Chapter 3 Planning Your Tax Strategy

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Chapter 3Planning Your Tax Strategy
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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.

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Learning Objective 1Describe the importance
of taxes for personal financial planning.
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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.

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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.

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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?

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Learning Objective 2Prepare federal
provincial income tax returns by calculating
taxable income and the amount owed for federal
provincial income taxes.
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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.

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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

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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

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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

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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

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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

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Learning Objective 3Select appropriate tax
strategies for different financial and personal
situations.
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Tax-Planning Strategies

• Tax planning is the use of legitimate methods to
  reduce ones taxes
• Accelerate deductions
• Delay receipt of income
• Delay deductions
• Accelerate receipt of income
• Tax Evasion.
• Illegally not paying all thetaxes you owe, such
  as not reporting all income.

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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

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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
• Childrens Investments
• Registered Retirement Savings Plans
• Registered Pension Plans
• Individual Pension Plans
• Deferred Profit Sharing Plan

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Learning Objective 4Identify tax assistance
sources.
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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

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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

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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

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