Chapter 3 – Managing Your Taxes
COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd
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Chapter 3 - Learning Goals
LG 1 - Discuss the basic principles of income taxation.
LG 2 - Describe the sources of income and deductions from
income used to determine taxable income.
LG 3 - Prepare a basic tax return using the appropriate forms
and schedules.
LG 4 - Explain when tax installments need to be made, when
to file your return and how to amend your return.
LG 5 - Know when to get help with your taxes and how
software can streamline tax return preparation.
LG 6 - Implement an effective tax planning strategy.
Learning
Goals
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Chapter 3 – Managing Your Taxes
Internet Links and On-Line Resources
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Planning tools
Tax tips from accounting firm Grant Thornton
Where your tax dollar goes. Government of Canada
Determining the marginal tax rate on a particular source of income.
Morningstar.ca
Canada Revenue Agency
Taxation of dividends received from Canadian Corporations. TD
Economics
General Income Tax and Benefit Package from CRA.
Tax Forms and Schedules
NETFILE Program
Tax Preparation Services in your area certified by CRA to submit
EFILE returns.
Web Links
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Chapter 3 – Managing Your Taxes
Key Chapter Terms and Definitions
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Terms
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Canada Revenue Agency
(CRA)
Goods and Services Tax (GST)
Harmonized Sales Tax (HST)
Income Tax Act (ITA)
Income taxes
Progressive tax structure
Marginal tax rate
Average tax rate
Withholding taxes
Canada Pension Plan (CPP)
Employment Insurance (EI)
Total income
Registered Retirement Savings
Plan (RRSP)
Registered Pension Plan (RPP)
Tax deduction
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Tax credit
T1 general return
Surtax
Notice of Assessment
Tax Evasion
Tax Avoidance
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Chapter 3 – Managing Your Taxes
Definitions
Canada Revenue Agency (CRA)
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The Canada Revenue Agency (CRA) is the
federal agency that is responsible for the
administration of the tax laws for the
Government of Canada and for most
provinces and territories; and various social
and economic benefit incentive programs
delivered through the tax system.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Goods and Services Tax (GST) and Harmonized Sales Tax (HST)
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The goods and services tax (GST) is a federal
sales tax that applies at a rate of 7% to the supply
of goods and services in Canada.
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It is a consumption tax.
Harmonized sales tax (HST) is a sales tax that
applies to the same base of goods and services as
the GST, but a rate of 15%. Of this 7% is federal
GST and 8% is a provincial sales tax. (HST has
been adopted by some maritime provinces. In
other provinces, the GST and a separate provincial
sales tax PST is applied.)
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Income Tax Act
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The Income Tax Act (ITA) is the federal
statute that sets out the federal law on the
taxation of income in Canada.
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It was originally enacted in 1917 in Canada.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Income Taxes
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A type of tax levied on taxable income by
the federal government and by provincial
and territorial governments.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Progressive Tax Structure
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A tax system in which the greater the
amount of taxable income, the higher the
rate at which the marginal dollar of taxable
income is taxed.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Marginal Tax Rate
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The tax rate you pay on an additional
dollar of taxable income.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Average Tax Rate
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The rate at which each dollar of taxable
income is taxed on average; calculated by
dividing the taxes payable by taxable
income.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Marginal versus Average Tax Rate
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A marginal tax rate is the rate you pay on an
additional dollar of taxable income.
FOR EXAMPLE: The marginal federal tax rate for a taxpayer with
less than $30,000 of taxable income is 15.25% - for taxable
income of over $118,286 is 29%.
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Terms
An average tax rate is the rate at which each
dollar of income is taxed at on average. It is
calculated by dividing the taxes payable by the
taxable income.
NOTE: In a progressive tax system like Canada, the average rate of
tax that a taxpayer faces is always less than the marginal rate.
This is because the first few dollars of taxable income at taxed at
the lowest rate, then once the limit is exceeded, additional dollars
of taxable income at taxed a progressively higher rates.
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Chapter 3 – Managing Your Taxes
Definitions
Withholding Taxes – Taxes Deducted at Source
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Taxes – based on the level of income and
estimated taxes payable – that are deducted by an
employer from the employee’s earnings each pay
period and remitted to CRA.
