Tax Flashcards

Question

Personal Tax Payable Tuition Tax Credit

Answer 1

* Individuals who are enrolled in the qualifying post-secondary educational program * May be transferred to spouse, common-law partner, parent, or grandparent to maximum of $5000 per year * Excess can be carried forward

Answer 2

Basis lesser of: * Amount of donation * 75% of net income Can be carried forward for a period of up to 5 years * 15% of first $200 * 33% of $200-$205,842 * 29% of $205,842 Can be combined with spouse

Answer 3

-Deduct the grossed-up amount

Answer 4

* -75% on the first $400 ($300 credit) * -50% on the next $350 ($175 credit) * -33% on next $525 ($175 credit)

Answer 5

Primary Ties * Dwelling owned or leased and vacant or not vacant and is leased to third party at non-arm's length * Dwelling place in Canada maintained for taxpayer's use * Spouse remains in Canada * The dependants remain in Canada Secondary Ties * Personal property kept in Canada * Social ties: Club memberships * Economic ties: Employment, business, RRSP * Other ties: Passport, seasonal dwelling

Answer 6

* The taxpayer's intention to permanently sever ties with Canada * Visits by the taxpayer to Canada while living abroad * Whether the taxpayer has established residential ties outside of Canada

Answer 7

* Individual who sojourns in Canada total of 183 days or more in year * Member of the Canadian armed forces * An ambassador, minister, high commissioner, officer or servant of Canada or a province

Answer 8

* Sojourner is a deemed resident who sojourners in Canada for 183 days or more * Part-year resident becomes or ceases to be resident part-way through the year

Answer 9

The later of: * Date the individual leaves Canada * Date the individual's spouse and/or dependants leave Canada * Date the individual becomes a resident of the new country he or she has emigrated to

Answer 10

Deemed to have disposed of all assets at FV Exceptions: * Canadian real or immovable property and resource property * Business property, including inventory of a business carried on through a permanent establishment * Registered pension plans, deferred profit-sharing plans and tax-free savings plans First 2 categories are taxable Canadian property. * Taxpayer may elect to have a deemed disposition * Would normally only wish to make this election if capital or other losses would not be able to use If the election results in an allowable capital loss * May only be deducted against taxable capital gains that arise from deemed disposition. * May not be deducted against taxable capital gains arising from actual dispositions.

Answer 11

Deemed resident if either of following: * Was incorporated after April 26, 1965. * Was incorporated before April 27, 1965, and it either carried on business or was resident under common law at any time after April 26, 1965 Common Law * If central management and control is located in Canada. * Central management and control is located where the Board of Directors of the company meets to make decisions on how the corporation is to be run.

Answer 12

* Able to deduct charitable donations from net income for tax purposes * Annual deduction is limited to 75% of net income for tax purposes * may be carried forward and used in any of the following five years * Limit of 75% of net income for tax purposes

Answer 13

Non-capital Loss * Carryback: 3 years * Carryforward: 20 years Net-capital Loss * Carryback: 3 years * Carryforward: Indefinite ABIL * Carryback: 3 years * Carryforward: 10 years then converted to net capital loss Farm Losses * Carryback: 3 years * Carryforward: 20 years Restricted Farm Losses * Carryback: 3 years * Carryforward: 20 years

Answer 14

Full amount deducted in Division C

Answer 15

* Deemed to have disposed of all property owned at time of death at FMV immediately before death * Property transfers to the spouse at tax base * Automatically applies; however may elect out of this provision. * If the rollover provision is elected out of, the property is deemed to have been disposed of at FMV * Election made on an asset-by-asset basis and it may be beneficial in situations where the deceased taxpayer has non-capital or net capital loss carryovers or other credits that would otherwise not be used.

