24. Canadian Taxation

Section 8: Working with the Client

24 Canadian Taxation

25 Fee-Based Accounts

26 Working with the Retail Client

27 Working with the Institutional Client

Canadian Taxation 24

Chapter Overview

In this chapter, you will learn the basics of taxation, including the tax features of pension income, tax deferral plans, and tax-free savings plans in Canada. We explain how the different types of income are taxed and identify the expenses related to investment income that might be tax-deductible. We also explain the two main types of pension plans and the different types of tax deferral and tax-free registered plans. Finally, you will learn some basic tax planning strategies.

Learning Objectives

Content Areas

1. Differentiate between the tax treatment of interest income, dividends, and capital gains or losses.
2. Calculate investment gains and losses.
3. Describe the different tax deferral and tax-free plans and their uses.
4. Identify basic tax planning strategies and strategies for minimizing tax liability.

Key Terms

Key terms are defined in the Glossary and appear in bold text in the chapter.

• Annuity: A series of payments made at equal intervals.
• Past service pension adjustment: Amount of retirement benefits provided for service before the effective date of the pension plan.
• Attribution rules: Rules designed to prevent income splitting.
• Pension adjustment: Reflects the value of retirement benefits accruing during the year.
• Canada Education Savings Grant (CESG): A grant that the federal government adds to registered education savings plans.
• Pooled registered pension plan (PRPP): A new kind of defined contribution pension plan design introduced to provide retirement savings to mainly small companies and self-employed individuals.
• Carrying charges: Expenses incurred to earn investment income that can be deducted for tax purposes.
• Registered education savings plan (RESP): A tax-sheltered investment vehicle designed to encourage saving for post-secondary education in Canada.
• Registered pension plan (RPP): A pension plan that has been registered with the Canada Revenue Agency.
• Registered retirement income fund (RRIF): An income fund created for a retired person from a registered retirement savings plan.
• Registered retirement savings plan (RRSP): A retirement savings plan that is registered with the Canada Revenue Agency within which an individual’s contributions are tax-advantaged.
• Self-directed registered retirement savings plan (SDRRSP): A version of the registered retirement savings plan that is self-managed within a prescribed statutory framework.
• Spousal registered retirement savings plan: A registered retirement savings plan where one spouse contributes to the plan for the other spouse.
• Superficial losses: Losses that occur when a security is sold and repurchased within 30 days.
• Tax-free savings account (TFSA): A flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income.
• Withholding tax: Taxes retained from income and remitted to the government.
• Deemed disposition: A transaction in which the Canada Revenue Agency pretends an asset was sold at fair market value, often for calculating taxes on capital gains.

Chapter 24: Canadian Taxation

Key Takeaways

• Understand how different types of income such as interest, dividends, and capital gains are taxed in Canada.
• Learn about various tax deferral and tax-free plans like RRSPs, TFSAs, and RESPs.
• Discover straightforward tax planning strategies to minimize tax liability effectively.

FAQ

Q1: What is capital gains tax?

A1: Capital gains tax is levied on the profit from the sale of assets or investments when such assets were purchased at a cost lower than the price at which they were sold.

Q2: How does an RRSP benefit me?

A2: Contributions to an RRSP can be deducted from your taxable income for the year, effectively lowering your overall tax burden. The investment grows tax-deferred until withdrawal.

Q3: What is the difference between a TFSA and an RRSP?

A3: Contributions to RRSPs are tax-deductible, while contributions to TFSAs are not. However, withdrawals from a TFSA are tax-free, whereas RRSP withdrawals are taxed as income.

Mathematical Formulas

To calculate after-tax returns on investment:

Tax Benefit Comparison

    pie
	    title Tax Benefit Comparison
	    "Tax Deductible (RRSP)" : 45
	    "Tax-Free (TFSA)" : 30
	    "Deferred (RESP)" : 25

Glossary

• Marginal Tax Rate: The percentage of tax applied to your income for each tax bracket in which you qualify.
• Income Splitting: A strategy to reduce family tax burden by redistributing income in a way to achieve lower overall taxes.
• Fiscal Year: A year as reckoned for taxing or accounting purposes.
• Money Purchase Plans: Pension plans in which contributions are fixed, but the benefits vary according to the amount of money contributed and the performance of the investment between the time contributions are made and retirement.

This guide will provide you with an essential understanding of Canadian taxation, specifically designed to aid your preparation for the Canadian Securities Course certification exam. Happy studying!

