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					                        Lecture Notes for AFM 201 (tax), Fall 2003
                               Class 1: B-L-B Chapter 1 (Introduction)

Federal and Provincial Taxes
- income taxes imposed by both federal government and provinces
- federal government collects taxes essentially for free if provinces accept federal definition of taxable
income (called a “tax-on-income” system)
- all provinces but Quebec have agreed for PIT, and all but Ontario, Quebec and Alberta have agreed for
CIT
-Income Tax Act (ITA) is a federal statute; provinces have own Income Tax Acts, but we will study
federal ITA only
- no UFE responsibility for provincial tax

Computation of Tax
         1. Feds
-income for tax purposes (called net income on the tax form) is known as “income” in the Act, and is
commonly called Division B income since it is computed under Division B of Part I of the Act.
-form also has “total income”, which is not in Act
- income = (business and property) + (employment and office) + other + taxable capital gains
- taxable income = income for tax purposes minus Division C deductions
-apply rate structure
-actual tax = amount applicable to bottom of bracket (4 brackets) + rate (4 rates) on excess
- reduce by non-refundable credits (define) to get federal tax
-compare to taxes actually paid to get amount owing or refund
-also refundable credits paid throughout the year
         2. Provinces
- start with taxable income (federally-defined), apply Ontario rates, credits, surtax

Organization of the Income Tax Act
- organized two ways
1. Part - Division - Subdivision
-e.g., Part I, Division B, Subdivision a is calculation of employment income
- more than 30 Parts
-Part I, Division B is almost half of the Act
2. Section - subsection - paragraph - subparagraph - clause - subclause
 89
89(1)
89(1)(b)
89)1)(b)(i)
89(1)(b)(i)(A)
89(1)(b)(i)(A)(I)

- usually, each subsection is one sentence (also section, if no subsections)
-two classifications are independent, e.g., Part I, Division B, Subdivision a is sections 5 to 8
- note vol. 2 of course notes begins with sectional list (i.e., titles of sections) of ITA, which helps with
homework problems
-only some sections in vol. 2 of course notes
-about 1/8 (300 pages of 2,600 pages of Act and Regulations)
Key Sections of ITA
- most sections apply to both corporations and individuals
- section 3 is definition of income
- subsection 2(2) says taxable income = income plus or minus Division C amounts
- section 111.1 is Division C ordering
- subsection 117(2) is the rate structure on taxable income (16%, 22%, 26%, 29%)
-section 118.92 is ordering of tax credits for individuals

Why Should You Learn the ITA?
- many tax practitioners rarely open it: CCRA people go to IT and IC’s, and H and R Block do the same
but:
1. IT, IC’s often not updated quickly on tax law changes
2. ITA (with Regs etc.) is the law, and courts rely on that
3. Tax services organized by section number, and tax people talk using Act numbers
4. UFE allows Act only (plus schedule of tax rates and credits)

Tax Planning vs. Tax Evasion
- legal vs. illegal
- tax avoidance

                                B-L-B Chapter 14: Rights and Obligations

Filing Returns
          Corporations
-are always required to file a return
- file within 6 months of end of the corporation’s taxation year (i.e., fiscal year)
          Individuals
-sometimes have to file a return, e.g. if tax is payable (owing, not just that there is positive tax for the
year), if disposed of capital property, or if a return is demanded by the Minister (key provision)
-also may file to get refundable credits (based on income shown on return)
-may file by paper or electronically (efile)
-if efile, no receipts need be submitted (but CCRA can request)
-time limit: by April 30, except June 15 if you or your spouse carries on a business
-however, payment due by April 30 in any case

Penalty for Filing Late
-5% of unpaid tax plus 1% per month thereafter
-so file a return if there would otherwise be a penalty, even if you don’t have the cash to pay immediately
-if no unpaid tax, then no penalty unless CCRA requests that you file

Obligations of Payors
- an employer must:
(i) deduct Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income
tax from amounts paid to employees;
(ii) remit these deductions along with the employer’s share of CPP contributions and EI premiums paid;
(iii) report to the employee and the CCRA the employee's income and deductions on the appropriate
information return (T4 or T4A) by the end of February of the following calendar year;
- interest and penalties apply if the employer under-withholds
- also other payers (non-residents), T5's for interest
-often no slips issued (e.g., capital gains on sale of cottage), but still must report
                             B-L-B Chapter 3: Employment Income

