Noh Review Taxation: Non-Refundable Tax Credits

In this post, Noh Review will cover the non-refundable tax credits for 2012. First of all, it is critical for you to understand where these tax credits go. The basic outline looks like below:

 

Employment Income

+ Business Income

+ Property Income

+ Other Income

+ Taxable Captial Gain

- General Deductions

- Losses                          

= Income

- Division C Deductions

= Taxable Income

* Tax Rate                      

= Tax Payable

 - Division E Credits      

= Net Tax Payable

 

Here, the Division E Credits are non-refundable tax credits that we will discuss in this post today.

 

Non-Refundable Tax Credits for 2012 (Federal)

1. Basic Personal Credit: Every resident of Canada is eligible to claim this credit.

15% * 10,822

2. Married Credit (Spouse or common-law partner amount): If you are supporting your spouse or common-law partner who lives with you, and whose net income for the year will be less than $10,822, you can claim this credit.

15% (10,822-Spouse's Division B Income)

3. Equivalent to Married (ETM): There is a person who lives with you or The person is under 18 or infirm/parent

15% (10,822-Spouse's Division B Income)

4. Child Amount (Dependent Child Under 18 Years of Age): Either parent(not both) can claim $2,191 for each child under 18 who resides with both parents throughout the year. If the child is infirm, add $2,000 to the claim for that child. Any unused portion can be transferred to that parent's spouse/common-law partner.

15% * 2,191

5. Caregiver Amount: If, at any time in the tax year, you maintained a dwelling and your/your spouse's parent/grandparent (resident) aged 65 or older lived with you, you can claim this credit. This credit is reduced when the net income of the parent/grandparent exceeds a certain level.

Federal: 15% [4,402- (Relative's Division B income - 15,033)]

6. Infirm Dependent Amount: If you support an infirm dependent relative age 18+, you can claim this amount.

15% [4,402 + 2,000 Family Caregiver Amount Tax Credit - (Dependent's Division B income - 6,420)]

* Family Caregiver Amount Tax Credit (New in 2012): If the dependent is infirm, you can claim this credit. You can have an increase of $2,000 to spousal amount, equivalent-to-married, child amount, caregiver amount, or infirm dependent amount.

7.  Age Credit: If you will be 65 or older on December 31, 2012, you can claim this credit.

15% [6,720 - 15% (Division B Income - 33,884)]

8. Pension Income Credit: If you will receive regular pension payments from a pension plan/fund (excluding CPP, QPP, OAS), you can claim this credit.

15% * Lesser of $2,000 and pension income

9. Canada Employment Credit: If you are employed in Canada, you can claim this credit.

15% * Lesser of $1,095 and employment income

10. Disability/Impairment Amount: If you have an impairment in physical/mental functions that is severe and prolonged, you can claim this credit.

15% * 7,546 15% * 4,402 for disabled child

11. Tuition, Education, and Textbook Amounts (Full-time and part-time): If you are a student enrolled at a university or college and you will pay more than $100 in tuition fees, you can claim this credit. The university can be both in and out of Canada.

Tuition Credit: 15% * Total tuitions if over $100 Education Credit: 15% ($400 * full-time months + $120 * part-time months) Textbook Credit: 15% ($65 * full-time months + $20 * part-time months) If  you are a part-time student and have mental/physical disability, you receive the tax treatment of a full-time student.

12. Charitable Donations Credit: If you made a charitable donation to a CRA-registered charity, you can claim this credit with official donation receipts.

(15% of first $200) + (29% of next) Maximum donations amount is 75% of net income

13. Medical Expenses: You can claim this medical expenses credit if they were paid by you or your spouse/common-law partner.

15% of medical expenses which exceed the lesser of $2,109 and 3% of Division B Income If medical credit is more than $10,000, deny impairment credit.

14. Fitness for Children: You can claim to a maximum of 15%* $500 per child the fees paid in 2012 relating to the cost of registering your child in a prescribed program of physical activity. Children less than 16 years old

15. Artistic, Cultural and Recreational Activities for Children: You can claim to a maximum of 15% * $500 per child the fees paid in 2012 relating to the cost of registration or membership of your child in a prescribed program of artistic, cultural, recreational or developmental activity. Children less than 16 years old

16. Home Buyer's Amount: You  can claim an amount of 15% * $5,000 for the purchase of a qualifying home made in 2012, if You or your spouse acquired a qualifying home. This is your first home and you are a first-time home buyer.