In this section

• 24.1 Introduction
  Learn about the importance of understanding the basics of taxation for investment advisors in Canada. This chapter covers the types of investment income and their different tax treatments, along with strategies for optimizing after-tax returns.
• 24.2 Canadian Taxation System
  Detailed guide on the Canadian Taxation System, covering tax treatment of interest income, dividends, and capital gains or losses.
  • 24.2.1 Calculating Income Tax
    Understanding the process of calculating income tax in Canada, including steps on taxable income, allowable deductions, tax credits, and net tax payable.
  • 24.2.2 Types Of Income
    Learn about the four types of income and how they are taxed under Canadian tax laws. Detailed insights on Employment Income, Business Income, Income from Property, and Capital Gains/Losses.
  • 24.2.3 Taxation Of Income
    Comprehensive guide on the taxation of income in Canada, detailing federal and provincial tax rates, calculations, and illustrations.
  • 24.2.4 Taxation Of Income From Property
    Learn about the taxation of income from property including registered plans, interest income, dividends from taxable Canadian corporations, and dividends from foreign corporations. Discover the intricacies of capital gains, and methods to minimize taxable investment income.
  • 24.2.5 Tax-deductible Items Related To Investment Income
    Explore the various tax-deductible expenses related to investment income, including allowable carrying charges and those you cannot deduct. This guide provides comprehensive details to help you make informed decisions regarding tax deductions.
• 24.3 Capital Gains And Losses
  Learn about calculating capital gains and losses, understanding the terminology, and the tax implications based on CRA definitions in our detailed guide on Capital Gains and Losses.
  • 24.3.1 Disposition Of Shares
    Comprehensive guide on determining capital gains or losses when disposing shares, principles of adjusted cost base, and considerations for warrants, rights, and stock dividends in Canadian taxation.
  • 24.3.2 Disposition Of Fixed-income Securities
    An in-depth guide to understanding the disposition of fixed-income securities, covering capital gains, accrued interest, and practical examples.
  • 24.3.3 Capital Losses
    Understand how capital losses are calculated, the rules for worthless and superficial losses, and their implications in Canadian tax law.
  • 24.3.4 Tax Loss Selling
    Learn about tax loss selling, a strategy used to minimize taxes by selling securities at a loss and offsetting capital gains. Find details on timing, calculations, and considerations for making this investment decision.
• 24.4 Tax Deferral And Tax-free Plans
  Explore different tax deferral and tax-free plans available in Canada, their benefits, usage, and key aspects. Detailed explanation and FAQs included.
  • 24.4.1 Registered Pension Plans
    Comprehensive overview of Registered Pension Plans (RPPs) in Canada, detailing various components like Pension Adjustments, types of plans including Money Purchase Plans and Defined Benefit Plans, and critical tax implications.
  • 24.4.2 Registered Retirement Savings Plans
    Learn about Registered Retirement Savings Plans (RRSPs) including the types, contributions, withdrawals, and tax implications.
  • 24.4.3 Registered Retirement Income Funds
    Learn about Registered Retirement Income Funds (RRIF), including their features, rules for withdrawals, tax implications, and investment options.
  • 24.4.4 Deferred Annuities
    Learn all about deferred annuities, their features, tax implications, and the benefits they provide to investors. Gain comprehensive insights into how these financial products fit into your broader investment strategy.
  • 24.4.5 Tax-free Savings Accounts
    Learn about Tax-Free Savings Accounts (TFSAs), including basic rules, taxation, qualified investments, contributions, and withdrawals. Discover how they can fit into your financial planning.
  • 24.4.6 Registered Education Savings Plans
    A detailed guide on Registered Education Savings Plans (RESPs) explaining their features, types, tax implications, contribution limits, and additional benefits like the Canada Education Savings Grant (CESG).
  • 24.4.7 Pooled Registered Pension Plans
    An in-depth guide on Pooled Registered Pension Plans (PRPPs) covering eligibility, benefits, administration, and comparisons with other registered investments like RRSPs.
• 24.5 Tax Planning Strategies
  Effective tax planning is crucial for investors aiming to maximize their after-tax return. This section explores key strategies and considerations to minimize tax liability within legal parameters.
  • 24.5.1 Splitting Income
    Explore the strategy of income splitting to manage taxes efficiently by shifting income from higher to lower tax brackets within family structures.
  • 24.5.2 Transferring Income
    Learn about the intricacies of transferring income within family members and the tax implications it can entail under Canadian tax laws, including exceptions and attribution rules.
  • 24.5.3 Paying Expenses
    Optimize tax savings by strategically managing family expenses and investment contributions based on spousal incomes.
  • 24.5.4 Making Loans
    Understand how making loans within a family can be effective for tax purposes by following the specific rules and regulations set by the CRA. Learn about the prescribed rates, interest, and how to maximize the benefits.
  • 24.5.5 Discharging Debts
    Understand the concept of discharging debts in the context of tax strategies involving spouses and non-arm’s length individuals. Learn the rules, strategies, and examples that demonstrate how this can be utilized for tax savings.
  • 24.5.6 Canada And Quebec Pension Plan Sharing
    Comprehensive guide on Canada and Quebec Pension Plan sharing, including eligibility, process, and benefits. Learn how to split pensions with your spouse.
  • 24.5.7 Gifting
    Explore the implications of gifting investments to adult children or parents, including a case scenario and related key terms.
• 24.6 Summary
  Comprehensive summary and key takeaways on Canadian taxation, including world and Canadian-source income, tax deferral plans, income splitting, and tax planning strategies.