Employed vs. Self-employed
Issue
- issue is to distinguish between an employee and a self-employed person (unincorporated
business), particularly where the services are being provided to one entity exclusively.
- individuals prefer self-employment since broader range of deductible expenses
- affects employers also: income tax withholding and payment of CPP and EI premiums
- generally both employer and employee would prefer self-employment, so plan details of the
provision of services accordingly

Tests
- consider three inter-related tests, and then consider the weight of all of the evidence:
(1) economic reality or entrepreneur test. Sub-tests: control (orders given as to the manner work
is done; less relevant for professionals); ownership of the tools; chance of profit; and risk of loss.
(2) integration or organization test: since the Wiebe Door case, how dependent is the individual
on the organization? [old cases asked how dependent organization is on the individual, as p. 106
text]
(3) Specific result test. Is the contract for an amount of time or for a specific result?

Example
- see CCRA’s IT-525R (after p. 175 of the B-L-B text), which discusses performing artists
- paragraphs 6 and 7 give practical examples of factors which matter, although they do not
explictly use the 3 tests above

Employment income: basic principle
- amounts paid by the employer either taxable or nothing; amounts paid by the employee either
deductible or nothing

Employment income inclusions
 Section 5
- cash amounts
- includes tips (but not true gifts)
-“received” (i.e., cash accounting rather than accrual accounting)
Section 6
- defines “taxable benefits”, i.e., employer-paid benefits which result in inclusions in
employment income
- 6(1)(a) worded very generally, and would tax virtually any benefit
- IT-470R much more generous (very unusual for at IT)
- so rely on IT, even though it could be changed at any time
- one or two gifts, totalling no more than $500, and the employer can deduct the expense
- board and lodging taxable, but can argue employer’s convenience (e.g., beds for interns in
hospitals working crazy shifts); also note 6(6) exception for special work site or remote location
- employer-paid parking taxable
6(1)(a) exceptions
- key exceptions are contributions to private health services plans, group life insurance [but made
taxable elsewhere, in 6(4)] and RPP (registered pension plan) contributions by employer
- housing loss 6(19) to 6(23): first $15,000 of reimbursement tax-free, rest half-taxable
- employee loans 6(9), 80.4(1): tax difference between prescribed rate for period (including day
incurred, but excluding day repaid) and interest in respect of the year paid up to January30 of the
next year
- “lesser of” calculation for home purchase loans
6(1)(b): allowances
-vs. reimbursements
- some reimbursements taxable under 6(1)(a)
6(1)(b) exceptions
- to be tax-exempt, generally have to be reasonable (among other tests)
-deemed unreasonable if for motor vehicle and not based solely on kilometres travelled
- unwritten practice: CCRA allows 41 cents for the first 5,000 kilometres, then 35 cents per
kilometre after that (based on limit to deduction by employer)
                                Lecture Notes for AFM 201: Class 2

Employment income inclusions (continued)

6(1)(e): company car (i.e., employer-provided car)
- two elements, standby charge and operating benefit
- standby charge for auto (broadly defined), which 6(2) says is:
         -for owned auto, generally 2% per month times the cost of the car, including GST and
         PST
         - for leased auto, two-thirds of the lease cost
         - A/B factor reduces this if at least 90% employment use (rare, since commuting is
         personal use)
6(1)(k): operating cost benefit for company car if employer pays for gas, oil, insurance, etc.
- usually use 16 cents per kilometre
- if primarily business use, can elect instead one-half of the standby charge


Section 7: stock options
- stock option is the right to purchase shares at a specified price for some period of time
- a form of employee compensation

Inclusion
- taxable amount is the number of shares multiplied by the difference between the fair market
value on exercise and the exercise price
- 3 times to consider
        – first is granting: no tax then
        -second is exercise: tax then if shares other than the two types described below
        1.       Shares are of a Canadian-controlled private corporation (i.e., no publicly-traded
                 shares).
        2.       Shares are of a public company (if election made, which is normal, but there is a
                 $100,00 limit – see below).
        -third is sale of the shares. This is the time for the two types described above. Also have
        tax at this time on capital gain since the time of exercise.

