Personal Income Tax July 16, 2014
Personal Income Tax Personal income tax is an element of financial assessment, since taxation influences available resources, sources and uses of funds; Personal income tax has a significant impact on the ability to realize personal financial goals, and therefore represents an important area for strategy development
Personal Tax Rates Canada s personal income tax system is progressive - higher levels of taxable income are taxed at higher rates; Both the federal government and the provinces collect personal income tax on this basis; Tax brackets = the range of taxable income for which a specific tax rate applies: Federal PEI 0 43,561 = 15% 0 31,984 = 9.8% 43,561 87,123 = 22% 31,985 63,969 = 13.8% 87,123 135,054 = 26% > $63,969 = 16.7% > $135,054 = 29%
Personal Tax Rates In addition to federal / provincial taxes on income, some jurisdictions also apply a surtax, which represents a tax on tax ; For example, PEI levies a 10% surtax on the amount of provincial taxes > $12,500; In PEI, the 2012 combined tax rates ranged from: 24.80% (15% +9.8%) 47.37% (29.0% + 16.7% + 1.67% surtax)
Personal Tax Rates Average tax rate = total taxes payable / total income; Provides an overall measure of tax burden, but does not reflect the rate that will apply to specific decisions; Average tax rates would be unique to the individual Marginal tax rate = tax rate that applies to one more dollar of income or incremental savings from one more dollar of deduction; Marginal tax rate is the relevant rate for specific personal tax planning decisions; Marginal tax rate varies according to the type of income (e.g. capital gains, dividends, other income);
Personal Tax Rates Different tax brackets, different taxing authorities, and different tax treatment of certain types of income combine to create an array of effective or marginal tax rates 2013 Personal Tax Calculator: http://www.ey.com/ca/en/services/tax/tax-calculators-2013-personal-tax
Marginal Tax Rates for PEI 2013 Taxable Income Income (General) Capital Gains Canadian Eligible Dividends first $31,984 24.80% 12.40% -0.99% over $31,984 up to $43,561 over $ 43,561 up to $63,969 over $63,969 up to $87,123 over $87,123 up to $98,145 over $98,145 up to $135,054 28.80% 14.40% 4.53% 35.80% 17.90% 14.19% 38.70% 19.35% 18.19% 42.70% 21.35% 23.71% 44.37% 22.19% 24.56% over $135,054 47.37% 23.69% 28.70% Marginal tax rate f or dividends is a % of actual dividends received.
Personal Income Tax Return One personal income tax return (T1) is used for both federal and provincial taxes; Step1: Calculate Total Income from all sources; Step 2: Step 3: Claim Deductions from Total Income to determine Net Income; Claim any further Deductions from Net Income to determine Taxable Income;
Personal Income Tax Return Step 4: Calculate Federal Tax based on Taxable Income; Apply federal Non-Refundable Tax Credits and federal dividend tax credits to determine Federal Tax Payable;
Personal Income Tax Return Step 5: Calculate Provincial Tax based on Taxable Income; Apply provincial Non-Refundable Tax Credits and other provincial tax credits, including dividend tax credit, to determine Minimum Provincial Tax; Calculate and add Provincial Surtax, if applicable, to determine Total Provincial Tax payable;
Personal Income Tax Return Step 6: Combine Federal Tax and Provincial Tax to determine Total Tax Payable; Deduct income taxes deducted at source / tax installments to determine net Balance Due / Refund.
Personal Tax Return Total Income Total Income (see P2, T1 General): Employment Income Canada Pension / Old Age Security Employment Ins. / Universal Child Care Benefit Pension / RRSP Income Taxable Amount of Eligible Dividends (Taxable amt = 1.38 x actual dividend received) Interest Income Self-employment (Net Income / Loss) Rental Income (Net Income / Loss) Taxable Capital Gains (Taxable Amt = ½ x Capital Gain)
Self-Employment Income Self-employment income is calculated and reported on T1 for proprietorships & partnerships; Self-employment = business, professional, farming & fishing Use supporting schedules to report gross income, and detail eligible business expenses; Complete a separate form for each business or professional activity operated; Business expenses are deductible on the basis they were be incurred with reasonable expectation of earning income; Report only net income or loss on the T1
Self-Employment Income Business expenses can include: Business use of home office expenses, apportioned on the basis of the area of work space divided by the total area of your home. Cannot use these expenses to increase or create a business loss, but can carry-forward unused amounts to future years; Motor vehicle expenses, including business use of a personal vehicle, apportioned on the basis of mileage travelled for business purposes divided by the total mileage for the year; Depreciation, as represented by Capital Cost Allowance, using CRA prescribed asset categories & rates; Interest on business related loans or borrowing.
