chapter 9 other sources of income and deductions in computing income 1

Chapter 9

Other Sources of Income and Deductions in Computing Income

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Other Sources of IncomeITA Reference Other Sources of Income

56(1)(a)(i) – (iv) Benefits in the nature of pensions

56(1)(a)(ii) Retiring allowance and other payments on termination of employment

56(1)(b) Support receipts and payments

56(1)(d) Annuity payments

56(1)(h), (i), (q), (t) Amounts received from deferred income plans

56(1)(n) Education assistance payments

56(1)(l) Legal costs awarded by a court

56(1)(u) Social assistance payments

56(1)(v) Workers’ Compensation

56(2) Indirect payments

56(6) Child care benefit

56.4 [Proposed] Restrictive Covenants2

Benefits in the Nature of Pensions

• Includes pension benefits received under the Old Age Security Act and the Canada Pension Plan– Income splitting – CPP– Income splitting – Pension income

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Retiring Allowances and Other Payments on Termination of Employment

• Retiring allowance is taxable– Specifically includes:

a) Retirement from an office or employment in recognition of long service; or

b) Loss of office including court-awarded damages received by the taxpayer, or as a bequest, by a dependant or relation of the taxpayer or his/her legal representative.

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Support Receipts and Payments

• Spousal support:– Recipient has an inclusion while payer has a deduction

– Support deductible if:1. Payments are made as allowances on a periodic basis;

2. Payments are made for the maintenance of recipient;

3. Recipient has discretionary use of the amounts;

4. Payments are to spouse who is living apart because of marital breakdown or paid by a natural parent of a child of the recipient; and

5. Payments are made pursuant to an order of competent tribunal or a written agreement.

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Support Receipts and Payments

• Child support payments– Not deductible by payer– Not included in income of recipient

• Legal fees– To enforce pre-existing rights support is

deductible

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Amounts Received From Deferred Income Plans

• Receipts from the following included in income:– Registered retirement savings plan (RRSP)

– Home Buyer’s Plan (HBP)

– Lifelong learning plan (LLP)

– Deferred profit sharing plan (DPSP)

– Registered education savings plan (RESP)

– Registered disability savings plan (RDSP)

– Registered retirement income fund (RRIF)

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Registered Education Savings Plan (RESP)

• Allow contributions to a plan to fund post-secondary education for a qualified beneficiary

• Contributions are not deductible and not taxable when the plan allows their withdrawal

• Investment income of the plan is sheltered until beneficiary withdraws

Time Limit Type of Plan Limit

Years of contribution Regular 31 years

Disabled 35 years

Termination Regular 35 years

Disabled 40 years

Lifetime contribution limit $50,0008

RESP

• Canada Education Savings Grant– 20% of the first $2,500 annual contribution to an RESP

for the benefit of child up to the age of 18 paid directly to RESP by government

– Maximum per beneficiary = $7,200

– Rate is enhanced for lower income families

• Canada Learning Bond– Initial $500 and subsequent annual $100 for each child

born after Dec. 31, 2003 if child’s family entitled to National Child Benefit supplement

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RESP

• Distribution from RESP to subscriber can occur if:– Subscriber is alive– Each beneficiary is either:

• Over 21 years of age and not eligible to receive educational assistance payments, or

• Has died

– RESP has been in existence for at least 10 years.

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Registered Disability Savings Plan (RDSP)

• Helps parents and others save for the long-term financial security of a child with severe disability– Similar to RESP design

– Lifetime contributions: $200,000 maximum

– Contributions can be made until beneficiary is 59

• Canada Disability Savings grant• Canada Disability Savings bond

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Education Assistance Payments

• Included in income:– Scholarships, fellowships, bursaries, or prizes for

achievement in field of endeavour of the taxpayer

– Research grants

• Exemption of scholarships, fellowships, and bursaries

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Other Inclusions

• Legal costs awarded on appeal from assessment of any tax, interest, or penalties

• Award or reimbursement of legal expenses paid to collect or establish right to a retiring allowance or benefits under a pension plan

• Social assistance payments• Workers’ Compensation

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Indirect Payments

• Anti-avoidance provisions that include in income of the taxpayer:– Income diverted at his/her direction to someone else

either for the taxpayer’s benefit or to the benefit of the other person

– Any rights to income transferred by the taxpayer, while resident of Canada, to someone who is not at arm’s length

– Income earned on non-arm’s length loans which do not yield a commercial rate of interest

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Restrictive Covenants[Proposed]

“Restrictive Covenant” is an arrangement, an undertaking or a waiver of a right or advantage

that affects, in any way, the acquisition or provision of property or services by the taxpayer or someone

not dealing at arm’s length with the taxpayer.

