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CHAPTER NINE

CHAPTER NINE. Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes I. Other Sources of Income II. Other Deductions III. Registered Retirement Savings Plans. EXCLUSIONS. Restrictive Covenants Page 428-429 Attendant Care Expenses page 455

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CHAPTER NINE

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  1. CHAPTER NINE • Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes • I. Other Sources of Income • II. Other Deductions • III. Registered Retirement Savings Plans

  2. EXCLUSIONS • Restrictive Covenants Page 428-429 • Attendant Care Expenses page 455 • Expenses of Residents absent from Canada Page 456

  3. I. Other Sources of Income • A catch-all category that captures taxable income which does not qualify as one of the primary sources. • The items classified as other sources of income are all from a specific list found in sections 56 through 59.1 of the Act.

  4. Other Income Sources • The major types of income that are taxable as other sources of income are as follows: • Benefits received from an RRSP • Benefits received from a registered retirement income fund created from an RRSP • Pension benefits received from an employer’s pension plan • OAS, CPP, QPP • DPSP benefits received • Foreign pension benefits • Retiring allowances • EI benefits • RESP income

  5. Other Income (cont.) • Scholarships, fellowships, or bursaries, to the extent that such payments exceed $3,000 (applies only to amounts received by a student enrolled in a program entitling the student to claim the education tax credit). Otherwise, such receipts, including prizes for achievement in a field of endeavour, are exempt only to the extent of $500 annually. • Research grants received in excess of expenses incurred to conduct the related research activity. • Alimony or maintenance payments from a former spouse, provided that they are received as periodic payments and are pursuant to a court order or written agreement.

  6. Death Benefits • Payments in recognition of employee’s service in an office or employment • 1st $10,000 is excluded from income

  7. Support Payments • Spousal Support fully taxable if you: • A) Live apart • B) Periodic Basis • C) Recipient can use as they want • D) Spouse or former spouse • E) Order or written agreement • If taxable it is deductible by other party.

  8. Child Support • Agreement entered into prior to May 1 1997 then payments are taxable • Agreements after are not taxable

  9. Social Assistance/WCB • Reportable as income • Deduction provided by paragraph 110(1)(f) which effectively makes it non-taxable • Amount comes into income but is then deducted to calculate taxable income

  10. Aggregation Formula Revisited • The total of a taxpayer’s other items of income is included in Segment A, along with employment income, business income, and property income.

  11. What items are not subject to tax under the Canadian tax system? • Lottery winnings • Receipt of a gift • Receipt of an inheritance • Life insurance proceeds on the death of an individual • Profits from betting or gambling, when conducted for pleasure or enjoyment • Proceeds from accident, disability, sickness, or income maintenance insurance policies (if the employee has paid all of the premiums).

  12. II. Other Deductions • A catch-all category that permits the deduction of items that do not qualify under the four primary sources of income. • Deductions in this category must come from a specific list of items found in section 60 through 66.8 of the Act.

  13. Other Deductions • The major items included in this category are as follows: • RRSP contributions • Alimony or maintenance payments to a former spouse, provided that they are paid on a regular, periodic basis and are pursuant to a court order or written agreement. • Amounts paid by a taxpayer as fees or expenses to conduct an objection or appeal in relation to an assessment under the Act. • Moving expenses • Child care expenses

  14. Retirement Savings Vehicles • RRSP - All Individuals • RPP - Employees Only • RRIF - All Individuals • DPSP - Employees Only

  15. Registered Retirement Savings Plans (RRSPs) • Basic Concepts • Deduct Contributions • Tax Free Earnings • Taxed On Withdrawal • Registration • Various Financial Institutions

  16. Overview Of System • RRSP Deduction Limit • Pension Adjustments (PAs) • Past Service Pension Adjustments (PSPAs) • Pension Adjustment Reversals (PARs)

  17. Formula A + B + R – C Where A = Balance at end of last year B = lesser of RRSP Dollar Limit and 18 percent of Earned Income for previous year, reduced by the PA of previous year R = Pension Adjustment Reversal for the year C = Past Service Pension Adjustment for the year RRSP Deduction Limit ITA 146(1)

  18. Year Money Purchase Limit RRSP Dollar Limit 1996 to 2002 $13,500 $13,500 2003 $15,500 $14,500 2004 $16,500 $15,500 2005 $18,000 $16,500 2006 $19,000 $18,000 2007 $20,000 $19,000 RRSP Dollar Limit

  19. Earned Income - ITA 146(1) • Employment Income • Business Income (Loss) • Disability Payments • Royalties (Some) • Net Rental Income (Loss) • Net Research Grants Received • Spousal Support Received (Paid)

  20. Carry Over Provisions • Undeducted Contributions • Carry Over Until Death • Why Not Deduct Immediately? • Unused RRSP Deduction Room • Meaning • No Time Limit

  21. Excess Contributions • General Rules • Penalty Of 1% Per Month • Meaning Of Excess Contributions: Contributions That Are More Than $2,000 Greater Than Unused Deduction Room