Taxable Dividends Dividends represent after tax distributions from limited companies. Accordingly, the income has already been subject to tax at the corporate level; Personal tax treatment of dividends tries to adjust for this corporate tax to avoid double taxation ; For tax reporting purposes, actual dividend payments from publicly-traded taxable Canadian corporations are grossed up by 38% of the amounts received when included in income. The reported amounts are referred to a taxable dividends ; In turn, federal and provincial dividend tax credits can be claimed; Federal tax otherwise payable is reduced by or 15.02% of the taxable amount; Provincial tax otherwise payable is reduced by 10.5% of the taxable amount.
Taxable Dividends Marginal Tax Rate on Dividends is different than rate for all other sources of income. (PEI, Top bracket = 28.70%) 2013 Taxable Income Income (General) Capital Gains Canadian Eligible Dividends first $31,984 24.80% 12.40% -0.99% over $31,984 up to $43,561 over $ 43,561 up to $63,969 over $63,969 up to $87,123 over $87,123 up to $98,145 over $98,145 up to $135,054 28.80% 14.40% 4.53% 35.80% 17.90% 14.19% 38.70% 19.35% 18.19% 42.70% 21.35% 23.71% 44.37% 22.19% 24.56% over $135,054 47.37% 23.69% 28.70% Marginal tax rate f or dividends is a % of actual dividends received.
Capital Gains / Losses Capital transactions are taxed differently from income items; Common types of capital property include: cottages; securities: stocks, bonds, and mutual fund units; land, buildings, including rental properties. Capital Gain / Loss = Proceeds from Sale - (Cost Base + Selling Costs/Outlays) Taxable amount of Capital Gain = ½ x Capital Gain Allowable Capital Loss = ½ x Capital Loss Allowable Capital Losses can only be applied against Taxable Capital Gains these losses cannot be deducted from other sources of income; Marginal Tax Rate for Capital Gains = ½ x rate on other income;
Capital Gains / Losses Example In 2013, Mario sold 400 shares of Public Corporation for $6,500. He received the full proceeds at the time of the sale and paid a commission of $60. The adjusted cost base of the shares is $4,000. Mario calculates his capital gain as follows: Proceeds of disposition $ 6,500 A Adjusted cost base $ 4,000 B Outlays and expenses on disposition + 60 C 4,060 D Capital gain (line A minus line D) = $ 2,440 E Because only 1/2 of the capital gain is taxable, Mario reports $1,220 as his taxable capital gain as part of his total personal income.
Rental Income Rental property income is calculated and reported on T1 for each property an individual owns or co-owns; Use supporting schedules to report gross income, and detail eligible rental expenses; Complete separate form for each rental property operation; Rental expenses are deductible on the basis they were be incurred with reasonable expectation of earning rental income; Rental expenses can include depreciation, as represented by Capital Cost Allowance, using CRA prescribed asset categories & rates. However, an individual cannot claim depreciation / CCA to increase or create a rental loss, Report only net income or loss on the T1
Personal Tax Return Deductions from Total Income To determine Net Income (see P3, T1 General): Registered Pension Plan contributions; Registered Retirement Savings Plan (RRSP) contributions Professional / Union Dues Child Care Expenses Moving Expenses (> 40km, move for employment / selfemployment, full-time attendance at university) Carry Charges / Interest Expense incurred to earn investment income
Deductions from Total Income Deduction for RRSP Contributions In 2013, RRSP contributions are subject to annual contribution limit: 18% of previous year s (2012) earned income to max. of $23,820; less any 2012 Pension Adjustment as reported by employer (if you also contribute to RPP), plus all unused contribution room accumulated and carriedforward from previous years; Unused RRSP contribution room carries forward & accumulates; It is possible to contribute more than the $23,820 annual RRSP limit in a 2013 if you have unused contribution room from previous years;