Answer 16

Taxpayer did not carry on business * Death: Jan 1 to Oct 31 * Apr 30 of the year following the date of death * Death: Nov 1 to Dec 31 * Six months after the date of death Taxpayer carried on business * Death: Jan 1 to Dec 15 * Apr 30 of the year following the date of death * Death: Nov 1 to Dec 31 * Six months after the date of death

Answer 17

For Spouse * RRIF taxed in spouse's hands if successor * RRSP taxed in spouse's hands unless transferred to their RRSP * TFSA keeps tax exempt status For non-spouse * FMV of RRIF at time of death is taxed in deceased taxpayer final return * FMV of RRSP at time of death is taxed in deceased taxpayer final return

Answer 18

Least of the following amounts: 1. Unused lifetime deduction: $424,126 ($848,252 × ½) less all previous capital gains deductions claimed 2. Annual gains limit: A – B, where A is the lesser of: * The net taxable capital gains for the year of assets disposed * The net taxable capital gains from the year on the disposal of QSBC shares B is the total of: * the amount, if any, by which net capital losses deducted in the year exceed the difference, if any, between (a) and (b) above * The ABIL realized in the year whether claimed or not 3. Cumulative gains limit: The sum of all components of the annual gains limits for the current and prior years reduced by: * The sum of all amounts of capital gains deductions claimed in prior years * The (CNIL) balance at the end of the current year

Answer 19

* Used primarily (at least 50%) in an active business carried on in Canada by either the corporation or a related corporation; or * Invested in shares or debt of an SBC corporation that was connected with the particular corporation.

Answer 20

The following four conditions must all be met for the shares to be considered QSBCS: * The corporation must be an SBC * The shares must be owned by the taxpayer, the taxpayer's spouse or common-law partner, or a partnership related to the taxpayer. * The shares must not have been owned by anyone other than the taxpayer or a related person during the 24 months before the shares are disposed of. * Throughout the 24-month holding period, more than 50% of the fair value of the assets must have been used primarily in an active business carried on in Canada. The first condition requires that the corporation meet the 90% test at the time that the shares are sold, while the fourth condition only requires more than 50% of the assets to have been used in an active business for the 24-month period preceding the sale. A sole proprietor can incorporate his or her business shortly before a sale and then sell shares of the new corporation and claim the exemption because no one other than the taxpayer or a related person owned the shares in the 24 months prior to the sale.

Answer 21

Where corporation has conferred a benefit on shareholder, or someone non-arm's length with the shareholder, the FV of the benefit must be included in the shareholder's income as property income. The value of the benefit is not deductible to the corporation, regardless of whether the amount is later repaid. This rule does not apply to salaries, wages, bonuses, employment benefits or dividends that are already included in the shareholder's income.

Answer 22

Where a loan has been made to a on shareholder, or someone non-arm's length with the shareholder, the amount of the loan is required to be included in the taxpayer's income in the year that the loan was made. Loans must be included in income unless any of the following conditions are met: * iShareholder is an employee of corporation and meets the exemptions for employees * Loan is repaid within one taxation year after the year it was made (cannot be on two consecutive fiscal balance sheets). * Loan was made in the ordinary course of money-lending business. * Loan is inter-company loan or made to non-resident. Shareholder/employee may be exempt if: * Not a specified employee (owns less than 10% of the shares). OR * Loan to specified employee for one of three reasons: * to acquire a dwelling for their own occupation * to acquire newly issued treasury shares * to acquire a motor vehicle for employment use * AND * The following two conditions are met: * Bona-fide repayment terms * Loan by virtue of employment (all other employees are eligible for similar loans Other considerations * If loan is not included in income, imputed interest must be included in shareholder’s income. * If loan is included in income, no imputed income is included in shareholder’s income. * Repayment of loan that has been included in income is eligible for deduction in the year it is repaid.

