed 8 %or +*siness. This is her car and she p*rchased it on @arch 1, 2011 %or :9,000. Please

note this ;as a simple passen)er vehicle.

In order to +*# the car, #o* had to ta&e a loan o% :,000 and d*rin) 2011 #o* paid :2 in interest related to this loan

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Solution

1.  Oere these expenses %or the p*rposes o%earnin) income

The ans;er is #es the# ;ere so ;e can ded*ctthem there is no mention o% allo;ances thatmi)ht impact o*r decision so ded*ct

1 Telephone costs are ded*cti+le W :00, sinceall o% them ;ere %or +*siness p*rposes

2  Ohat other thin)s can ;e ded*ct

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Solution cont1d• ome '%%ice $xpenses

5 6oo& at the test do ;e meet the test7

The individ*al m*st spend more than 08 o% their time ;or&in) %rom there

There m*st +e a constant stream o% meetin)s at the locationand it is %or the p*rposes o% earnin) emplo#ment income

 As per the in%ormation in the <*estion, I thin& ;e can sa# thatshe meets the criteria %or home o%%ice expenses.

 Ohat home o%%ice expenses can she ded*ct

6et=s ass*me the +est thin) to do is to ded*ct *nder B1%.

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Solution cont1d @ort)a)e interest o% :2000

Ins*rance o% :21

Propert# Tax o% :124

$lectricit# o% :42K eatin) o% :21

• Mortgage is not deductible

• I% ;e are sa#in) B1%, the %ollo;in) are ded*cti+le7

5 Ins*rance W :215 Propert# Tax W :124

5 The rest7 electricit# and heatin) W :42K and :21 arealso ded*cti+le

5 Prorate %or 08, o*r home o%%ice ded*ction is :,K2.0

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Solution cont1d• A*tomo+ile costs important to note that she o;ns the

car

5 This is important +eca*se she can ta&e a CCA ded*ction5 Passen)er vehicles are class 10.1 assets and there%ore can

ta&e a 08 CCA on an ann*al +asis. In the ac<*isition #ear ;e do the hal% #ear r*le

5 Class 10.1 also has a limit o% :0,000 per car, re)ardless o%

the price. Oith ST, ;e have a cost o% :0,0001.1:,900

5 There%ore, o*r CCA ded*ction %or the #ear is as %ollo;s :,900 0.0. :0B

Prorate this %or +*siness *se W8 :29

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QUESTIONS?