Deduction
-also may be Division C deduction (i.e. after computing Division B income but before taxable
income) of one-half of the inclusion. This gives a capital-gains-type inclusion rate, but the
income is still employment income. Applies in two circumstances:
3.     paragraph 110(1)(d): exercise price is greater than or equal to the share price at the time
       of granting. (This is almost always the case.)
4.     paragraph 110(1)(d.1): shares are of a Canadian-controlled private corporation (CCPC)
       and are held for at least 2 years after exercise.


Tests to Qualify for Election
Can elect on shares which vest (i.e., first become exercisable) in the year if the employee is
entitled to a 110(1)(d) deduction (see above) and the fair market value of these shares at the time
of granting is no more than $100,000.

Example

Situation: Option to acquire up to 1,000 shares at $10 per share. Market price at that time is
$10. Price at time of exercise is $15. Exercise on full 1,000 shares. Sell when price is $18.

Tax Result:
      - No tax on granting.
      - No tax on exercise since qualifies for the election.
      - Employment income on sale of ($15 - $10) x 1,000 = $5,000.
      - Division C deduction under paragraph 110(1)(d) of 50% x $5,000 = $2,500.
      - Capital gain on sale of ($18 - $15) x 1,000 = $3,000. Taxable capital gain is 50% x
      $3,000 = $1,500.
      - Total inclusion in Division B income on sale is $5,000 + $1,500 = $6,500, but
      deduction in computing taxable income of $,2500.

Detour to Cover Goods and Services Tax (GST): chapter 1
- Excise Tax Act, primarily Part IX
- usually 7% rate, but 15% rate in Harmonized Sales Tax (HST) provinces (Newf., NB, NS): note
that these provinces do not have provincial sales tax
- applies to all supplies (e.g., sales, provision of a good to an employee as a taxable benefit) by
GST registrants
- 3 kinds of supplies
•       taxable supplies, collect GST and remit to government, but get back GST paid on inputs
        through input tax credit (ITC): actual refund
•       exempt supplies, do not collect and remit GST but also do not get ITCs (health services,
        financial)
•       zero-rated supplies (drugs, groceries, exports), do not collect and remit GST but get ITCs

Employment Income Inclusions (cont.): Taxable Benefit Arising from Employer-Paid GST
- many taxable benefits are exempt supplies (e.g., low-interest loans) or zero-rated supplies
- therefore, have GST only on fringe benefits which count as taxable supplies
- main example is personal use of company car (standby charge and operating cost benefit)
- GST element already included in formulas above
                             Lecture Notes for AFM 201: Class 3

Deductions from Employment Income
- see exercises if you are having problems
Section 8
- contains all such deductions, because subsection 8(2) says so
-effect is that many outlays which are to earn employment income are not deductible
Paragraph 8(1)(b) - legal expenses to collect salary
Paragraph 8(1)(f) - sales expenses
- 4 tests, (i) to (iv)
- note if receive an allowance but the amount is unreasonable, include it in income and deduct the
expenses
- very broad wording
- no capital expenditures, but see 8(1)(j) below for autos and aircraft
- no 18(1)(l) expenditures
- limited to commission income
- need form T2200 signed by employer
Paragraph 8(1)(h) (travelling expenses) and 8(1)(h.1) (motor vehicle expenses)
- if claim under (f), can’t claim under (h) or (h.1): so must choose
- prorate motor vehicle expenses for % employment use
- T2200
Special Rules re Meals
- for (f) or (h) deduction, must be away from municipality of work for 12 hours or more: 8(4)
- only 50% deduction for meals and entertainment: section 67.1
Paragraph 8(1)(i) - dues etc.
- (i): professional membership dues to maintain standing in a profession recognized by statute
- (ii): office rent (nothing if you own the home)
- (iii) supplies consumed (T2200)
- (iv) trade union dues
- where overlaps with 8(1)(f), claim here since no commission-income limit here
Subsection 8(13) - work space in home
- further limitation: principal place of employment duties OR exclusively for earning
employment income and regularly used for meetings
Paragraph 8(1)(m) - registered pension plan contributions: deductible
Paragraph 8(1)(j)
- only if deduction allowed under (f), (h) or (h.1): prorate by % employment use
- deduct interest (including section 80.5 deemed interest), up to section 67.2 limit of $300 per
30-day period, with no rounding
- also deduct Capital Cost Allowance (CCA) on auto or aircraft; no other assets eligible
- luxury-car capital cost limit of $30,000 + PST + GST: 30% declining balance rate, 1/2 of that in
year bought
- also deduct lease costs up to similar limit (p. 147-148: complex; not on exam)
                                 Lecture Notes for AFM 201: Class 4