Answer 23

Advantages to incorporating a business: * Tax reduction * Tax deferral -Pay dividends when convenient * Income splitting * Can issue non-voting shares to family members * Can also split without incorporating but need to provide justification for the salary Factors to consider in determining remuneration: * Corporate tax rate * Shareholder manager’s: Combined marginal personal tax rate * Availability of tax credits and deduction * Shareholder’s objective regarding CPP, RRSP, and RPP - * Shareholder manager’s objective regarding growth of the business * Risk tolerance Process to determine ideal mix of salary and dividends * Determine the personal marginal tax rate on after-tax dividends * Compare the result in step 1 to the personal marginal tax rate on salary to determine the increase in the personal tax rate as a result of substituting salary * -Divide the dollar amount of the unused dividend tax credits from the dividend only option by the result from Step 2 = Amount of salary to substitute for dividends

Answer 24

Nice guy gets FMV

Answer 25

The tax cost of the property to the transferor. ITA 73(1) automatically applies regardless of whether consideration is paid or not. The transfer is tax-free because: * the deemed proceeds of disposition to the transferor are equal to the tax cost of the property * the deemed cost to the transferee is equal to the tax cost of the property The transferor may make an election for ITA 73(1) to not apply, the rules discussed above for NAL transactions will apply to the exchange. Attribution applies: * If the transferor does not elect out of ITA 73(1) OR * fair value consideration is not paid Attribution does not apply: * If the transferor elects out of ITA 73(1) AND * fair value consideration is paid

Answer 26

* Any capital gain or loss on the property will be taxed in the hands of the transferor at the time of the transfer and the rules for NAL sales of property will apply * If attribution applies, income earned on the property (such as interest, dividends and rental income) is attributed back to the transferor and taxed in his or her hands until the year in which the NAL minor turns 18. * Capital gains are not attributed back.

Answer 27

Advantages * Losses realized in the startup period of the business may be deducted against other sources of income of the individual partner or proprietor * A full set of financial statements is not required • Salaries may be paid to the partner or proprietor's spouse and children to the extent that they work in the business and the salaries are reasonable. Disadvantages * There is no opportunity for tax deferral, as all profits earned are included in the personal tax return of the individual partner or proprietor in the year earned. * A partnership or proprietorship may not be used for estate planning or estate freezes * The lifetime capital gains exemption may not be claimed on the sale of partnership or proprietorship assets.

Answer 28

Advantages * Salaries may be paid to the spouse and/or children of the owner of the shares to the extent that they work in the business and the salaries are reasonable. * Further income splitting may be accomplished through dividend payments to the spouse and children. * If the shareholder's personal rates are higher than the corporate rates, personal taxes may be deferred by delaying dividend payments * Estate planning and succession are possible • The capital gains exemption can be used when shares are sold Disadvantages * Startup losses cannot be deducted against the shareholder's other sources of income. * A separate corporate tax return must be filed, including either a full set of financial statements prepared in accordance with generally accepted accounting principles or a general index of financial information

Answer 29

* Control * Ownership of tools * Chance of profit/loss * Integration * Specific Results * Intent Employee relationship * Limited deductions available * Income tax withheld at source * No requirement to register for GST * Eligible for paid vacation, severance pay * Job security * Tax return due April 30 of the following year Contractor relationship * More expenses are deductible, if incurred to earn business income * Must make quarterly instalments if the threshold is met * Must be GST registered if the threshold is met * No severance or job security * Tax return due June 15 of the following year Implication of incorrect classification * Could be liable for both the employer's and the employee's share of CPP and EI premiums and for withholding taxes. * Penalties and interest may be levied on the under-remittance of those payments.

Answer 30

Did the taxpayer intend to use the asset as an item of inventory or as a capital asset? If the primary intention to use the asset as a capital asset was frustrated, did the taxpayer have, at the time of purchase, a motivating intention to sell the property at a profit? * The relationship of the transaction to the taxpayer's business If the transaction is similar to other transactions entered into during the normal course of the taxpayer's business operations, this factor supports a conclusion that the profit from the sale is business income. * Nature of the asset If the asset can be used over time to produce income, the asset can be considered a capital asset. * Number and frequency of transactions A large number of similar transactions over a period of time imply that the asset is inventory. * Length of period of ownership of asset A longer period of time implies that the asset is a capital asset, while a shorter holding period implies that the asset is inventory.

