CHAPTER 7 personal income tax
CHAPTER 7 personal income tax GENERAL CONCEPTS OF INCOME TAXATION Prescribed forms: Canadian income taxation based on self-assessment completed on income tax return Progressive: for Canadian system for individuals that higher levels of taxable income are taxed at higher rates o Lower rate applies to all income up to a specific level, then al income above that level is taxed at the higher level Average tax rate: total tax payable divided by total income Marginal tax rate: rate applied to one more dollar of income o Average tax rate will be equal to or less than the marginal rate Marginal after-tax rate = (1 – marginal tax rate) x (interest rate) Surtaxes: taxes based on the tax, they are temporary and usually apply most heavily on upper tax brackets INVESTMENT INCOME Dividends tax credit: neutralizes the effect of double taxation o A company pays dividends after it has paid tax on them; when shareholders receive dividends from the company they must pay income tax on the dividends o Any dividends received from a Canadian company is grossed up by one-quarter (multiplied by 1.25) and grossed-up amount, called taxable amount, is included in income Deduct federal tax payable a dividends tax credit equal to 2/3 of gross-up Deduct federal tax payable a dividends tax credit equal to 1/6 of actual dividends paid Effect is to tax dividends paid by Canadian corporations less than an equivalent amount of interest
Capital gain: when you sell a capital item for more than the sum of its original price and all the transaction costs of buying and selling it Capital loss: when the selling price is less than the purchase and transaction costs Taxable capital gain: added to income on line 127 of T1, multiplied by one-half Capital gain deduction: if capital gain comes from disposition of qualified shares of a small business corporation Allowable capital loss: if sale creates a capital loss (one-half)
CALCULATING COMBINED MARGINAL TAX RATES Marginal tax useful to compare two investments opportunities with different taxes; based on after-tax cash flow Marginal tax rates essential for long-term financial planning where trying to estimate how much a particular savings plan will accumulate tc tf tp tsf tsp DTCprov
the combined marginal tax rate the marginal federal rate the marginal provincial rate federal surtax rate on the marginal federal tax provincial surtax rate on the marginal provincial tax provincial dividends tax credit as a % of the dividends paid
Interest or ordinary income with surtaxes tc = tf (1 + tsf) + tp (1 + tsp)
Capital gain: when you sell a capital item for more than the sum of its original price and all the transaction costs of buying and selling it Capital loss: when the selling price is less than the purchase and transaction costs Taxable capital gain: added to income on line 127 of T1, multiplied by one-half Capital gain deduction: if capital gain comes from disposition of qualified shares of a small business corporation Allowable capital loss: if sale creates a capital loss (one-half)
CALCULATING COMBINED MARGINAL TAX RATES Marginal tax useful to compare two investments opportunities with different taxes; based on after-tax cash flow Marginal tax rates essential for long-term financial planning where trying to estimate how much a particular savings plan will accumulate tc tf tp tsf tsp DTCprov
the combined marginal tax rate the marginal federal rate the marginal provincial rate federal surtax rate on the marginal federal tax provincial surtax rate on the marginal provincial tax provincial dividends tax credit as a % of the dividends paid
Interest or ordinary income with surtaxes tc = tf (1 + tsf) + tp (1 + tsp)
