AFM 202 Tax Tutorial

Sept. 26, 2014

In this tutorial
Taxprep Midterm prep
This weeks content
Other Income:
Tax deferred plans (RPP, RRSP, RESP, etc.)

Deductions
RRSP contribution
Moving expenses
Childcare expenses

Tax Payable & Tax Credits

Medical or disability credit

Tax Prep Midterm Review

Major Forms & Jump Codes to Know

Basic Forms
Identification (ID)
Family (FAM)
Jacket (J)
Schedule 1 (1)
ON428 (ON428)

Types of Income
Self-employment (2125)
Interest, Dividends (T3,
T5, 4)
Capital Gains (ACB, 3)
Employment (T4, J104)
Other income (T4RSP,
T4A, FOREIGN)

Major Forms & Jump Codes to Know Contd

Deductions & Credits
CCA forms
J212
J229, 777
RRSP, RRSP MAX,
T2205
T1M
CARE

Other Misc. Forms

Instalments (INST)
TSUM
Loss carry forward (LOSSC)
T1135 (1135)
MARGINAL
ABIL

Summary of Homework Problems

Problem

Major things to know

Property income, business income, business expenses

CCA (CCA, terminal loss, recapture), capital gains, losses

Same as 1 & 2

Rollforward

Capital gains (PUP, LPP, etc.) , employment vs. self

employment, instalments

Employment expenses

Family tax, employment, RRSP, child care, moving expenses

Family tax, different types of income, 1135, RRSP, business,

child care, childcare

Family tax, foreign income, various credits (student, medical,

disability, donations, etc.)

Common Mistakes
Forgetting to check Terminal Loss on CCA
classes with no assets
Forgetting to check boxes on ID (check for 1135!)
Missing income not on slips/some income not
taxable
Not overriding on commission income, both
amount and check box (due to Taxprep error)
If you know you are likely to miss
something, write it on your cheat sheet!

Other things to note

Overrides: Do not do them! (Unless specified)
Headings & details
Know what you can choose from choose the
method that yields the least amount of tax!
Does the person need a tax return (for families)
For sample marking key likely to be used see
assignments marking key from last year

QUESTIONS? GOOD LUCK!

Tax Deferred Plans Tax Impact

Pension income
T4RSP - Registered Retirement Savings Plan,
(RRSP) income taxable when withdrawing
money from your RRSP
T4RRIF -Registered Retirement Income Fund
(RRIF) what your RRSP turns into after 70
T4OAS (Old Age Security) clawback possible
T4AP (CPP income)
T4A (Corporate pensions, RESP withdrawals)

Deductions: RRSP
RRSP Deduction Worksheet

RRSP Deduction Limit

Withdrawals/Contributions

Input the issuer and the date of when

the amount was contributed

Complete form 1028

Ensure RRSP Max Worksheet is also
complete
Contributions to RRSP are deductible
Withdrawals are taxable represent
INCOME

Spousal RRSP
Spouses can contribute to each others accounts
When withdrawals are received, T4RSP is
used if there are spousal contributions Box
24 needs to be a YES
Form 2205 Spousal RRSP information
The amount that you are claiming on line 208
cannot have amounts for a spouses RRSP that
is greater than your own contribution limit

Calculating RRSP contribution limit

Current Year RRSP contribution limit (in most
questions it is given) - There is a maximum amount
we can contribute to our RRSPs.
The calculation should be as follows:
Add: Prior year RRSP deduction limit
Less: Prior year deduction
Plus: The lesser of: a) 18% * PY Earned income
b) $23,820
Less: Unused RRSP contributions carried forward
Less: Pension adjustment

Limit Examples
a) Pauls bank tells him that his deduction limit for
2012 is $55,000. During 2012, he had
contributed $35,500 to his RRSP. During 2012
Pauls earned income was $200,000. What is
his contribution limit for 2013?
b) Pauls bank tells him that his deduction limit for
2012 is $25,000. During 2012 he had
contributed $35,500 to his RRSP. During 2013
Pauls earned income was $150,000. What is his
contribution limit for 2013?

Limit solutions
a) Limit 2012 = $55,000
Less: Deductions taken (35,500)
Unused limit carried forward $19,500
Less: PA = 0
Plus:
2013 Dollar Limit: Lesser of
a) 18% *200,000= $36,000
b) $23,820 Take this
Maximum contributions for 2013 =
19,500+23,820=43,320

Limit Solutions
b) Limit 2012 = $25,000
Less: Deductions (35,500)
Unused deductions carried forward $10,500
Less PA: 0
2013 Dollar Limit: Lesser of
a) 18% *150,000= $27,000
b) $23,820 Take this
Maximum contributions made for 2013 = $13,320
What are the side-effects of this conclusion?