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Also known as taxes deducted at source.
These at-source remittances include:
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Federal and provincial income taxes
Employee’s required contributions to the Canada Pension
Plan (CPP)
Employee’s required contributions to Employment
Insurance (EI)
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Canada Pension Plan
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The Canada Pension Plan is a federal
government plan that provides retirement
pensions, disability benefits and survivor
benefits to individuals. Benefits are based
on premiums paid into the plan. The plan
covers both employed and self-employed
individuals.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Employment Insurance
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Terms
Employment Insurance is a federal
program that provides temporary financial
assistance for unemployed Canadian while
they look for work or upgrade their skills.
Canadians who are sick, pregnant or caring
for a newborn or adopted child, as well as
those who must care for a family member
who is seriously ill with a significant risk of
death, may also be assisted by
Employment Insurance.
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Chapter 3 – Managing Your Taxes
Definitions
Total income
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Income from all sources earned by a
taxpayer during the year including income
from employment, business, property and
capital gains.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Registered versus Non-registered Investments
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A registered investment is one that has special tax
treatment under the ITA.
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Examples of registered investments include:
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Registered Pension Plans (RPP)
Registered Retirement Savings Plan (RRSP), and
Registered Retirement Income Fund (RRIF)
These foregoing registered investments are specially
registered with CRA and the amounts of money invested
in them are not subject to tax, and additionally, the
investment returns these investment returns earn over
time are not subject to tax. These features increase the
amount of money that tax payers can invest, given a
limited disposable income, and increase the rate of
return earned on the assets while protected from tax.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Registered versus Non-registered Investments …
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A non-registered investment is an investment in
any asset that will produce investment returns
(interest, dividends and capital gains)
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Examples of non-registered investments include:
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Income-producing property
Common stock
Preferred stock
Bonds
Canada Savings bonds
Savings Accounts
Term Deposits
Non-registered investment’s returns are subject to
income tax in the year the returns are ‘realized.’
Chapter 3 – Managing Your Taxes
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Definitions
Realized Returns
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A realized return is one that is created at a point in
time.
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Terms
In the case of interest, when it is accrued or when it is
received in the form of cash, the interest income is
‘realized’ for tax purposes and therefore must be
included in income and subject to tax in that calendar
year.
In the case of capital gains, when a financial asset such
as a stock rises in price but is not sold to ‘capitalize’ on
the price increase, the capital gain is not ‘realized’ for tax
purposes. Such capital gains are NOT subject to tax.
To realize a capital gain or capital loss, the investment
must be sold (except in a deemed disposition situation).
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Chapter 3 – Managing Your Taxes
Definitions
Registered retirement savings plan (RRSP)
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An individual retirement savings plan into
which a taxpayer can make, within limits
prescribed by CRA, tax-deductible
contributions.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Registered pension plan (RPP)
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A pension plan offered by an employer into
which an employee can make taxdeductible contributions based on the level
of earnings of the individual.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Tax deduction
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Amounts that may be subtracted when
calculating income.
Deduction reduce taxable income by the
amount of the deduction.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Tax credit
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Amounts that are deducted from a tax
liability that reduce taxes otherwise
payable.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
T1 General Return
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The tax form used by most individuals
when filing their annual income taxes.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Surtax
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An additional tax calculated based on a tax
amount previously determined.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Notice of Assessment
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CRA’s acknowledgement of the filed return,
summarizing the return, the balance owing
(refund), the differences between CRA’s
calculations and the filed return.
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Includes RRSP contribution room for the
coming year.
Includes statement of interest, penalties, and
other information pertaining to outstanding
balances.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Tax evasion
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The illegal act of failing to accurately report
income or deductions, and, in extreme
cases, failing to pay taxes altogether.
Terms
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Chapter 3 – Managing Your Taxes
Definitions
Tax avoidance
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The act of reducing taxes in ways that are
legal and compatible with the intent of the
ITA.
Terms
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Chapter 3 – Managing Your Taxes
THE END!
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