Chapter4: Tax Concepts

A capital gain results from profit on the sale of capital assets.

TRUE

All interest and dividends received by an individual taxpayer (outside of an RRSP or TFSA) are taxable.

TRUE

An investor who receives $10 000 interest will pay higher taxes than one who receives $10 000 from eligible dividends.

TRUE

Canada's tax system is called "progressive," which means the higher someone's income, the higher the percentage of income paid in taxes.

TRUE

Filing an income tax return, even when you have no tax to pay, may increase the amount of RRSP contributions you are allowed in later years.

TRUE

If Jack has total RPP and RRSP contributions of $9000, he can deduct that amount from his total income to calculate his taxable income.

TRUE

Interest paid on a qualified student loan can be used to reduce tax owing through a tax credit.

TRUE

Organizing your records to take advantage of tax credits and deductions and investing in tax sheltered accounts like RRSPs and TFSAs are the best ways to avoid taxes.

TRUE

Self-employed taxpayers must have paid all taxes owing by April 30th of the following year.

TRUE

Tax evasion occurs when taxpayers attempt to deceive the Canada Revenue Agency by knowingly reporting less tax payable than what the law requires them to pay.

TRUE

The Canada Education Savings grant is taxable to the beneficiary when paid from a Registered Education Savings Plan (RESP).

TRUE

The basic personal amount is a non-refundable tax credit that can reduce tax payable to zero for people with income under $11 000.

TRUE

The combined Federal and Provincial tax rates vary a lot from province to province.

TRUE

The spousal/common law tax credit is available to those supporting a spouse who had earnings under $11 635 in 2017.

TRUE

There is a required repayment of certain social benefit payments if your net income is above a certain level.

TRUE

Tuition and charitable donations can be carried forward to reduce taxes in future years.

TRUE

Tuition, pension, and age amount credits can be transferred to your spouse if you have no tax to pay.

TRUE

Union dues and spousal support payments can be deducted in the calculation of taxable income.

TRUE

For people in the highest marginal tax bracket, which would save them the largest financial benefit? A) A $10 000 RRSP contribution B) A $10 000 RESP contribution. C) A $10 000 TFSA contribution. D) These would all be the same.

A

Which of the following would produce the largest financial benefit to a tax payer who earns and is in the forty percent marginal tax bracket and the twenty five percent average tax bracket? Assume that all items are options of equal importance. A) A $5000 contribution to his/her child's RESP B) A $5000 medical expense amount for orthodontics C) A $5000 contribution to his/her TFSA D) A $5000 contribution to his/her RRSP

D

Provincial governments collect property taxes.

FALSE

If a stock was purchased for $3000 in January 2003 and is sold in June 2003 for $4000, what is the taxable result? A) Capital gain of $1000 and taxable income of $500 B) Business income of $1000 and taxable amount of $1000 C) Capital gain of $1000 and taxable income of $1000 D) Taxable capital gain of $1000

A

If you are supporting a spouse who attended school and had $3000 in taxable income A) you can claim their tuition tax credit. B) all of their non-refundable tax credits can be used to reduce your tax. C) you are entitled to a caregiver tax credit. D) you can deduct their personal basic amount.

A

In which general category of tax should a homeowner earning over $250 000 in salary per year be expected to pay the most? A) Personal income tax B) Consumer tax (GST/HST) C) Property tax D) Excise tax

A

Marta received an inheritance of $20 000 and wants to allocate it towards her six-year-old son's education in the most effective manner. Which of the following considerations will have the greatest financial impact? A) Contributing to an RESP in such a way as to collect the maximum Canada Education Savings Grant B) Benefiting from the tax deferral in an RESP account as quickly as possible C) Applying for the Canada Learning Bond as soon as possible D) Collecting the maximum Educational Assistance Payments in the RESP account

A

Melanie, a homeowner, has mortgage interest of $3000, RRSP contributions of $1500, and charitable contributions of $500. According to her filing status, a basic personal amount of $11 635 is allowed. How much should Melanie deduct on her tax return? A) Her only deduction is the $1500 RRSP contribution. B) She can deduct $13 135, her basic personal amount and her RRSP contribution. C) She can deduct $13 635, her basic personal amount, charitable donation and her RRSP contribution. D) She has deductions of $2000 for her RRSP and charitable donation.