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Restrictive CovenantsFigure 9-1

Has a payment beenreceived for a restrictivecovenant?

Are these payments includedin either employment income,as proceeds for eligible capitalproperty or as proceeds ofdisposition shares or apartnership interest?

Include in income from a Restrictive covenant underSection 56.4

The payments are taxed aseither employment income,as proceeds for eligiblecapital property or as proceedsof disposition of shares or apartnership interest

Yes

Yes

No

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Tax-Free Savings Account (TFSA)

• Allows Canadian resident individuals (18+) to earn investment income on a tax-free basis

• Contributions are not deductible• Neither income earned in account nor withdrawals

are taxable• Contribution limits:

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2009 2010 2011 2012 2013 2014 and on

Annual $5,000 $5,000 $5,000 $5,000 $5,500 Indexed

Cumulative 5,000 10,000 15,000 20,000 25,500

Exempt Entities

• Not taxable under Part I of the Act

• Involves government and not-for-profit organizations

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Deductions in Computing Income[subdivision e]

• Capital element of annuity

• RRSP contributions

• Overpayments included in income

• Fees related to objections and appeals

• Legal fees to establish a right

• OAS clawback

• Moving expenses

• Child care expenses

• Disability support deduction

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Capital Element of Annuity

• Capital element is determined by multiplying the annual annuity payment by:

Capital outlay to buy the annuity

Total payments to be received or expectedto be received under the contract

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Registered Savings Plan

• Types of tax-assisted retirement plans:– Defined-benefit registered pension plans– Money-purchase registered pension plans– Deferred profit sharing plans– RRSPs

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RRSPs

Purpose: To give an individual an incentive to save money for retirement.

Incentive: Individual can claim tax deductions for contributions to his/her RRSP or a spousal RRSP. Income accumulates in plan tax-free.

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RRSPsFunds withdrawn from RRSP

At Maturity

Taxed whenreceived

Two Options:1.Received in lump sum• Taxed when received

2.Purchase RRIF or retirement annuity• Tax deferred until receipt

Prior to Maturity

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RRSP Contribution Limit

If the individual is: The annual contribution limit for 2012– 2015:

A member of an RPP or DPSP

(A) individual’s unused RRSP deduction room carried forward from the previous year

PLUS(B) Lesser of: (i) RRSP dollar limit, and (ii) 18% of earned income for the prior yearMINUS(C) Pension adjustment

Self-employed individual or individual not described above

(A) individual’s unused RRSP deduction room carried forward from the previous year

PLUS(B) Lesser of: (i) RRSP dollar limit (ii) 18% of earned income for the prior year.

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RRSP Dollar Limits

2012 2013 2014 2015

RRSP

RRSP Dollar limit $22,970 $23,820 $24,270 Indexed

Earned Income needed @ 18% $127,611 $132,333 $134,833 Indexed

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RRSP: Earned Income• Includes income for the period individual was resident in

Canada during the year from:– Office or employment

– Business carried on by individual, alone, or as active partner

– Property (from rental property or royalties related to work or invention of individual)

– Support payments included in individual’s income

– Supplementary unemployment benefit plans, net research grants, and support receipts

– Disability pension received after 1990 from CPP or QPP

• Less total loss or deduction in the year from:– A business, property, and deductible support payments

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RRSP: Pension Adjustment (PA)

• Provided on individual T4.

• Represents the value of tax-assisted or sheltered benefits accruing to the taxpayer in a year.

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RRSP Contribution Room Carried Forward

• Current year = Sum of:1. Unused RRSP room from prior years, and

2. Lesser of:a. Dollar limit for the prior year, and

b. 18% of earned income from prior year.

LESS: PA for prior year.

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RRSP Excess Contribution

• 1% per month penalty until “excess” for the year is removed

• An individual may contribute up to $2,000 in excess of his/her deductible limit without penalty– But excess amount is not deductible

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Contributions to Spousal RRSP

• Individual may contribute to a spousal RRSP but individual subject to their own contribution limit

• Attribution will apply on withdrawal of the funds by the spouse if:– Individual made a contribution to any spousal plan in

the current year or the preceding two years; and

– Contribution is required to be included in computing the income of the individual’s spouse.