Answer 31

Denied and added to adjusted cost base Denied if meets following three conditions: * The taxpayer, the taxpayer's spouse, or a corporation controlled by either the taxpayer or his or her spouse sells a property. * Any of the above taxpayers acquire or reacquire the same property or an identical property in the 30-day period before or after the sale of the property. * Any of the taxpayers referred to above still own the property at the end of the 30-day period after the sale of the property.

Answer 32

On a disposition of a capital property, the vendor may agree to receive payment over a period of time. To align the taxation of the capital gain with the cash available to the vendor, a capital gains reserve may be claimed to defer the payment of tax. The reserve is calculated as the lesser of two amounts: * Capital gain × (Proceeds not due \* / Total proceeds) * 20% of the capital gain × (4 – Number of preceding years ending after the disposition); Due means an enforceable right to immediate payment. The amount included in income each year is calculated as follows: In the year of the sale: * [(Capital gain – Reserve) × Capital gains inclusion rate]. In each year after the sale: * [(Prior-year reserve – Current-year reserve) × Capital gains inclusion rate]. In years after the sale, the previous year's reserve is added back and a new reserve may be claimed if applicable.

Answer 33

* LCGE provides a tax incentive for investing in a successful small Canadian business. * BIL rules provide tax relief for investing in shares or debt of a failed small Canadian business. * BIL results from the actual or deemed disposition of certain capital properties. * This may arise on disposition of shares or debt of a SBC * An SBC is a CCPC where all or substantially all of its assets (90%) are used in an active business carried on primarily in Canada. * BIL is the full amount of the loss and ABIL is 1/2 of BIL. * In the year that an ABIL is realized, it is deductible against any source of income. * If it cannot be used in that year, it may be carried back three years and forward 10 years and deducted against any source of income in those years. * If the taxpayer is unable to use up the ABIL in the carryover period, it is added to the taxpayer's net capital loss carryover balance. * If a taxpayer has made a claim for a capital gains exemption in a preceding year or in the current year, some amount of the BIL will be restricted. * The restricted amount of the BIL becomes an ordinary capital loss. The restricted portion of the BIL is determined as being the lesser of: * The BIL for the year (before deducting the restricted portion) * The cumulative capital gains deduction claimed in preceding years × a factor for that year

Answer 34

* Allows exemption from paying tax on all or a part of a capital gain arising on the disposal of the taxpayer's principal residence to the extent that the taxpayer has designated the residence as personal residence for one or more years. * A principal residence: * includes any housing unit * must have been ordinarily inhabited at some time during the year by the taxpayer or spouse, common-law partner, former spouse, former common-law partner, or child * Exemption is limited to the building and half a hectare of land, unless the taxpayer can prove that the excess land is necessary for the taxpayer's use and enjoyment of the property. * Only one residence may be designated as a principal residence for a family unit for a given year. * A family unit includes the taxpayer's spouse or common-law partner and their single children under 18 years of age at the end of the year. * If a taxpayer buys or sells a property partway through a year, each part-year counts as a full year. * If a taxpayer sells a home and purchases another home in the same year, will have owned two homes in the same year but can only designate one as a principal residence for that year. * Where a family unit owns more than one residence in a year, the family unit may only designate one of the residences as a principal residence for that particular year.