GST rebate on employee deductions: chapter 3
- idea is to refund GST paid on section 8 deductions
- since employee not a GST registrant, no ITCs
- instead, employee rebate (following year) of 7/107 of deduction
- relates only to taxable supplies (e.g., not insurance)
- 6(8): in year rebate received, include in income / reduce capital cost of property

Capital Gains and Capital Losses: chapter 7
- capital gains vs. business income: if intention is to sell for a profit, then business income
- if intention to hold to earn income, then capital gain
- section 39 election on Canadian securities

- recognized on disposition, which can be actual or deemed (e.g., death)
- calculation:
•        proceeds of disposition (P of D) less sum of expenses of disposition and adjusted cost
         base (ACB) = gain [from 40(1)(a)]
•        gain less exemption or reserve = capital gain
•        capital gain times inclusion rate (now 50%) = taxable capital gain (TCG) [from 38(1)(a)]
- if instead negative: loss, capital loss, allowable capital loss (ACL) [from 38(1)(b)]
- ACB = cost plus additions (“ACB bumps”) in 53(1) and less deductions (“ACB grinds”) in
53(2)
- additions: section 7 stock option benefit, 1994 capital gains deduction phase-out
- deduction: government assistance

Capital gains reserve
- if not all P of D received by the end of the year, spread TCG over as much as 5 years
- deduct from capital gain a capital gains reserve [40(1)(a)(ii), (iii)]
- reserve is the: lesser of:
         (1) gain times the fraction of proceeds not received;
         (2) fraction of the gain which declines over time (80%, 60%, 40%, 20%, 0%)
- each year, include last year’s reserve in income and deduct new reserve
- capital gain can be spread over no more than 5 years

Principal residence exemption
- each year you can designate one residence that you own and live in as your principal residence
- on sale, if you designate a residence for at least one year, deduct from normal gain:
         gain x (one plus # years designated) / (# of years owned)
- purpose is to provide full exemption of gain when you sell and then buy in the same year
- if you own more than one residence, think carefully about how many years to use on each
         - first assign no-option years, then allocate all but one year to the residence with the higher
         gain per year
                                 Lecture Notes for AFM 201: Class 5

Personal-use property (PUP)
- property used primarily for personal use and enjoyment
- minimum $1,000 P of D; minimum $1,000 ACB
- special treatment of losses
         - for sub-category of listed personal property (LPP, defined in section 54), can apply losses only
         against gains in previous 3 years or subsequent 7 years
         - for other PUP, losses deemed to be zero

Identical properties (e.g., shares)
- if acquired at different times at different prices, what is ACB of unit sold today?
- Act’s answer is take a weighted-average: add up all amounts paid and divide by # of units
- for next sale, that weighted-average ACB per unit is starting point

Superficial loss
- tax system can’t allow sales to recognize losses, then immediate buy-backs
- rule: loss deduction denied if sell property at a loss, buy same or identical property in (-30,+30) period,
and own some property at end of period
- this “superficial loss” added to ACB

Section 3 revisited
- 3(b): most allowable capital losses can only be deducted against taxable capital gains
- 3(d) exception is allowable business investment losses (ABILs), which is allowable capital loss on
shares or debt of small business corporation

Division C deductions
1. Stock option deduction of one-half of employment income inclusion: two alternative ways
- 110(1)(d.1): stock options of CCPCs, if shares held for two years
- 110(1)(d): any stock option, if exercise price no less than share price at grant date (i.e., no immediate
value)
2. Deduction for certain receipts (don’t tax, but get Division B income “right”)
- social assistance, worker’s compensation, Guaranteed Income Supplement
3. Home relocation loan
- deduction for imputed interest inclusion on first $25,000 of the loan
4. Loss carryover deductions
Lecture Notes for AFM 201: Class 6

- note the table of capital gains inclusion rates on p. 376. Do not read the material below this
table on p. 376 and also do not read Exhibit 7-1 on p. 377.
- homework for Monday is #14 and #15, and readings are as scheduled on the daily calendar
(except do not read section entitled “Taxable Income of Non-Residents”) on pp. 527-528.
- note that capital losses on listed personal property are carried to other years in the computation
of Division B income
- this is different from all other losses, which are applied to other years as Division C deductions