A

Reginald is thinking about asking his employer to defer a $5000 bonus to next year's income because he would have to pay $2050 in tax if he received it this year. What should he do? A) If his marginal tax rate next year will be less than 41 percent he should consider deferring it. B) He should take the bonus now because of the opportunity cost. C) If his marginal tax rate next year will be less than 45 percent, he should defer it to next year. D) If his marginal tax rate next year will be less than 35 percent, he should defer it to next year.

A

When considering allocating funds to a TFSA account versus an RRSP account, which of the following is least critical? A) Avoiding taxation on the investment funds B) The intended purpose for the investment funds C) The marginal tax bracket of the individual D) The financial goals of the individual

A

Which of the following is not typically a legitimate tax deduction in Canada? A) Mortgage interest on your home B) Union dues C) RRSP contributions D) The cost of some investment advice

A

For qualified individuals, a contribution to a registered retirement savings plan (RRSP) will be A) a tax credit. B) a deduction from total income. C) eligible to be transferred to a spouse D) a deduction from federal tax payable.

B

Fillipe is in the forty percent marginal tax bracket and has a variety of income sources. Which of the following will he owe the least tax for? A) $1000 interest income B) $1000 dividend income C) $1000 award from his company D) $2000 capital gain

B

If George is 65 and in a combined marginal tax bracket of 42 percent, then A) he can save $840 on his taxes if he applies his son's $2000 of tuition amount. B) he can save $840 on his taxes from his $2000 RRSP contribution. C) he can save $840 on his taxes from his $2000 medical expenses. D) All of the above are correct.

B

If a stock was purchased in January 2004 for $1000 and sold in December 2005 for $3000, what is the taxable result? A) Taxable capital gain of $2000 B) Taxable capital gain of $1000 C) Income of $2000 D) Annual taxable gain of $500

B

If you are a married taxpayer supporting a spouse who has less than in taxable income, A) you must be the one to claim all tax credits. B) you are entitled to a spousal or common-law partner tax credit. C) you are entitled to a dependant partner tax deduction. D) your spouse will not be able to apply for the GST/HST refund.

B

Interest income would come from earnings on A) stocks. B) term deposits. C) RESPs. D) the sale of mutual funds.

B

Jake invested $800 in an RRSP. If he is in the 30 percent marginal tax bracket, he will A) pay $800 less in taxes. B) pay $240 less in taxes. C) receive an $800 tax credit. D) receive a $400 tax deduction.

B

Jerome is recently divorced and has two children that live with his ex-wife. What deductions should Jerome claim on his tax return? A) Child support payments B) Spousal support payments C) Caregiver deduction D) Child care expenses

B

Meg makes RRSP contributions resulting in a tax rebate of $1200 each year. She is in a 30 percent tax bracket. What was the amount of her contribution? A) $3000 B) $4000 C) $22 222 D) Unknown

B

Tax credits are used to reduce tax A) when calculating total income. B) after total taxes payable are calculated. C) before you subtract all deductions. D) by deducting them from total income.

B

Under which of the following conditions must you file a personal income tax return? A) You acquired capital property during the calendar year. B) You have to contribute to the Canada Pension Plan. C) You will receive an income tax refund. D) You got married, separated, or divorced during the calendar year.

B

Which of the following is not a feature of a registered education savings plan (RESP)? A) The Educational Assistance Payments B) The tax deduction for the contributions C) The Canada Education Savings Grant from the government D) The Canada Learning Bond for modest income families

B

Which of the following is not taxable income? A) EI payments B) Life insurance benefits C) Rental income D) The use of a company car

B

Which would reduce taxes the most for a high income earner (income over )? A) $4800 interest on a student loan B) $4800 RRSP contribution C) $4800 medical expenses D) These would have the same effect.

