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AFM 202 Tax Tutorial Slides Week 2 - 2014
AFM 202 Tax Tutorial Slides Week 2 - 2014
In this tutorial
Personal Income Tax Administration
Capital vs. Income
Identical Shares
Capital Gains Reserve
Personal Use Property
Employment Income
Employed vs. Self Employed
Example:
Selling inventory: business income
Selling business equipment: capital gain
Taxpayers
business and
transaction in
question
Taxpayers
behaviour
Identical Shares
ACBs of identical shares pooled together
Example 1:
Jan 1- Bought 5 shares for $20 each
Feb 1- Bought 10 shares for $30 each
Mar 1- Sold 7 shares for $35 each
Solution Example 1
Date
Type
# of shares
Price/share
Total Cost
Jan1/2014
Purchase
20
100
Feb1/2014
Purchase
10
30
300
Total
15
400/15=27
400
Sale
27
187
Outstanding
27
213
Mar1/2014
Proceeds
245
=35*7
ACB
187
=27*7
CG
58
=245-187
TCG
29
=58*50%
Proceeds:
If >$1,000, Proceeds
If <$1,000, $1,000
ACB:
If >$1,000, ACB
If <$1,000, $1,000
Employment Income
Tests:
Economic reality
Control, Ownership of tools, chance of profit/loss
Integration
Specific Results
Contract
Employed:
Specific deductions
CPP: 4.95% * (salary up to 52,500- 3,500)
EI: 1.88% * (salary up to 48,600)
Self Employed:
Deduct all reasonable business expenses from income
Stock Options
Public
CCPC
CCPC
Grant Date
April 1
Nothing
Nothing
Exercise Date
July 1
Employment Income:
($15-$10)*2,500
=$12,500
ACB:
$10*2,500+$12,500
=$37,500
Nothing
Sale Date
Dec. 1
Capital Gains:
Proceeds=$20*1000=$20k
ACB=$37,500/2500*1000
=$15,000
CG=$5000
TCG=$2500
Employment Income:
=($15-$10)*1000=$5k
Capital Gains:
TCG=$2500
(Calculations same as Public
company)
Dividends
Grossed up when received as individuals
(concept o integration)
Public (eligible): 38% gross up
Federal DTC: 6/11 of gross up
Provincial DTC: 5/11 of gross up
Example 3 Dividends
Joe received a $1000 dividend from Blackberry
(public company) and a $1000 dividend from
Local company (CCPC). What amount should be
recorded on the tax return and what is the DTC
to be reported for each?
Assume marginal tax rate of 46%
38%
Total Dividend
Income
Eligible
Ineligible
1,000
1,000
380
25%
1,380
250
1,250
46%
635
46%
575
Federal DTC
6/11
(207)
13/18
(181)
Prov DTC
5/11
(173)
5/18
(69)
Total Credits
(380)
(250)
Taxes Payable
255
325
Integration
Point is so businesses and individuals pay the
same amount of tax
Seen through: Dividend gross up and DTC,
different tax rates for individuals and
corporations, SBD
Employment Deductions
Most of the time included on Line 229 of the J form
This is for other employment expenses
The form has a bunch of different things that can be
deducted from income
The J form does not specific deductions such as
RRSP deductions
Enter on Form T777
Some expenses are not deductible unless they were
required for the purpose of employment must
complete form T2200
Employment Expenses
In the process of earning income, there are some
expenses that can be deducted
Expense deductions are focused in section 8 of the
income tax act
There are differences in the treatment depending
on if the individual is a commissioned or regular
employee
Relevant Sections to know: 8(1)(b)(i)(m)(s)(h)(h.1)(j)
(f) for the income tax act
Examples of deductions
Automobile Expenses
CCA deduction if owned by you
Other deductions
Includes things such as:
entertainment costs, meals
Regular
8(1)(f) is restricted
up to the amount of
commission
received
Cannot claim
property taxes and
insurance
Usually claimed
under 8(1)(h)(h.1)
and other sections
Commissioned Employees
They fall under 8 (1) (f)
Commissions are shown under the T4 in box 42
Employee did not have an allowance for travel
expenses
8 (1) (f) is capped at the commission income
Example 4
Professor Timothy is an educational consultant
and he creates courses on taxation at the
University of Waterloo to second and fourth year
students. His contract states that he has to pay
certain expenses related to his employment. He
does not possess an office and nor does he receive
any allowances.
On a theoretical level, what expenses can the
Professor deduct from his employment income?
Solution 4
1. Home Office Expenses
There is a test for home office expenses:
The individual must spend more than 50% of their time
working from there
There must be a constant stream of meetings at the location
and it is for the purposes of earning employment income
These expenses do need to be prorated based on the space
at the house
2. Automobile expenses
Potential things he may be able to claim include: insurance,
gas, CCA maintenance etc. But these need to be prorated for
business use
WHY?
Example 5
Jane is the Vice President of Marketing at ABC
Company. Her salary is $125,000 and she received a
$50,000 commission due to robust sales attributed to
her tremendous marketing campaign.
What are the options for Jane in regards to
deductions? Think of the income tax act sections?
Solution 5
Example 6
Jane is a sales person and she was required to pay the following
expenses from her pocket:
Telephone costs = $500 (all for business)
Jane works from home and approximately occupies 30% of the house
for work. She incurred the following expenses related to this:
Solution 6
1. Were these expenses for the purposes of
earning income?
The answer is yes they were so we can deduct
them there is no mention of allowances that
might impact our decision so deduct
1) Telephone costs are deductible @ $500, since
all of them were for business purposes
2) What other things can we deduct?
Solution 6 contd
Home Office Expenses
Look at the test do we meet the test:
The individual must spend more than 50% of their time
working from there
There must be a constant stream of meetings at the location
and it is for the purposes of earning employment income
Solution 6 contd
Solution 6 contd
Automobile costs important to note that she owns the
car
This is important because she can take a CCA deduction
Passenger vehicles are class 10.1 assets and therefore can
take a 30% CCA on an annual basis. In the acquisition year
we do the half year rule
Class 10.1 also has a limit of $30,000 per car, regardless of
the price. With HST, we have a cost of $30,000*1.13=
$33,900
Therefore, our CCA deduction for the year is as follows
$33,900 *0.5*0.3 = $5085
Prorate this for business use @55% = $2797
QUESTIONS?