More Division C deductions

Non-capital loss for the year (“flip side” of Division B income)
- if 3(d) exceeds 3(c), excess becomes a non-capital loss for the year and is applied as a deduction in
other years
- some Division C deductions are also included in the definition of a non-capital loss
- 111(8) non-capital loss for the year is:
          3(d) + certain Division C deductions - 3(c) - farm loss
- farm loss subtraction needed since included in 3(d) as business loss
- back 3, forward 7 (calculate non-capital loss carryover balance)

Net capital loss for the year (“flip side” of 3(b))
- recall 3(b) amount is amount by which TCG exceeds ACL
- if instead ACL exceeds TCG, difference is net capital loss
- for this purpose, delete ABILs from ACL since ABILs in 3(d)
- back 3, forward indefinitely (calculate net capital loss carryover balance)
- adjust for changing inclusion rates: divide by inclusion rate for year of loss, multiply by rate in year of
application
- loss carryover deduction is lesser of 3(b) amount for the year and net capital loss carryover balance
adjusted for any change in inclusion rates

Farm losses
- carry-back 3 years, carry-forward 10 years.


Strategy of claiming loss carryover deductions
- claim amounts are optional
- usually use most restricted type first, then type which expires first. This means that you normally use
net capital losses first, then non-capital losses, then farm losses.
- don’t waste non-capital loss carryovers by reducing taxable income below the amount needed to reduce
tax payable to zero (e.g., not below the basic personal amount of $7,634 for 2002)
- carrybacks require revision of previously-filed income tax returns. In doing problems, we will assume
perfect foresight. Thus, you can do the problems on a line-by-line basis rather than a year-by-year
basis: This is the result that will occur in the end after all carry-backs have taken place
                                         Lecture Notes for AFM 201: Class 7

Computation of Tax
- 2003 rate schedule and tax brackets(and in Vol. 2 of course notes)
- tax deductions vs. tax credits; add credit base or add credits (16%); refundable vs. non-refundable credits
- numbers in Act for brackets and credits wrong due to indexing of brackets and credits: see sheet
- provinces apply own rate schedule to taxable income; also have own credits -- we will ignore