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RRSP: Withdrawal Before Retirement

• Gross amount received by individual before maturity including in individual’s income

• Except a tax-free withdrawal is permitted for:– Home Buyer’s Plan (HBP)

– Lifelong Learning Plan (LLP)

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Retirement Options

• RRSP matures by the end of the year in which the individual reaches the age of 71

• Individual may make withdrawals from plan earlier for retirement

• Retirement options:– Fixed-term annuities

– Life annuities

– RRIF

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RRSPs and RRIFs on Death

• Treatment dependent on beneficiary– Spouse or common-law partner– Financially dependent child or grandchild– Other beneficiaries

• Transfer to an RDSP

• Contributions for year of death

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Transfer of Retirement Income and Sheltered Amounts

• Lump-sum retirement income can be transferred on a tax-free basis, but only where the amounts are transferred directly from one plan to another.

• Retiring allowances may be transferred tax-free to an RRSP or RPP subject to following limits:– $2,000 × number of pre-1996 years during which the

individual was employed;

– $1,500 × the equivalent number of non-vested pre-1989 years.

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Overpayments and Other Deductions

• Overpayments included in income

• Objections and appeals

• Legal fees to establish a right

• OAS clawback

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OAS Clawback

The lesser of:

(a) OAS benefits $xxx

(b) Income under Div. B without par. 60(w) deduction $ xxx

Less: 70,954

Excess, if any: $ xxx

15% of excess, if any $xxx

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Moving Expenses

• Deductible expenses include:– Reasonable travelling costs in moving family to the new residence;

– Transporting or storing of household effects;

– Cost of meals and accommodation near old residence or new residence not exceeding 15 days;

– Lease cancellation costs of old residence;

– Selling costs of old residence;

– Cost of legal services, transfer taxes, or registration taxes on new residence, but only if old residence is sold;

– Mortgage interest, property taxes, insurance premiums, and costs associated with maintaining heat and power (max. $5,000) of “vacant” old residence prior to sale;

– Cost of revising legal documents to reflect taxpayer’s new address.

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Moving Expenses

• Eligible Relocationa) Taxpayers who move to carry on business or be

employed in Canada may deduct their moving expenses from that business or employment income; and

b) Students who move to attend a post-secondary institution on a full-time basis either in or out of Canada may deduct their moving expenses from student income.

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Moving Expenses• Specific limitations:

a) Taxpayer must move 40 km closer to work location or post-secondary institution

b) Moving expenses exceeding income from the work location in a year can be deducted in any following year against income from that work location

c) Taxpayer cannot be reimbursed by or be in receipt of an allowance from his/her employer for moving expenses unless he/she includes reimbursement/ allowance in income

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Child Care Expenses

• Lower income parent or supporting individual may deduct unless that individual is:– A student in full-time/part-time;

– Infirm and incapable of caring for children for at least two weeks;

– Confined to prison for at least two weeks; or

– Living apart from the higher income taxpayer throughout a period of at least 90 days commencing in the year due to a marital breakdown.

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Child Care Expenses

• Limitations:– Eligible child includes child who turned 16 during the year;

– Payments cannot be made to persons under 18 who are related and a person claimed as a dependant;

– Maximum amount claimable for boarding school or camp:• $175 per week for each child under age of seven (or child who has a

severe and prolonged mental/physical impairment),

• $100 per week for any other eligible child;

– Earned income is defined very specifically; and

– Must have receipts with SIN of person providing services.

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Child Care ExpensesLower Income Spouse:• Deduction is the least of:

i. Amount paid in the year by the taxpayer or supporting person

ii. $4,000 for each eligible child seven and up

$7,000 for each eligible child under seven

$10,000 for each child with severe and prolonged mental/physical impairment

iii. 2/3 of the earned income of the taxpayer

MINUS: amount deducted by higher-income spouse.

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Child Care Expenses

Higher Income Spouse:• Deduction is the least of:

1. Least of (i), (ii), and (iii) of lower income spouse but computed using the earned income of higher-income taxpayer.

2. The sum of:a) $250 × number of children who have a severe and prolonged

mental/physical impairment;

b) $175 × number of children under seven at end of year; and

c) $100 × number of other eligible children

TIMES the number of weeks lower-income spouse was a student, incapable of caring for the children, was in prison, or was living separate because of marital breakdown.

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Disability Support Deduction

• Disability support expenses are fully deductible if incurred to enable a taxpayer to work or attend school but subject to a dollar deduction limit

• Refundable medical expense supplement includes 25% of expenses claimed under disability supports deduction

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