17. Public Transit Passes Credit: You can claim an amount of 15% * total public transit passes expenses.

Amounts transferred from your spouse/common-law partner: If your spouse will not use all of his/her age amount, pension income amount, tuition, education and textbook amounts, disability amount or child amount on his/her income tax return, you can claim the unused amount. Cannot transfer medical, charitable donations or CPP/EI amounts

Amounts transferred from a dependent: If your dependent will not use all of his/her disability amount on his/her income tax return, you can claim the unused amount. If your dependent child/grandchild will not use all of his/her tuition, education and textbook amounts on his/her income tax return, you can claim the unused amount.

It is interesting to note that some of these non-refundable credits have a clear purpose, and they are for the benefit of the society. For example, home buyer's amount credit is available in hopes of encouraging more people to buy their first houses. The public transit passes credit is another great example. You can basically take back 15% of what you paid for your bus fares. This could be interpreted as the Canadian government's efforts in attempting to reduce air pollution and greenhouse gas emissions. Increasing the use of public transit, including buses, subways and commuter trains, will help ease traffic congestion and reduce air pollution. This tax credit makes public transit more affordable for Canadia residents.

 

But if you are a student, these non-refundable credits are not as meaningful because your net income is likely low anyways. Again, these are non-refundable credits for the year, so you cannot technically get these back as cash. In other words, you can only deduct these amounts from your net income, and if your net income is low, these credits are useless realistically. My assumption is that once you start working full-time, you are going to be looking for every possible non-refundable tax credit in order to minimize the tax that you pay to CRA.

Noh Review Taxation: Residency

As some accountants are getting ready for the tax season, this post will help clarify some of the Canadian taxation concepts regarding residency.

Residency for Individuals

• The Canadian Income Tax Act imposes taxes based on Residency. This means individual who currently reside in Canada, who may or may not be citizens.
• Individuals who are not residents of Canada but are employed in Canada, carry on business in Canada or dispose of taxable Canadian Property are subject to Canadian taxation.
• Canadian Residents are taxed on their worldwide income, regardless of which country the income was earned in. To avoid double taxation, Canada has negotiated a number of international reciprocal tax agreements.
• Key Principle: The country in which income is earned has priority in taxing that income and the country of which the payer is a resident allows all or some part of the foreign tax paid as a credit against the domestic tax.

1) Full-time resident: taxed on his worldwide income for a full year

• Deemed: Sojourned in Canada for 183 days or more OR Have the characteristics of a non-resident
• Common Law: Continuing State of relationship with Canada

• Maintaining a dwelling
• Immediate family remaining in Canada
• Maintaining personal property and social ties in Canada
• Furniture, clothing, cars, medical insurance, seasonal residence, employment/investment with Canada, retirement savings plans, credit cards and securities accounts, landed immigrant status, passport, license, membership, retention of Canadian mailing address, telephone listing and newspaper subscriptions

2) Part-Year Resident: Taxed on his worldwide income earned during the part of the year he was resident in Canada

• Clean Break: Leaves Canada during a year and severs all ties with Canada (with a spouse and dependants)
• Fresh Start: Comes to Canada during a year after permanently severing all ties with the previous residence

3) Non-Resident: Taxed on his Canadian-source income

• Employed in Canada [Continuous business activity: Carried on business in Canada or Disposal of taxable Canadian Property]
• E.g. A non-resident selling something in Canada through a salesperson = carrying on business in Canada
• Through an independent contractor (Canadian retailer/wholesaler) = not carrying on business in Canada = not taxable in Canada on business income earned in Canada
• “A person who is a non resident for the whole year cannot be a part-time resident. To be a part time resident, there must be a period in which the person was resident, in the sense of a full-time resident, and a period in which the person was non-resident.”

Canada-U.S Tax Convention: Exists to avoid double taxation or tax avoidance. Exempts a CDN resident from U.S taxation on salaries, wages, and other remuneration if:

• Remuneration < $US 10,000
• Present in the U.S. for <183 days

Only Taxed in U.S if he had a permanent establishment in U.S:

• More than 50% of gross active business revenues in U.S
• Or business is for U.S. customers
• Defined as a fixed place of business through which business of a resident of (a country) is wholly or partly carried on.
• Places of management,  a branch, and office, a factory
• Individual who is resident in Canada, would only be taxed in the U.S if the individual has or had a “permanent establishment” regularly available to him or her in the U.S. The tax amount is capped at the income attributable to the permanent establishment in the U.S.

Residency for Corporations: Depends on resident vs. non-resident

Corporate Residence depends on:

• Deemed Resident if incorporated in Canada after April 26, 1965
• Common Law: Central management and control are in Canada; Real business is carried on in Canada; Permanent establishment in Canada
• If incorporated before 1965, still deemed resident if it was resident by the common law principle of control management and control; it carried on business in Canada after 1965