-skip: “Credits for Part-time and Non-Residents”
- in calculations, note that section 257 says all numbers that would be negative are deemed to be zero. Use this at
each step of calculation in evaluating formulas for credits given below.
- 118 basic personal credit: 16% of $7,756 (basic personal amount). Effectively exempts first $7,756 of taxable
           income. So don’t use loss carryover deductions to reduce taxable income below this (note no choice for
           3(d) deductions).
- 118( 1)(a) marital (also common-law partners, including same-sex and opposite-sex) credit: 16% x [$6,586 -
           (spouse’s Div. B income - $659)]
- 118(1)(b) equivalent-to-married (EQM). In year of marriage choose EQM or marital; after that can only claim
           marital. Formula same. Tests (i) live with you and (ii) under 18 or infirm or parent. Mostly used by single
           parents.
- a taxpayer may have only one spouse or EQM credit.
- 118(1)(c.1) caregiver: (i) living with you and (ii) over-65 parent or infirm relative who is not your spouse. Formula
           16% x [$3,663 - (Div. B income - $12,509)].
- 118(1)(d) infirm dependant: 16% x [$3,663 - (dependant’s Div. B income - $5,197)]. Must be over 18. Need not
           live with you. Cannot be your spouse.
NOTE 118(4), (5) limitations, e.g., if overlap for same person, must choose one of EQM, caregiver, or infirm
dependant.
---------------------------------------------------------------------------------------------------------------------------
- 118(2) age credit. For 65+. Note phase-out in formula: 16% x [$3,787 - 15% x (Div. B income - 28,193)].
- 118(3) pension credit. Usually for 65+. 16% of lesser of $1,000 and pension income (not OAS or CPP or money
out of an RRSP).
- 118.1(3) charitable: mostly donation to registered charities or Crown. 16% of first $200, 29% above that. Limit
           75% of Division B income, with 5-year carryforward.
- 118.2(1) medical credit. Prescription drugs, medical devices, health insurance premiums, payments to medical
           practitioners, cost of attendant (but deny impairment credit if over $10,000). Any 12-month period ending
           in the year. Threshold lesser of $1,755 and 3% of Division B income. Can claim for whole family, but if
           non-spouse dependant reduce credit by 68% of excess of Division B income over basic personal amount.
- 118.3 impairment (i.e., disability) credit of 16% of $6,279. Markedly restricted in basic activities of daily living
           (e.g., blind, deaf, wheelchair) and certified to be so by health professional. Supplement for disabled child
           of maximum of 16% x $3,663. Transfer to person claiming (or could have claimed if the person had no
           income and was over 18) EQM or caregiver or infirm dependant for the person, after the person’s tax
           zeroed out. Spouse transfer elsewhere. Spreading to many provisions.
- 118.5 tuition credit: 16% of fees if total over $100. For post-secondary courses at university or college or
           HRDC-approved occupational-skill courses. Can be for university outside Canada.
- 118.6 education credit. Post-sec. 16% x $400 x full-time mo. + 16% x $120 x part-time mo..
- tuition and education credits. have indefinite carryforward (118.61), alternatively, transfer of first $800 of credits
           to parent after student’s tax zeroed out (118.9). Spouse transfer elsewhere.
- 118.7 16% tax credit on employee CPP and EI contributions up to maximum. Refund above that.
------------------------------------------------------------------------------------------------------------------------
- no longer multiplying by 16% for following credits
- 118.8 transfer of unused credits to spouse or common-law partner. Amount transferred is tuition and education
           credits up to $800 limit + age credit + pension credit + impairment credit, after spouse’s tax is zeroed out.
           Note that this transfer is not used for medical and charitable credits, for which one person simply claims the
           credit for the whole family. Some credits cannot be transferred to spouse by any means, e.g., CPP and EI
           credits.
- 121 dividend tax credit. Available for taxable dividends from taxable Canadian corporations. For such dividends,
include grossed-up dividend (5/4 x actual dividend) in Div. B income, and then receive dividend tax credit of 13
1/3% of grossed-up dividend. Idea is “integration” of corporate and personal income tax – total tax paid at
corporate level and personal level is the same as if the person earned the income directly instead of through a
corporation.
- 82(3) election allows dividends to be transferred from one spouse (or common-law partner) to another if it increases
the marital tax credit. Complex: change in Division B incomes may change many credits. Do it only if it saves taxes
when all factors are considered. Done automatically by many computer programs.

Lecture Notes for AFM 201: Class 8

- 118.92: ordering of credits. Useful checklist, but rarely matters.

Refundable Credits
- paid even if have zero tax liability (“deemed” to be an amount of tax paid, so can be refunded)
- file return to claim these, even if no income
- based on income of both spouses or common-law partners, so both must file

1. 122.5(3) GST credit. Idea is to reduce burden of GST on low-income people. Either person in couple can claim.
Must check box on return, but CCRA calculates. Paid in four instalments, starting July. Eligible if, at the end of the
year, you are married, a parent or over 18 years of age.
Note that the credit is reduced by 5% x (combined Division B income of couple - $28,193). Not responsible for
calculation on the exam.

2. 122.61 Canada Child Tax Benefit (CCTB). The only tax relief for costs of children. Register on birth (not on
return). Generally paid to female. Paid monthly, starting July. For low and middle-income families only. Two
components: NCB supplement and base benefit, each with its own income phase-out based on the couple’s combined
income. Income in the year 2003 determines payments starting July 2004. [Note: Supplement reduces welfare
payments.]. Not responsible for calculation on exam.

Foreign Tax Credit
- when Canadian residents earn income in a foreign country, the two countries need to agree on which country will
tax the income
- usual agreement is that the country in which the income is earned will tax the income first, and the country of
residence will tax the income but give a foreign tax credit
- non-business foreign tax credit is the lesser of:
(1) the foreign tax paid
(2) (foreign income / Division B income) x federal tax after all non-refundable credits except the political tax credit
and the dividend tax credit

Tax on Old Age Security Benefits
- OAS is included in Division B income
- repayment of lesser of (i) OAS benefits (ii) 15% of excess of the individual’s Division B income over $57,879
- amount repaid should not be taxed, so 60(w) deduction for repayment
- to avoid circularity: in calculating the repayment, do not consider the 60(w) deduction
                                Lecture Notes for AFM 201: Class 9

