Personal Income Tax

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Chapter 6

• Personal Income Tax

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K. Hartviksen
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Personal Income Tax

• You can access many resources from Canada Customs
  and Revenue Agencys web site (including
  downloadable forms in PDF format) at
• http//www.ccra-adrc.gc.ca/menu-e.html

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Personal Income Taxation

• Income Tax Act
• self-assessment
• progressive
• marginal vs. average tax rates
• tax brackets
• tax credits vs. deductions
• Taxation of Investment Income
• interest
• dividends
• capital gains and losses

K. Hartviksen
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1997 Rates of Income Tax

• FEDERAL TAX RATES
• Taxable Income Tax Rate
• 0 - 29,590 17
• 29,500 - 59,180 26
• 59,180 29
• ONTARIO PERSONAL TAX RATE
• 48 OF FEDERAL

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Income Taxation (Feb, 2000)

• Paul Martins budget of February 28, 2000
  introduced fundamental changes to our income tax
  system.
• 66.67of realized Capital gains will now be taxed
  rather than at 75
• Federal tax brackets have been increased and are
  now fully indexed
• increase of personal exemption to at least 8,000
• Taxable Income Pre 2000 budget rates July 1, 2000
• 0 - 29,590 (35,000) 17 17
• 29,591- 59,180 (35,001 - 70,000) 26 24
• 59,180 ( 70,000 ) 29 29
• In 1999 Ontario tax rate was 39.5 of federal tax

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Income Taxation (Fall, 2000)

• Paul Martins pre-election mini budget in the
  fall of 2000 set forth a series of election
  promises from the Liberals.
• 50 of realized Capital gains will now be taxed
  rather than at 66.67
• Federal tax brackets have been increased and are
  now fully indexed and an additional tax bracket
  above 100,000 was added.
• increase of personal exemption to at least 8,000
• Taxable Income Federal Rates 2000 Provincial
  Rates TOTAL
• 0 - 30,004 17 6.37 23.37
• 30,005 - 60,009 25 9.62 34.62
• 60,010 29 11.16 40.16
• In 2000 Ontario disentangled its tax rates from
  the federal rates.

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Individual Marginal Tax Rates 2001
FEDERAL Taxable Income Tax on
Rate on Excess Base Amount 30,754 or less
-- 16 30,755 - 61,509
4,921 22 61,510 - 100,000 11,687 26 100,0
01 or more 21,694 29 ONTARIO Taxable
Income Tax on Rate on
Excess Base Amount 0 -
30,814 0 6.16 30,815 61,629 1,898 9.22 gt
61,630 4,739 11.16
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Total Marginal Tax Rates 2001(excluding surtaxes)
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2008 Marginal Rates of Income Tax

• FEDERAL TAX RATES
• Taxable Income Tax Rate
• 0 - 37,885 15
• 37,886 - 75,769 22
• 75,770 - 123,184 26
• 123,185 29
• ONTARIO - PROVINCIAL TAX RATES
• Taxable Income Tax Rate
• 0 - 36,020 6.05
• 36,021 - 72,041 9.15
• 72,042 11.16

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2008 Marginal Rates of Income Tax

• Taxable Income Federal Provincial Total
• 0 - 36,020 15 6.05 21.05
• 36,021 - 37,885 15 9.15 24.15
• 37,886 - 72,041 22 9.15 31.15
• 72,042 - 75,769 22 11.16 33.16
• 75,770 - 123,184 26 11.16 37.16
• 123,185 29 11.16 40.16

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Marginal versus Average Tax Rates
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Taxes

• Key issues
• What is an average tax rate? When should it be
  used?
• What is a marginal tax rate? When should it be
  used?
• Why do we pay attention to marginal tax rates?

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Marginal Tax Rate

• That rate of tax you will pay on the next dollar
  of income.
• This is the rate you should use when making
  investment decisionsbecause investments lead to
  you receiving incremental investment income
  (dividends, interest or capital gains)
• It is the after-tax returns you will expect from
  your investment that are relevant for investment
  decision-making.

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When Might You Use a Marginal Tax Rate?

• Whenever you are evaluating an incremental
  decision
• For example
• When evaluating an investment decision to
  determine the net after-tax rate of return.
• For example if you want to find the marginal
  after-tax rate of return on interest income of
  10

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Average Tax Rate

• Equals Net Taxes Payable/Taxable Income
• will always be much lower than your marginal tax
  rate because the first few dollars of taxable
  income are not taxedthe first 37,885 is taxed
  at the lowest federal rateand so on...

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When Might You Use an Average Tax Rate?

• In this course we will use this when forecasting
  after-tax income available sometime in the
  future, when you are given gross income
  forecastsand must make some assumptions about
  taxes

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Tax Deduction

• Is amount that you are allowed to deduct from
  income in the process of calculating your taxable
  income.

