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Chapter Objectives. Be able to: Identify other sources of income and deductions. Explain the benefits of RRSPs and the related retirement options. Calculate RRSP contribution limits. Identify and apply the special rules in determining net income. Other Sources of Income and Deductions.
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Chapter Objectives Be able to: • Identify other sources of income and deductions. • Explain the benefits of RRSPs and the related retirement options. • Calculate RRSP contribution limits. • Identify and apply the special rules in determining net income.
Other Sources of Income and Deductions • Other is a catch-all for all income items that are not included in one of the four primary sources and listed in sections 56-59.1of the ITA. • Examples are: pension benefits from RPPs, RRSPs, RRIFs, OAS, & CPP, payments from DPSP & RESP, E.I. benefits, scholarships, research grants, and receipt of alimony & maintenance. • Other is a catch-all for all deduction items that are not included in one of the four primary sources and listed in sections 60-66.8 of the ITA. • Examples are: RRSP contributions, payment of alimony & maintenance, moving expenses, and child care expenses. • The other deductions category is important since it is the last test in the income tax scheme for determining the deductibility of an expenditure.
Registered Retirement Savings Plans • They offer a significant benefit to taxpayers since contributions to an RRSP and returns on accumulated funds are not taxed until withdrawn from the plan during retirement. However, there are annual contribution limits. • If an individual does not belong to an employer’s RPP or DPSP, the annual contribution limit will be the lesser of 18% of earned income and the stipulated maximum for that year. • If an individual does belong to an employer’s RPP or DPSP, the annual contribution limit will be the lesser of 18% of earned income and the stipulated maximum for that year and, from that result, less a pension adjustment. This pension adjustment is how RRSPs are integrated with RPPs and DPSPs. The amount of the pension adjustment will depend on circumstances, such as whether the RPP is a money-purchase plan or a defined-benefit plan.
Registered Retirement Savings Plans (continued) • Unused contribution limits are carried forward indefinitely and are added to the future annual contribution limits. • In general terms, earned income is employment income excluding RPP contributions, rental income, royalty income, alimony & maintenance income, and research grants net of expenses less employment losses, rental losses, and alimony & maintenance payments. • It is mandatory to convert the accumulated funds in an RRSP to a retirement income vehicle before December 31 of the year that an individual reaches 69. Retirement income vehicles available are RRIFs, guaranteed fixed term annuity, and life annuity. • From an individual’s total contribution limit, contributions can be made to his/her own plan and a spousal plan. • The long-term benefit to spousal contributions is that the withdrawals from the spousal plan will included in the spouse’s taxable income.
Special Rules for Net Income Determination • All items that are deductible from any source of income are only deductible to the extent that the expenditure is considered reasonable in the particular circumstances. • The CCRA has the ability to allocate or reallocate the total price amongst the assets included in a group purchase in accordance with the apparent fair market values of the individual properties. • When related parties are involved in a transaction, there are special rules that apply to prevent the elimination or reduction of tax by selling at a price other than fair market value. • Although salaries can be accrued when incurred, they must be paid within 180 days of the fiscal year-end in order to be deductible. • Special rules apply when a property has been disposed of in satisfaction of a debt (foreclosure) or there is a gain on the settlement of debt (such as in extreme financial difficulty).
Attribution Rules • Property transferred to a child is deemed to have been sold for fair market value, except for farm property. However, property transferred to a spouse is deemed to have been sold for its cost amount. • Subsequent income received by a spouse on transferred property must be attributed back to the original owner. These attribution rules do not apply if the transfer was made in a manner equivalent to an arm’s length transfer. • Subsequent income, except capital gains and losses, received by a child under 18 on transferred property must be attributed back to the original owner. • These attribution rules also apply to other minors such as nieces and nephews.