127.51 Alternative Minimum Tax (AMT)
- any individual must pay the greater of regular Part I tax and the “minimum amount” (i.e., AMT)
- formula for minimum amount is:
        16% x [adjusted taxable income - $40,000] - basic minimum tax credit
- adjusted taxable income = taxable income
        + losses on films and videotapes from CCA and interest charges
        + resource property losses (Cdn. exploration expense, Cdn. development expense)
        + 60% of 3(b) amount
        + losses of investments covered by tax shelter identification rules
        - dividend gross-up (i.e., 1/4 of Canadian dividends)
- basic minimum tax credit is all tax credits except dividend tax credit and tax credit transfers

Analysis
- compare to regular Part I tax:
        - 16% flat rate instead of normal increasing rates
        - $40,000 basic exemption
- therefore, AMT will only apply if adjusted taxable income is much bigger than regular taxable
income
- so do not calculate AMT in problems unless you see film losses, resource property losses, or tax
shelter losses

Business Income (B-L-B text chapter 4)
- section 9: income from business or property is profit therefrom
- deductions: section 18 denies unless meet conditions (esp. 18(1)(a), incurred to earn income,
and 18(1)(b), not a capital expenditure), but section 20 overrules (use as checklist, e.g., CCA)

Basic capital cost allowance (CCA) rules (B-L-B text chapter 5)
- depreciable property is organized into CCA classes
- balance in each class is known as the “undepreciated capital cost”(UCC)
- each year:
        - add to the beginning-of-year UCC the purchase price of property of the class
        - subtract from UCC an amount for disposals (lesser of cost and proceeds)
        - subtract ½ net amount (amount, if any, by which purchases exceed disposals)
        - calculate and subtract CCA claim
        - add back ½ net amount to get UCC at the start of the next year

- idea of “½ net amount” rule above is to ensure assets which are purchased or sold in the year get only
½ of the ususal CCA deduction, since on average they are only owned for ½ of the year
- if UCC is negative at the end of the year, the negative amount is “recapture” (business income)
- if UCC is positive and no assets left in the class, then deduct the remaining UCC as a “terminal loss”
- cannot have a capital loss on depreciable property (effectively deduct the loss through future CCA
deductions)
                                Lecture Notes for AFM 201: Class 10

Tax Planning (B-L-B text chapter 1; responsible for pp. 38-41 and pp. 54-55 only)

Tax compliance: keeping tax records, filling out the forms and generally doing what the law requires
- this is about 95% of what we have done in these tax classes

Tax planning: making decisions regarding tax which are in the best interests of the clients
- often tax planning involves proposed transactions, since little choice about tax consequences after the
transaction is done
- usually optimal tax planning means the lowest possible tax, but not always
- balance tax savings and non-tax costs

Example 1: property taxes on polluted properties
- property taxes levied by cities and towns are based on the assessed value (usually estimated market
value) of the property
- some firms publicly argued for lower values due to the fact they had polluted their properties
- not a good idea: tax saving were low relative to the public relations costs
Example 2: Employed vs. Self-employed
- self-employed people are not covered by employment insurance (EI)
- so even though a worker could save tax by being considered self-employed, some workers may want to
be considered employees in order to qualify for EI benefits

Types of tax planning

1. Unilateral tax planning: planning for one economic entity (e.g., one individual or one couple)
- calculate consequences of the alternatives for only that one entity
- examples: 82(3) election; election re stock options for employee of public corporation

2. Multilateral tax planning: two or more economic entities involved
- example: employee compensation, selling a business, negotiating spousal support
- consider benefits to both parties and look for a win-win situation (e.g., lower salary but increase
non-taxable fringe benefits, so both employee and employer are better off)

Marginal Tax Rates

- recall that the marginal tax rate is the tax rate on an extra $1 of income, or tax saving from an extra $1
of deductions
-usually marginal tax rate = federal rate + provincial rate
-e.g., taxable income of $25,000, then mtr = 16% federal + 6.05% provincial = 22.05%
- an increase in income can also reduce refundable credits. This can be considered an increase in the
marginal tax rate. Thus, because of the GST credit phase-out, the marginal tax rate for the person on p.
559 of the text might be 16% + 6.05% + 5% = 27.05%.
- marginal tax rates help in doing both unilateral and multilateral tax planning as a quick mental guide to
the expected tax impact of a transaction, e.g., an RRSP contribution will save you in tax the marginal tax
rate times the amount of the contribution

				
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