1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 3 Planning Your Tax Strategy 3-1

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives – Chapter 3 1.Describe the importance of taxes for personal financial planning. 2.Prepare federal and provincial income tax returns by calculating taxable income and the amount owed for federal and provincial taxes. 3.Select appropriate tax strategies for different financial and personal situations. 4.Identify tax assistance sources. 3-2

3.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Describe the importance of taxes for personal financial planning. 3-3

4.  2004 McGraw-Hill Ryerson Ltd. Taxes and Financial Planning About one-third of each dollar you earn goes to pay taxes. An effective tax strategy is vital for successful financial planning. Understanding tax rules and regulations can help you reduce your tax liability. To help you cope with the many types of taxes you should... Know current tax laws as they affect you. Make purchase and investment decisions that reduce your tax liability. Maintain complete tax records. 3-4

5.  2004 McGraw-Hill Ryerson Ltd. Four Types of Taxes  Taxes on purchases. Sales tax & excise tax.  Taxes on property. Real estate tax. Personal property tax.  Taxes on wealth. Estate taxes. Capital gains (losses).  Taxes on earnings. Income tax. 3-5

6.  2004 McGraw-Hill Ryerson Ltd. Filing Your Federal & Provincial Income Tax Return Determine whether you are required to file a return Students should file even if they do not expect a return to get GST/QST refunds and housing refunds Which form best serves your needs? Are you required to submit additional schedules or supplementary forms? 3-6

7.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Prepare federal & provincial income tax returns by calculating taxable income and the amount owed for federal & provincial income taxes. 3-7

8.  2004 McGraw-Hill Ryerson Ltd. STEP 1: Determining Total Income Taxable Income is the net amount of income, after allowable deductions and expenses are deducted, on which income tax is computed. Most, but not all, of income is taxable. Types of Income  Employment Income  Investment Income  Passive Income  Other Income  Scholarships, bursaries, study grants, etc. 3-8

9.  2004 McGraw-Hill Ryerson Ltd. Computing Your Total Income Total income is affected by exclusions. Amounts not included in gross income. Also referred to as tax-exempt income, which is income not subject to income tax. Total income is also affected by tax-deferred income. This is income that will be taxed at a later date, such as earnings from a Registered Retirement Savings Plans (RRSP) or Registered Pension Plan (RPP). Tax Shelter – an investment that provides immediate tax benefits and a reasonable expectation of future profit 3-9

10.  2004 McGraw-Hill Ryerson Ltd. STEP 2: Calculating Net Income and Taxable Income Net income is total income after certain reductions have been made Deductions are expenses that can be deducted from total income Common deductions include; Contributions to registered deferred income plans (RRSP, RSP) Medical expenses Investment counseling fees Union and professional dues Child care expenses Certain employment related expenses Capital Gains exemptions 3-10

11.  2004 McGraw-Hill Ryerson Ltd. STEP 3: Calculating Taxes Owed Taxable income is basis for computing amount of your income tax Tax rates and tax credits are used to compute taxes payable Marginal Tax Rate (MTR) Is rate of tax paid on last, and next, dollar of taxable income Average Tax Rate (ATR) Total tax due divided by gross income 3-11

12.  2004 McGraw-Hill Ryerson Ltd. Tax Credits Tax credits are an amount subtracted directly from the amount of taxes owed Basic personal amount Spousal (equivalent-to spouse) amount Contributions to CPP / EI Disability amount Tuition and education expenses Medical expenses Charitable donations 3-12

13.  2004 McGraw-Hill Ryerson Ltd. Making Tax Payments Source Withholding Employees withhold from source to pay income tax, CPP and Employment Insurance contributions Reported to you on your T4 Can reduce source withholding Installment Payments Deadlines & Penalties Must file by April 30 of each year Automatic 5% penalty on balance owing if late 3-13

14.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Select appropriate tax strategies for different financial and personal situations. 3-14

15.  2004 McGraw-Hill Ryerson Ltd. Tax-Planning Strategies Tax planning is the use of legitimate methods to reduce one’s taxes Accelerate deductions Delay receipt of income Delay deductions Accelerate receipt of income Tax Evasion. Illegally not paying all the taxes you owe, such as not reporting all income. 3-15

16.  2004 McGraw-Hill Ryerson Ltd. Tax-Planning Strategies Consumer Purchasing: some buying decisions directly affect taxes Owning a home is one of the best tax shelters because it is exempt from capital gains as long as it qualifies as your principal residence Home Buyers Plan: first time buyers can withdraw from their RRSP for down-payment Student Loans: can claim tax credit on interest on student loans Employment related expenses: home based business 3-16

17.  2004 McGraw-Hill Ryerson Ltd. Investment Decisions Tax exempt investments – capital gain exemptions on certain small businesses and farm property Tax deferred investments – income taxed at a later date Self-employment Children’s Investments Registered Retirement Savings Plans Registered Pension Plans Individual Pension Plans Deferred Profit Sharing Plan 3-17

18.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Identify tax assistance sources. 3-18

19.  2004 McGraw-Hill Ryerson Ltd. Tax Information Sources Tax information sources and assistance can be found at: Canada Customs and Revenue Agency Libraries and Bookstores Internet sites Tax publications Tax preparation software and electronic filing Tax preparation services 3-19

20.  2004 McGraw-Hill Ryerson Ltd. What if your return is audited? A tax audit is a detailed examination of your return for Canada Customs and Revenue Agency More information is requested Keep detailed records; receipts, cancelled cheques, evidence to prove amounts claimed Avoid common filing errors 3-20

21.  2004 McGraw-Hill Ryerson Ltd. Types of Audits Desk Audit Inquiry mailed asking you to clarify or document Field Audit Agents visit to have access to records May request only specific information You should seek assistance from a professional advisor Generally not cause for alarm 3-21