Deductions from Total Income Deduction for RRSP Contributions Example: You had earned income of $100,000 in 2012 and paid $4,250 into your company's Registered Pension Plan In all prior years you have contributed the maximum deductible amount; 2013 Contribution Limit: Multiply $100,000 by 18% to determine your maximum contribution which would be $18,000 (Cannot exceed $23,820). Subtract the $4,250 Pension Adjustment, as represented by the 2012 amounts paid into company plan No unused amounts carried forward from previous years Deduction limit = $13,750
Personal Tax Return Deductions from Total Income Other deductions from Net Income to Taxable Income (see P3, T1 General) For purposes of Bus 421: Taxable Income = Net Income
Personal Tax Return Federal Tax Federal Tax Calculation (see Schedule 1): Federal tax calculation based on taxable income: Federal tax is then reduced by amount equal to 15% of Nonrefundable Tax Credits. Basic personal amount, age, spouse /dependants, CPP / EI contributions, tuition, interest on student loans, amounts transferred, medical expenses > 3% of net income; Federal tax is reduced by Non-refundable Charitable Donation credits (@ 15%; 29% for all donations over $200) Dividend tax credit (15,02% of the taxable amount of eligible dividends)
Non-Refundable Tax Credits Spouses / Dependants The calculation of federal tax allows for the sharing of various nonrefundable tax credits within a family unit; All taxpayers are eligible to claim a Basic Personal Amount to reduce federal taxes ($11,038 x 15%) therefore there is effectively no federal tax on the first $11,038 in income; Spouses, children, parents, grandparents, etc. may qualify as dependants for tax purposes under certain circumstances; Various tax credits may be claimed for these dependents: Amount for Spouse ($11,038 net income); Amount for Eligible Dependent (in place of Amount for Spouse) Amount for Children <18 ($2,234 each) Age Amount ($ 6,854 if >= age 65) Disability Amount and/or Transfer ($7,697) Tuition / Education Amount and/or Transfer Medical Expenses
Non-Refundable Tax Credits Other Federal Tax Credits Taxpayers are eligible to claim tax credits for their actual contributions to CPP ($2,356.20 max) and EI ($891.12 max.); Taxpayers that report employment income, can also claim the Canada Employment Amount ($1,117 max); Taxpayers that are first time home buyers can claim a one-time federal tax credit of $5,000 - Home Buyers Amount (one claim per couple); Other federal tax credits: Interest Paid on Student Loans; Tuition, Education ($400 /mo full-time attendance) and Textbook ($65 / mo. full-time attendance) Child Fitness / Arts Credits ( Max $500 each) Medical Expenses (Amounts > 3% of Net Income) Charitable Donations
Non-Refundable Tax Credits Charitable Donations Currently, the non-refundable charitable donations tax credit is calculated as 15% multiplied by the first $200 of charitable donations, and then 29% for the portion of the donations that exceeds $200. Starting in 2013, a temporary non-refundable first time donor s super-credit will be available to supplement the CDTC for individuals. This new credit effectively adds 25% to the rates used in the calculation of the CDTC for up to $1,000 of monetary donations. As a result, a first-time donor will be allowed a 40% federal credit for donations of $200 or less, and a 54% federal credit for the portion of donations over $200 but not exceeding $1,000.
Non-Refundable Tax Credits Provincial Tax Provincial Tax Calculation (see Form PE 428): Provincial tax calculation also based on taxable income: Provincial tax is then reduced by an amount equivalent to 9.8% of non-refundable tax credits Generally, the types of non-refundable tax credits available to reduce provincial tax are similar to those applicable in the federal calculation; However, the maximum allowable amounts will differ; Some non-refundable tax credits are specific to one tax calculation or the other (e.g. Home Buyers Amount, Canada Employment Amount, etc = federal tax credit, only).