B

Your earnings in 2017 were $120 000, which is the 40 percent marginal tax bracket and 30 percent average tax bracket, in your province. How much would your taxes be reduced if you made the full RRSP contribution for this year (and had no additional RRSP room)? A) $7803 B) $10 404 C) $26 010 D) $12 000

B

Robert is 66 and so qualifies for the age amount. His taxable income for 2017 was 65000. The threshold income for the age amount is $36 430 and the maximum age amount is $7225. What age amount will he qualify for? A) $4285 B) $2940 C) $7225 D) Zero

B- Helene Turcotte turned 65 on October 8, 2017. Her taxable income for 2017 was $42 000. EXAMPLE Although Helene qualifies for the age amount credit, it will be reduced because her income is above the threshold amount of $36 430. The maximum age amount for 2017 is $7225. Helene qualifies for a reduced age amount calculated as: $7225 - [($42 000 - $36 430) * 0.15] = $7225 - (5570 * 0.15) = $7225 - $835.50 = $6389.50

5) Even if you haven't paid any tax during the year (i.e. through withholdings or directly), it is beneficial to file a tax return because A) you can carry forward all non-refundable tax credits to future years. B) you can get a tax refund for your RRSP contributions. C) you may be eligible for a tax-free refundable GST/HST credit. D) it is required by law, if you are over 18.

C

By what date must self-employed individuals file their income tax returns? A) December 31 B) April 30 C) June 15 D) 90 days after their fiscal year-end

C

Canada's taxation rules are called "progressive." This means A) taxes are deducted from your income and withheld at the source. B) that Canada's tax system supports progressive social programs. C) the higher your income, the higher your tax rate. D) government benefits are clawed back when someone's income exceeds a certain threshold.

C

Fred's income this past year included salary of $70 000, $3 000 in interest income, a $4 000 capital gain from selling some stock and a $5000 inheritance. For tax purposes, what is his total income this year? A) $80 000 B) $82 000 C) $75 000 D) $77 000

C

Income earned from the sale of an asset for more than you paid for it is classified as A) dividend income. B) business income. C) a capital gain. D) a windfall.

C

John has been told that he should not take any overtime because it will push him into the next tax bracket. Which of the following is true? A) Moving into the next marginal tax bracket could reduce John's net income overall. B) The marginal tax brackets apply to tax credits and deductions and will not make a direct difference to John's net income. C) Moving into the next tax bracket will give John a larger refund on his RRSP contribution. D) Moving into the next tax brackets will give John a larger refund from his tax credits.

C

Ralph has total income of $53 000. He has business expenses of , made a $5000 RRSP contribution and incurred $4000 in tuition expenses for his daughter, who did not work and is a freshman at a local community college. Personal basic exemptions of $11 138 and a marginal tax rate of 26 percent apply. Compute Ralph's taxable income for the current year. A) $18 862 B) $26 000 C) $30 000 D) $14 862

C

Roan is a student in Ontario who travelled to BC for his summer job. When in BC he worked in mining camps and his residence was over 40 km from his actual place of employment. He spent $2000 moving to BC and back to Ontario and earned $22 000. During the remaining eight months he went to school full time. Which of the following describes his tax situation best? A) He will be able to claim full tax credits for moving expenses, tuition, and the personal amount. B) He will be able to deduct half the $2000 moving expenses because he lived more than 40 km from his work, and can claim tax credits for tuition and the basic personal amount. C) He will be able to deduct $2000 for moving expenses and claim tax credits for tuition and the basic personal amount. D) He will not be able to deduct moving expenses as he lived more than 40 km from his work, but he can claim tax credits for tuition and the basic personal amount.

C

Sally's total income is $38 000 and she divorced last year. She does not own a home, but has charitable contributions of $1500 and interest on her car of $2100. This year she also paid spousal support of $2000, child support of $5000, and tuition of $2600. Her basic personal amount is $11 138. What is Sally's taxable income? A) $34 500 B) $31 900 C) $36 000 D) $20 762

C

Which of the following income is taxed at the lowest rate? A) Salary B) Interest C) Capital gains D) Tips

C

Which of the following is true for a Registered Disability Savings Plan (RDSP)? A) Contributions made to the plan are tax deductible. B) The annual maximum contribution is $17 750. C) Contributions can be made until the end of the year in which the beneficiary turns 59. D) All withdrawals made from the RDSP are tax free as long as the beneficiary receives the income.

