24.6 Summary

Summary

In this chapter, we discussed the following key aspects of Canadian taxation:

• Global Taxation: Canada taxes the world income of its residents and the Canadian-source income of non-residents. All taxpayers must calculate their taxable income annually based on four general types of income:
• Types of Income:
  • Employment income
  • Business income
  • Capital property income
  • Capital gains and losses
• Marginal Tax Rate: The marginal tax rate, which is the rate paid on each additional dollar earned, is based on the combined provincial and federal tax rate.

Capital Gains and Losses

• Capital Gain: A capital gain arises from selling a capital property for more than the adjusted cost base (ACB) plus any costs of disposing of the property.
• Capital Loss: Disposition of worthless securities results in an allowable capital loss; however, superficial losses are not eligible as capital losses and must be deferred.

Tax Deferral Plans

Tax deferral plans allow taxpayers to delay paying tax on income until a future point, typically at retirement. Contributions to these plans are limited by legislation and generally based on taxable income. Here are some key plans:

• RRSPs (Registered Retirement Savings Plans): Contributions are tax-deductible up to allowable limits, and income accumulates tax deferred while it remains in the plan.
• RPPs (Registered Pension Plans): Established by companies to provide pension benefits for their employees upon retirement.
• RESPs (Registered Education Savings Plans): Designed to pay for the post-secondary education of a beneficiary.
• RRIFs (Registered Retirement Income Funds): Require the holder to make minimum, annual taxable withdrawals based on a government-specified formula.
• PRPPs (Pooled Registered Pension Plans): Intended to fill gaps in employer-sponsored pension plans.
• TFSAs (Tax-Free Savings Accounts): Allow income from property up to a limit to be fully exempted from tax.

Income Splitting and Tax Planning Strategies

• Income Splitting: Involves transferring income from a highly taxed family member to a spouse, child, or parent who is in a lower tax bracket. Attribution rules may be triggered.
• Other Strategies: These include setting up spousal RRSPs, having the higher-taxed spouse claim tax-deductible investment expenses, making loans to family members, sharing government pension benefits, and making gifts to children or parents.

Review Questions

Now that you have completed this chapter, you should be ready to answer the Chapter 24 Review Questions.

Frequently Asked Questions

If you have any questions about this chapter, you may find answers in the online Chapter 24 FAQs.

Key Takeaways

• Canada’s taxation system involves both world income for residents and Canadian-source income for non-residents.
• Four general types of income are taxable: employment income, business income, capital property income, and capital gains and losses.
• Capital gains and losses arise from the selling of capital properties for more than or less than the adjusted cost base plus disposal costs.
• Various tax deferral plans exist, including RRSPs, RPPs, RESPs, RRIFs, and PRPPs.
• Income splitting and other tax-planning strategies can help reduce the overall tax burden for families.

Glossary

• Marginal Tax Rate: The rate of tax applied to each additional dollar of income.
• Capital Gain: The profit from selling a capital property for more than the adjusted cost base and associated disposal costs.
• Adjusted Cost Base (ACB): The cost of a property adjusted for various factors, such as improvements or previous dispositions.
• Superficial Losses: Capital losses that occur when an identical property is repurchased within 30 days before or after the sale date, which must be deferred.
• Registered Retirement Savings Plan (RRSP): A retirement savings plan with tax-deductible contributions and tax-deferred investment growth.
• Registered Retirement Income Fund (RRIF): A retirement income vehicle where the holder must start making minimum annual withdrawals based on a formula set by the government.

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📚✨ Quiz Time! ✨📚



  




## Which types of income are used to calculate taxable income in Canada?

- [ ] Employment income and rental income
- [ ] Business income and lottery winnings
- [x] Employment income, business income, capital property income, and capital gains and losses
- [ ] None of the above

> **Explanation:** Taxable income in Canada includes employment income, business income, capital property income, and capital gains and losses.


## What is a taxpayer's marginal tax rate?

- [ ] The average tax rate on all income earned
- [ ] The tax rate on inherited income
- [x] The rate paid on each additional dollar earned
- [ ] A fixed percentage of all income

> **Explanation:** The marginal tax rate is the rate paid on each additional dollar earned, combining both provincial and federal rates.


## What triggers a capital gain for Canadian tax purposes?

- [ ] Purchasing a capital property
- [ ] Renting a capital property
- [x] Selling a capital property for more than the adjusted cost base plus any costs of disposition
- [ ] Donating a capital property

> **Explanation:** A capital gain arises when a capital property is sold for more than its adjusted cost base plus any costs of disposing of the property.


## What is an allowable capital loss?

- [ ] Loss from donating a property
- [ ] Loss from property devaluation
- [x] Loss from disposing worthless securities
- [ ] Loss from rental income

> **Explanation:** An allowable capital loss is realized from the disposition of worthless securities.


## What is a tax-deferral plan?

- [ ] A plan that requires immediate tax payment
- [x] A plan that allows taxpayers to delay paying tax on income until a future date, typically at retirement
- [ ] A plan that only applies to lottery winnings
- [ ] A plan that involves prepaying taxes

> **Explanation:** Tax-deferral plans allow taxpayers to delay paying tax on income until some point in the future, typically at retirement.


## Which of the following is true for RRSPs?

- [ ] Contributions are unlimited and tax-free
- [x] Contributions are tax deductible up to allowable limits, and income accumulates tax-deferred while in the plan
- [ ] Withdrawals are tax-free
- [ ] RRSPs are funded by the government

> **Explanation:** Contributions to RRSPs are tax deductible up to allowable limits, and the income accumulates tax-deferred while it remains in the plan.


## What is the purpose of a Registered Retirement Income Fund (RRIF)?

- [ ] To provide tax-free income throughout retirement
- [x] To allow the holder to make minimum, annual taxable withdrawals based on a government formula
- [ ] To defer taxes indefinitely
- [ ] To provide post-secondary education funding

> **Explanation:** RRIFs require the holder to make minimum annual withdrawals that are taxable, according to a formula specified by the government.


## What is a common feature of a TFSA?

- [x] Income from property held in a TFSA is fully exempted from tax up to a limit
- [ ] Contributions are tax-deductible
- [ ] Withdrawals are limited to post-secondary education expenses
- [ ] TFSAs are employer-sponsored plans

> **Explanation:** TFSA income from property is fully exempted from tax, up to a specified limit.


## Which of these tax-planning strategies involves transferring income to a family member in a lower tax bracket?

- [ ] Tax deferral 
- [x] Income splitting
- [ ] Investment growth
- [ ] Immediate gifting

> **Explanation:** Income splitting involves transferring income from a highly taxed family member to a family member in a lower tax bracket to minimize the overall tax burden.


## What are attribution rules in the context of income splitting?

- [ ] Rules that determine the tax-exempt status of gifts
- [ ] Guidelines for immediate income reporting
- [x] Rules that may cause transferred income to be attributed back to the original taxpayer
- [ ] Conditions for receiving government pensions

> **Explanation:** Attribution rules can cause income that has been transferred to a family member in a lower tax bracket to be attributed back to the original taxpayer for tax purposes.