Non-Refundable Tax Credits Provincial Tax Provincial Tax Calculation (see Form PE 428): Basic personal amount = $7,708. Therefore there is effectively no provincial tax on the first $ 7,708 in income; Amount for Spouse ($7,201 net income); Amount for Eligible Dependent (in place of Amount for Spouse) = $6,923 net income; Amount for Children <18 Age Amount ($ 3,764 if >= age 65) Disability Amount and/or Transfer CPP / EI contributions Tuition / Education Amount and/or Transfer, Interest on Student Loans Medical Expenses (> 3% of net income)
Non-Refundable Tax Credits Provincial Tax Provincial Tax Calculation (see Form PE 428): Provincial tax is reduced by Non-refundable Charitable Donation credits (@ 9.8%; 16.7% for amounts over $200) Dividend tax credit (10.5% x eligible taxable dividend amount) Add: Provincial Surtax (PEI = 10% x provincial tax > $12,500)
Personal Tax Return Taxes Payable Taxes Payable (see P4, T1 General): Add Federal Tax payable Provincial Tax payable Less Amounts Deducted at Source (eg payroll deductions) Tax Paid by Installments = Balance Due / Refund
Tax Deductions vs. Tax Credits Tax Deductions v. Non-Refundable Tax Credits Tax deductions are expenses / allowances in the calculation of taxable income; Tax credits are deducted only in the calculation of federal and provincial tax payable; Deductions typically provide savings at the marginal / effective tax rate; Tax credits are calculated at specified rates (usually 15% federal + 9.8% provincial), so they typically produce savings at the lowest marginal rate (24.8%);
Personal Income Tax Problem # 7-6 (Mary James)
Problem # 7-6 Calculate Mary s Total Income: Self-employment Consulting fees $ 45,000 Investment Income Interest $ 2,000 = $ 47,000 Deductions from Total Income None Net Income / Taxable Income $ 47,000
Problem # 7-6 Tax brackets = the range of taxable income for which a specific tax rate applies: Federal PEI 0 43,561 = 15% 0 31,984 = 9.8% 43,561 87,123 = 22% 31,985 63,969 = 13.8% 87,123 135,054 = 26% > $63,969 = 16.7% > $135,054 = 29%
Problem # 7-6 Calculate Mary s Federal Tax Liability: Taxable Income $ 47,000 Federal Tax Bracket - Sch 1: (>$43,561 and < 87,123) Federal Tax = $ 47,000 ( 43,561) = 3,439 x 22% 756.58 6,534.00 Basic federal tax 7,290.58
Problem # 7-6 Calculate Mary s Federal Tax Liability: Basic federal tax. 7,290.58 Less: Federal Non-Refundable tax Credits (1,800.00) Net Federal Tax 5,490.58
Problem # 7-6 Calculate Mary s Provincial Tax Liability: Taxable Income $ 47,000 Prov l Tax Bracket PE 428: (>$31,984 and < 63,969) Provincial Tax = $ 47,000 ( 31,984) = 15,016 x 13.8% 2,072.21 3,134.00 Basic PEI tax 5,206.21
Problem # 7-6 Calculate Mary s Provincial Tax Liability: Basic PEI tax.. 5,206.21 Less: PEI Non-Refundable tax Credits ( 925.00) Provincial Tax, before Surtax 4,281.21 PEI Surtax = (PEI Tax - $12,500) x 10% - Net Provincial Tax 4,281.21
Problem # 7-6 Calculate Mary s Total Tax Liability: Net Federal Tax... 5,490.58 Net Provincial Tax 4,281.21 Total Tax Liability 9,771.79 Mary s Average Tax Rate = (9,771.79 / 47,000) 20.8% Mary s Marginal Tax Rate = 35.8%
Personal Income Tax Return Tax Filing Responsibilities Individuals must file personal income tax returns if: there is tax to paid for the year; or there is a requirement to repay any old age security or employment insurance benefits; or the taxpayer has not repaid all amounts withdrawn from a registered retirement savings plan (RRSP) under the Home Buyers' Plan or the Lifelong Learning Plan. the taxpayer has to contribute to the Canada Pension Plan (CPP) on self-employed earnings. This can apply if, for 2013, the total of net self-employment income and pensionable employment income is more than $3,500.
Personal Income Tax Return Tax Filing Responsibilities Even if the previous conditions do not apply, individuals may want to file personal income tax returns: The taxpayer wants to apply for the GST/HST credit (including any related provincial credits); The taxpayer or spouse want to begin, or continue, receiving Canada child tax benefit payments, including related provincial or territorial benefit payments. The taxpayer wants to report income for which you could contribute to an RRSP in order to keep your RRSP deduction limit for future years up to date; or The taxpayer receives the guaranteed income supplement or allowance benefits under the old age security program.
Personal Income Tax Return Tax Filing Responsibilities Interest If you have a balance owing for 2013, CRA charges compound daily interest starting May 1, 2014, on any unpaid amounts owing for 2013. Interest will be charged and the balance due and any penalties starting the day after your return is due. Late-filing penalty If you owe tax for 2013 and do not file your return for 2013 on time, CRA will charge a late-filing penalty based on 5% of your 2013 balance owing, plus1% of your balance owing for each full month that your return is late.