  22. Excess Contributions • Tax Planning • If Withdrawn Within One Year After The Year Assessment Received For Year Of Contribution: Can Deduct Under ITA 146(8.2) • Otherwise: Taxed When Withdrawn

  23. Options At Retirement • Age 69 - Must Collapse • Lump Sum Withdrawal • Annuities • Life Annuity • Fixed Term • RRIF

  24. Other Plan Terminations • Departures From Canada • Death Spousal Rollover? Termination at age 69

  25. Spousal RRSPs • Benefits • Income Splitting • Additional Pension Credits • Attribution Rules • The Problem • The Rule • In The Year Or The Two Following - ITA 146(8.3) • Attributed To Contributor

  26. Retiring Allowances • Total Allowance In Income • Rollover To RRSP (Maximum) • $2,000 For Each Year Prior To 1996 (1995 Budget Change) • $1,500 For Each Year Prior To 1989 (If No Vested Contributions To RPP Or DPSP By Employer)

  27. Home Buyers’ Plan (HBP) • General Rules • How Much? Max $20,000 • Who Qualifies? 1st time Homebuyers or no home last 4 years • When Must You Buy? Before Oct 1 of year following withdrawal • Limit On RRSP Deductions- Must be contributed more than 90 days before withdrawal

  28. Repayment • When? 2nd year following withdrawal • How Much? • 1/15, 1/14, 1/13, etc. • Amount Withdrawn  $15,000 • Repayment (  1,000) • Balance  $14,000

  29. Repayment • Departures From Canada-repaid within 60 days of departure • Death Of Registrant- remaining balance becomes income to deceased • Tax Planning Aspects- 2 spouses 2 plans • Provides extra funds for home purchase through refund

  30. Lifelong Learning Plan (LLP) • General Rules • How Much? • $10,000 In Any One Calendar Year • $20,000 Maximum Over Four Calendar Years • Who Qualifies? • Full Time Enrollment - Qualifying Educational Program In Year Of Withdrawal • Entitled To Enroll Prior To March Of Year Following Withdrawal

  31. Lifelong Learning Plan (LLP) • Limit On RRSP Deductions • Same As Home Buyer’s Limit • Repayment – When? • Must Begin Within Six Years • Repay Over 10 Years Straight Line • Like Home Buyer’s Plan

  32. RESP’s • Earnings tax free • No initial deduction • Withdrawn amounts are income to beneficiary • Max Contrib $4,000 annually $42,000 max. • If accumulated income paid to subscriber extra tax of 20% • Can occur if each beneficiary over 21, ineligible to receive payments or deceased

  33. RESP’s continued • Can elect to rollover to RRSP if room exists. • Canada Education Savings Grant program • 20% of 1st 2,000 RESP contribution • Maximum grant of $7,200 • Refunded if child does not attend post secondary • Canada Learning Bond- help low-middle income families ( 0-70,000 annual income)

  34. Registered Pension Plans (RPPs) • Registration Of The Plan • Employer Contributions • General Rules • Limitation • Employee Contributions • Options At Retirement

  35. Establishment Withdrawals No Maximum Minimum (Under 69) FMV ÷ (90 - Age) Minimum (69+) 7.38% At Age 71 20% At Age 94 And Subsequent Registered Retirement Income Funds (RRIFs)

  36. Death Of Registrant Evaluation Continuing Tax Deferral Flexibility Registered Retirement Income Funds (RRIFs)

  37. Moving Expenses • Deductible moving expenses are those incurred by an individual for relocation to commence a business or employment in another part of Canada, or to attend a university or other post-secondary school, to the extent of income earned in the new location.

  38. Moving Expenses include: • Deductible moving expenses include: • Travel costs • Transportation and storage of belongings • Temporary board and lodging near the new or old residence (up to 15 days) • Costs of cancelling a lease for the old residence • Selling costs of the old residence • Legal fees and land transfer taxes for the purchase of a new residence if an old residence is sold • Cost of maintaining a vacant former residence for a period of three months to a maximum of $5,000 • Cost of revising legal documents to reflect a change of address, replacing driver’s licences, and obtaining utility connections and disconnections.

  39. Limitations to moving expenses • Moving expenses are eligible for a deduction only if the new residence location is at least 40 kilometres closer to the new work location than the previous residence. • If all or a portion of the expenses cannot be deduction in the year of the move because of insufficient income at the new location, the unclaimed portion can be carried forward and deducted in the following year.

  40. Child Care Expenses • Deductible child care expenses include the cost of babysitting, day care, or lodging at a boarding school, for children 16 years of age or less, provided that the expenses were incurred so that the taxpayer could pursue employment, business, or research activities. • Actual child care expenses are deductible only to the extent that they do not exceed $4,000 per child ($7,000 if the child is under seven years of age at year end), or 2/3 of the taxpayer’s earned income for the year. • If more than one person supports a child, the deduction usually must be claimed by the person with the least amount of income for tax purposes.

  41. Child Care (cont) • Limit for Boarding School or camp • 175/week if under 7 • 100/week otherwise • If lower income spouse in school, infirm or in prison Then higher income spouse can claim within normal amounts except an additional limit of $175/week for children under 7 and $100/week otherwise

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