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Tax Credit

• Is a direct reduction of tax otherwise payable.

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Total Income

• Includes
• Employment income 101
• Other employment income 104
• Old Age Security pension 113
• CPP or QPP benefits 114
• Disability benefits 152
• Other pensions or superannuation 115
• Elected split-pension amount 116
• Universal Child Care Benefit 117
• Employment Insurance and other benefits 119
• Taxable amount of dividends from taxable Canadian
  Corporations 180
• Interest Income 121
• Support payments received 128
• RRSP income 129
• Other income 130
• Workers compensation benefits 144
• Social assistance payments 145
• Net federal supplements 146

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Examples of Tax Deduction used in determining
Taxable Income

• Income From employment 50,000
• Net Business Income 10,000
• TOTAL INCOME 60,000
• Less Deductions
• RPP 4,000
• RRSP 8,000
• Annual Union, Professional Due 2,000
• NET INCOME 46,000
• Less Other Deductions
• Northern Resident Deduction 1,000
• TAXABLE INCOME 45,000

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Taxable Income

• Is the base upon which your personal tax
  liability is determined.
• Eg. In the lowest tax bracket
• Federal Taxes taxable income 15
• 10,000 .15
• 1,500

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Tax Credits

• Examples of Tax Credits
• non-refundable tax credits (15 of basic
  personal amount, age amount, spousal amount, CPP
  contributions, EI contributions, pension amount,
  tuition and education deductions, medical
  expensesetc.)
• Donations and gifts (15 of first 200 and 29 on
  excess)
• Dividend Tax Credit
• Federal political contribution tax credit
• Labour-sponsored funds tax credit

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Taxation of Investment Income

• Investment income includes
• interest
• dividends
• capital gains

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Taxation of Interest Income

• interest is taxed at the persons marginal tax
  rate

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Taxation of Dividend Income

• eligible dividends are grossed up by 45 and
  included in income, then the taxpayer is allowed
  a dividend tax credit equal to 18.9655 of the
  taxable amount of eligible cash dividend
• other than eligible dividends are grossed up by
  125 and included in income, then the taxpayer is
  allowed a dividend tax credit equal to 13.3333
  of the taxable amount of dividends reported.

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Taxation of Capital Gain Income

• 50 of a realized capital gain is subject to tax
  at the taxpayers marginal tax rate
• an allowable capital loss is 50 of the capital
  loss and may be used to offset taxable capital
  gains (carry back and carry forward provisions do
  apply.)

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Non-Taxable Income

• Some amounts you receive are not taxed.
  Nevertheless, you have to include them on your
  return because they may affect other deductions
  or credits which you may be entitled to receive.
  These amounts are Workers' Compensation payments,
  Social Assistance payments, and Net Federal
  Supplements. On line 144, enter your Workers'
  Compensation payments, which are shown in box 10
  of your T5007 slip. On line 145, enter your
  Social Assistance payments, which appear in box
  11 of your T5007 slip or the federal part of your
  Relevé 5 slip if you were a resident of Quebec.
  If you lived with your spouse or common-law
  partner at the time either of you received the
  social assistance payments, the one of you with
  the higher net income has to report these
  payments. On line 146, enter the amount of Net
  Federal Supplements which appear in box 21 of
  your T4A(OAS) slip.
• You claim a deduction on line 250 which equals
  the total of the amounts you entered on lines
  144, 145 and 146, unless your income on line 234
  is more than 55,309 and you reported Net Federal
  Supplements. If this situation applies to you,
  contact us to find out how much you can deduct on
  line 250 by calling the general enquiries service
  at 1-800-959-8281.

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Non-Taxable Income

• You do not have to report any of the following
  amounts on your return since these amounts are
  not taxable, and they do not affect any credits
  or deductions you can claim on your return. Do
  not report
• the goods and services tax/harmonized sales tax
  credit
• Canada Child Tax Benefit payments and related
  provincial benefits
• lottery winnings
• most amounts received because of disability or
  death that resulted from war service
• most amounts received from a life insurance
  policy following someone's death or
• an inheritance.
• However, you do have to report any income you
  earn from investing these non-taxable amounts.

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Support Payments

• 220 - Support payments made
• Support payments may be deductible or
  non-deductible depending on when the written
  agreement was made.
• Most child support payments paid according to a
  written agreement or court order dated after
  April 1997, are NOT deductible.

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Provincial Tax Rates

• See Table 6.3, of your text
• Note the divergent provincial tax approaches
• Five tax brackets in B.C. no surtaxes
• Flat provincial tax of 10 in Alberta
• Significantly higher tax rates in all brackets in
  Atlantic Canada together with surtaxes