C

Which of the following items is affected by the taxpayer's income level? A) The amounts deducted for employment expenses B) The amounts that can be deducted for charitable contributions C) The amount of clawback on social assistance payments D) Basic personal exemptions

C

Your earnings for last year were $42 000. How much of an RRSP contribution can you make this year (if you have no other RRSP room)? A) $5670 B) $4200 C) $7560 D) Insufficient information

C- Assuming that you or your employer do not contribute to an RPP, the deduction limit for 2017 is the lesser of 18 percent of your 2016 earned income or $26 010

Which taxpayers among the following can deduct some of his or her medical expenses? A) Jane, who has an income of $40 000 and medical expenses of $1100 B) Claude, who has an income of $60 000 and medical expenses of $2100 C) Peter, who has an income of $65 000 and medical expenses of $2375 D) Paula, who has an income of $26 000 and medical expenses of $700

C- To qualify for the medical expenses amount, your total medical expenses must be greater than either 3 percent of your net income or $2268, whichever is less.

If you are working as a Certified Financial Planner and you pay $500 to your association every year for membership, you can deduct $500 on your personal tax return as A) union/professional dues as long as you receive a tax receipt. B) an eligible tax credit as long as you do not get reimbursed for the amount. C) an employment expense as long as you receive a tax receipt. D) union/professional dues as long as you do not get reimbursed for the amount.

D

Samantha filed her tax return on August 1st and paid her $4000 balance owing. If the prescribed interest rate is 5%, how much did she owe in total? A) $4050 B) $4320 C) $4000 D) $4370

D

The Federal Government's use of net income versus taxable income ensures A) a progressive tax system. B) lower income individuals benefit the most. C) single parents benefit more. D) all taxpayers are treated equitably.

D

The T4 slip provided by your employer shows all your A) income earned and tax deducted for the year. B) income, professional dues, and taxes for the year. C) income earned and deductions for the year. D) income and deductions made by that employer for the year.

D

When taxable income on a progressive basis exceeds certain thresholds A) a higher rate of tax is charged on all income. B) tax credits become more important. C) deductions reach a maximum allowable amount. D) the tax rate is increased on the next dollars of income until a new income level is reached.

D

Which of the following best summarizes the correct process? A) Calculate total income, subtract tax credits and deductions, determine refund or balance owing. B) Add all deductions and subtract the credits from total income, determine refund or balance owing. C) Calculate total income, deduct RRSP contribution, apply tax credits and deductions, determine refund or balance owing. D) Calculate total income, subtract deductions, calculate taxable income, apply tax credits, determine refund or balance owing.

D

Which of the following can be used to reduce your federal income taxes? A) Child support payments for a six year old B) Real estate taxes C) Provincial income taxes D) Student loan interest

D

Which of the following income is taxable income? A) Insurance benefits B) Inheritances C) Scholarship income D) Tips received

D

Which of the following is an acceptable method of reducing your tax bill for the current year? A) Making large payments on your outstanding mortgage B) Increasing your contributions to your tax free savings account C) Earning income outside of Canada D) Deducting employment expenses you weren't reimbursed for

D

You have a salary of $30 000, an RPP deduction of $2 000, paid $1 000 interest on your mortgage and paid union dues of $800. If the basic personal amount is $11 635 and the federal tax rate is 15 percent, what federal tax do you owe? A) $4200 B) $2259 C) $2829 D) $2335

D - 30k-2000-800-11635*0.15

Deductions and tax credits both benefit high-income individuals more than moderate earners.

FALSE

Every individual that earns employment income is required to file a personal income tax return.

FALSE

Income from outside of Canada is not subject to Canadian income tax.

FALSE

Interest expense paid on home loans and car loans is deductible from your income tax.

FALSE

Jessie is 65 and has taxable income of $66 000. She would have her age amount credit fully clawed back.

FALSE

Knowledge of individual income taxes is somewhat relevant to financial planning.

FALSE

RRSP rules limit a taxpayer's contributions to the higher of 18 percent of total income to a maximum amount of $25 000.

FALSE

Students should not file income tax returns if their income is below the basic personal amount.

FALSE

Tax avoidance may be subject to both criminal and civil prosecution.

FALSE

Tax planning is best done at the same time you file your tax return.

FALSE

The Basic Personal Amount is a non-refundable tax credit that reduces ones taxes by $11 635 in 2017.

FALSE

The T4 slip provided by your employer shows all your earnings and deductions for the year.

FALSE

The maximum medical expenses credit cannot exceed three percent of total income.

FALSE

You have to file a personal tax return by April 30 each year only if the Canada Revenue Agency sent you a request to file.

FALSE