Tax Refresher for Advisors

Transcription

1 Tax Refresher for Advisors Canadian income tax basics 1

2 Ian Tod, MBA, CFP, CLU Advanced Case Specialist, National Robert Hurdman, CFP Investment Specialist, Western Canada 2

3 Agenda Progressive taxes, tax brackets Types of income Tax deductions and tax credits Tax planning opportunities Questions 3

4 1 Progressive Tax System Tax Brackets 4

5 Progressive Tax System The more you earn, the more you pay (in theory) Higher tax percentage for higher income Marginal tax: the rate at which the next dollar of income will be taxed. Average tax: Total taxes paid total income 5

6 2018 Federal Tax Brackets Income up to the amount listed is taxed at the rate shown. This ignores all deductions. Income Marginal Tax $46,605 15% $93, % $144,489 26% $205,842 29% Thereafter 33% Example: Federal taxes only. A taxpayer who earns $250,000 will pay: $46,605 x 15% = $6, ($93,208 - $46,605) x 20.5% = $ ($144,489 - $93,208) x 26% = $13, ($205,842 - $144,489) x 29% = $17, ($250,000 - $205,842) x 33% = $ Add them all up: total tax payable = $62, Marginal federal tax rate is 33%. Average federal tax rate is 24.9% 6

7 Combined Federal and Provincial brackets - Alberta Income Federal Tax Provincial Tax Combined Tax $46,605 15% 10% 25% $93, % 10% 30.5% $128, % 10% 30.5% $144,489 26% 12% 38% $153,773 26% 12% 38% $205,031 26% 13% 39% $205,842 29% 14% 43% $307,547 33% 14% 47% Example: Combined federal and provincial taxes. Ignoring deductions. A taxpayer who earns $250,000 will pay: $46,605 x 25% = $11, ($128,145 - $46,605) x 30.5% = $24, ($153,773 - $128,145) x 38% = $9, ($205,031 - $153,773) x 39% = $19, ($205,842 - $205,031) x 43% = $ ($250,000 - $205,842) x 47% = $20, Add them all up: total tax payable = $87, Marginal combined tax rate is 47%. Average combined tax rate is 35% Thereafter 33% 15% 48% 7

8 2 Types of income 8

9 Employment and Business Income Salary, wages, bonuses, vacation pay, commissions, etc. 100% inclusion rate fully taxable Interest income and foreign dividends are also 100% taxable: GICs, bonds, annuities, dividends from foreign stocks Taxable benefits: automobile benefits, employer-paid education, interest-free or forgiven loans, stock options, etc. Non-taxable benefits: automobile allowance, RPP, DPSP contributions, relocation expenses, private health service plans, health club dues, small gifts, uniforms, subsidized meals, etc. 9

10 Capital Gains Arises when you dispose of (sell) capital property (stocks, bonds, real estate, collectibles). When you sell for a profit, there is a capital gain. Sale price purchase price = capital gain. Disposition ACB = Gain. If you sell for less than your cost, it s a capital loss. This can reduce taxable capital gains. 50% inclusion At the top marginal tax rate for the individual 10

11 Dividends Eligible dividend is paid by a Canadian publicly-traded company or private company. CCPC General income: eligible dividend. Low-rate income: Ineligible dividend Dividends are grossed up (38% for eligible). This could impact OAS or other income-tested benefits. Dividends attract a dividend income tax credit of 15.02% of the grossed up amount. This results in a tax rate of about half that of earned/interest income. 11

12 Pension Income CPP, OAS, registered pension plans, RRSPs First $2,000 is tax-free (pension tax credit) 100% inclusion Income splitting Beginning at age 55 on RPP income Beginning at age 65 on RRIF or LIF income 12

13 Points to Note CPP can be shared with a spouse to balance the taxable income. It must be applied when benefits begin. OAS pension recovery tax (claw back) starts at $75,910 and is completely clawed back at $122,843. RRIF and LIF can be based on either spouse s age. Basing it on the younger spouse s age reduces the minimum withdrawal and can save taxes, if the client doesn t require the income. 13

14 3 Tax Deductions and Tax Credits The difference between deductions and credits, some common items. 14

15 Tax Deductions Tax deductions reduce your taxable income, dollar for dollar Eg. Total earned income = $100,000 gross. Not just what is deposited to the bank account, but the full paycheque. $10,000 is contributed to an RRSP The client will calculate their taxes on $90,000 of net income. 15

16 Common Deductions RPP, RRSP contributions Professional, association and union dues Child care expenses Disability support expenses Allowable business investment losses Carrying charges and interest expenses Employment expenses Social benefit repayment 16

17 Tax Credits Tax credits reduce your taxes payable. Eg. $90,000 of net taxable income = $18, (Alberta) Tax credit of $1, (basic personal amount) Taxes payable of $17,

18 Common Tax Credits Basic personal amount, age amount, spouse amount CPP contributions, EI premiums Canada employment amount Pension income amount Tuition and education amounts, interest paid on student loans Medical expenses Donations and gifts Dividend tax credit 18

19 Avoidance vs. Evasion Avoidance means using every legal means to minimize your taxable income and maximize your credits. Evasion means being dishonest. Don t do this. General anti-avoidance rule (GAAR) is used to ensure tax rules can t be twisted to favour the taxpayer. 19

20 Alternative Minimum Tax Used to ensure people pay at least some tax It s a separate calculation Can be reclaimed in next seven years 20

21 4 Tax Planning Opportunities 21

22 RRSPs and TFSAs RRSPs provide a tax deduction. Your taxable income is reduced by the amount of your contribution. Your tax savings is at your marginal tax rate. Eg. $10,000 contr x 33% MTR = $3,300 savings RRSP investments grow tax deferred and are taxed at withdrawal Maximum contribution is 18% of T4 income, capped at $26,230 TFSAs offer no tax deduction. Investments grow tax deferred. Withdrawals are not taxed. This means the growth is never taxed. Maximum contribution is $5,500 per year 22

23 Charitable Donations The federal charitable tax credit is 15% of the first $200 and 29% of the remainder. There is also a provincial tax credit There may be a first time donor super-credit, an additional 25% on the first $1000 There is a limit of 75% of your earned income that can be donated (does not apply in the year of death) Donations can be carried forward up to five years, or transferred to a spouse 23

24 For Owners of a Corporation Income Sprinkling Private Health Service Plans FlexSave Retained Earnings 24

25 ! Bonus Start Early, Invest Wisely 25

26 The power of starting early $200,000 $180,000 $160,000 Saving $100 per month, starting at age 20, then never adding to it. Total deposits: $12,000 Account value: $189,406 $140,000 $120,000 $100,000 $80,000 Saving $100 per month, starting at age 30, until age 65. Total deposits: $43,200 Account value: $178,696 $60,000 $40,000 Assumes: 7% rate of return, net, compounded $20,000 $0 26

27 The importance of asset allocation Risk is related to return. Asset allocation ensures that a client earns the highest return for the amount of risk they accept. Another way to look at it is the lowest risk for a targeted return. Professional managers supervise these funds, rebalancing them regularly to ensure they don t stray into higher risk. 27

28 5 Questions? 28

29 Thank you. For more information, contact your local HUB BDS or Investment Specialist. 29