Over-contribution
In part B, Paul contributed $35,500 when his
limit was $25,000 over by $10,500. Few things
to note that we also saw in questions:
1. The first $2,000 over this limit is OK and
without penalty and can be deducted in the
next year
2. The remaining $8,500 is going to have a 1%
penalty applied to it for every month it
continues to remain within the plan

Deductions Childcare Expenses

Make sure to enter all children on the FAM form first
Childcare Input all childcare incurred
Data Form
Data Form

Looks at your eligible childcare expenses including

camping (KNOW THE LIMITS!!!)
Form 778
Deduction is usually placed on the lower income individual
(A)
Basic limit for childcare expenses (specific to the particular
Form 778
years the children are born)
(B)

Tax-Prep specific details (Childcare

expenses)
Allowable deduction is the least of:
1. The amount of eligible expenses paid as per
Part A of form 778
2. 2/3 * earned income
3. Eligible expenses based on date of birth
- Other parts of the form ask for more information
in regards to your spouse and their income level

Childcare expenses
Childcare expenses are only applicable if:
1. They are considered to be eligible expenses
they must be for things such as nannies, not
babysitting (ex. parents go to the movies at night)
2. The child meets the eligibility criteria (must be
under 16 yrs. During any part of the current year)
3. The expenses must be for the purposes of
enabling the parents to go out and work

Problem 8 from class

Logically speaking we should have given the childcare
deduction to Bernice, why did we not?

Deductions - Moving Expenses

Moving
expense
deductions

Just like childcare expenses, there is

tax planning involved
We need to complete additional
forms to substantiate the
amounts T1-M form
There are eligible moving expenses
and not everything can be deemed
an expense

Moving Expenses
The relocation must be an eligible relocation
(Distance from Old house to work)- (Distance from new house to work)
Eligibility
> 40 km

Type of
income

Only applicable with employment or self employed income

No deduction if it is being applied against investment income or
employment insurance benefits

Meals, accommodations, travel, lease cancellation fees, incidental

Examples of costs, costs for selling old residence and purchasing new residence,
eligible Lets look at the T1-M form and walk through it
expenses

Moving Expenses
There are two ways through which we can deal with
moving expenses:
1. Detailed method
2. Simplified method
. The first method is more focused on tracking all
aspects of the expenditure requires a proper
collection of receipts
. The latter method will place limits on certain
things such as meals, since there is little evidence
to substantiate the amounts

Moving expense Examples

Calculate the moving expense deduction for the following
situation:
Bernice and Ken move their family on January 1, 2012 to
Waterloo, Ontario from Kitchener Ontario. The distance
from their old house to their new work is 50km. The
distance from their new house to their new work is 30km.
They incurred the following costs:
Moving truck : $100
Gas for car: $50
Lease cancellation fee: $500
Interior decorating for their new house: $5000

Moving Expense Answer

This was a trick question! One of the requirements
for moving expenses to be deductible is that the
relocation must be eligible. The difference between
the workplace from the new house less the distance
from the old house to the workplace is only 20km.
As noted earlier, the requirement is 40km; hence,
none of these costs are deductible.
Note: the interior costs on the house are not going
to be deductible, even if the problem could work.

Moving expense example

As a family moves, one of the costs that is
incurred is related to meals that they had to eat
during the move. The move was from San
Antonio, Texas to Calgary, Alberta. In total, the
family of five had consumed $6,000 of food in a
span of 10 days. They have kept all of their
receipts, what is the amount that can be
claimed?
What if there were no receipts?

Moving Expense example answer

A) $6000 can be claimed, since there is proof of
the receipts (this is the detailed method)
B) if there are no receipts, then that means, we
must use the simplified method. As per the CRA
(http://www.cra-arc.gc.ca/travelcosts/), we
must claim $17 per day for each meal per person,
so it would be: $17*3*5*10= $2,550.

Who claims Moving expenses

Usually placed on the individual with the higher
income
This is because they have a higher marginal tax
rate and hence there is a greater impact
The moving deduction will lead to a reduction of
the income that is taxed hence, those with the
higher income and in a higher tax bracket will
benefit from the reduction potentially moving
them out of a higher bracket and into a lower one

Tax Payable & Tax Credits

Taxes payable based on income brackets
Marginal tax rate - MARGINAL
What is the difference between a credit and
deduction?
Deduction is against taxable income whereas
credits are against taxes payable

Non Refundable Tax Credits

What does non-refundable mean?
Some of the credits @ 15%, on Schedule 1

Basic personal credit

Spousal credit
Child Tax credit
Age credit
Canada Employment
Donations (DONATION)
Medical Expenses (MED)
Tuition (T2202A)

Textbook (T2202A)
CPP/EI
Interest on Student Loans
Public Transit (364)
Childrens Fitness (365)
Childrens Arts (370)
Political donation
(POLITICAL)
Etc.!

Medical vs. Disability Credit

Disability credit check box on ID form
How to decide which one?
The disability amount is $7,546. The tax credit is 15% of this.
The medical amount is the amount of the total medical
expenses less a threshold amount. The tax credit is 15% of
this.
The tax saving from (B) is at most: 15% x [$10,000 + $7,546 ]
The tax saving from (A) is: 15% x [full cost of an attendant ]
Thus, (A) will always be better if the cost of an attendant is
more than $17,546.
For attendants cheaper than that (e.g., a $5,000 part-time
attendant), (B) might be a better choice.