Answer 35

Personal to income producing * If a taxpayer ceases to inhabit a home as a principal residence and commences to rent the property, there is a change in use of the property from personal to income producing. * The taxpayer is permitted to designate the home as his or her principal residence for up to four years after the year of the change in use as long as no capital cost allowance is claimed against any income earned on the property. * A separate election may also be made at the time that the property is rented out to not have changed its use. * The consequence is that there is no deemed disposition at fair value at the time of the change in use. Income producing to personal * A taxpayer may acquire a property and initially rent it out for some period of time before occupying the home as a principal residence. * If no election is made at the time of the change in use, there is a deemed disposition of the property at fair value at that time. * If no capital cost allowance was claimed on the property during the time that it was an income-producing property, the taxpayer may elect to not have a deemed disposition at the time of the change in use. * This election also allows the taxpayer to claim the PRE for up to four years prior to the year of the change in use. * The combination of this election and the election above, where the change in use is from personal to income producing, may not exceed four years.

Answer 36

Capital losses on PUP are denied. POD is greater of $1,000 or actual POD ACB is greater of $1,000 or actual ACB

Answer 37

* Painting * Coins * Stamps * Rare Books * Jewelry Capital losses on LPP can only be used against LPP gains. Capital losses on LPP can only be carried forward for 7 years. POD is greater of $1,000 or actual POD ACB is greater of $1,000 or actual ACB

Answer 38

* Capital gains or recapture arising may be deferred. * Includes any capital gain and/or recapture in income for tax purposes in the year in which property is disposed of. * In the year in which a replacement property is acquired, the taxpayer makes an election to defer the capital gain and/or recapture on the property disposed of. * When the replacement property is acquired in a taxation year after the year of disposition of the replaced property, the election is made by filing an amended tax return for the year of disposal of the replaced property. The two situations in which the replacement property rules apply are: Voluntary * Disposal: Property sold by taxpayer * Type of property disposed of: real property (land or land/building) * Use of property: Property used in a business * Type of property acquired: same or similar use as property disposed of * Timing of replacement: within 12 months following the end of the taxation year the former property was sold * Date of disposition: date the purchaser of the replaced property takes legal title to the property. Involuntary * Disposal: Property is lost, stolen, expropriated, or destroyed * Type of property disposed of: capital property except vacant land. * Use of property: Property does not have to be used in a business * Type of property acquired: same or similar use as property disposed of * Timing of replacement: within 24 months following the end of the taxation year the former property was sold * Disposition date: * Earliest of * The day the taxpayer has agreed to the full amount of compensation. * The day the compensation is determined by a court or tribunal.

Answer 39

Deferral for voluntary and involuntary disposition: * Deferred capital gains maximum deferral is lesser of: * POD less OC * Cost of replacement property less OC of disposed property * Deferred recapture Lesser of: * POD and OC less UCC of replaced property * Cost of replacement property Deferral of capital gains on disposition of small business investments To the extent that the proceeds of disposition of shares are reinvested in other eligible small business corps * CCPC that uses 90%+ of the FV of its assets in an active business carried on primarily in Canada * CCPC where assets are \< $50 million * Conditions: * Individual owned shares of eligible corporation throughout 185 days prior to sale * Replacement shares in an eligible small business corporation must be acquired within 120 days Maximum deferral: (Lesser of proceeds and cost of replacement/POD)\*Capital Gain

Answer 40

* Tax return to be filed for year ending at the deemed year end. * Short taxation year: requires proration of CCA, SBD, etc. * Unpaid amounts such as management bonuses must be paid within required time frame. * Short taxation year counts as one fiscal year for loss carryforward limits. * Charitable donation limit may be affected.

Answer 41

* Identify if an acquisition of control has occurred. * Determine the deemed year end — the day before AOC. * Identify all individual assets with accrued losses — accrued losses are deemed be triggered. * Identify potential tax planning opportunities — electing to trigger capital gains and/or recapture to utilize expiring * Determine the balance of non-capital losses that may be carried forward to use in the future. * Identify loss utilization strategies to use non-capital losses carried forward

Answer 42

Net capital losses, ABILs, and non-capital losses from property expire if not utilized at the deemed year end. Non-capital losses from a business source become restricted and may only be carried forward if: * The business that generated the loss is carried on throughout the taxation year that the losses are to be utilized; and * The business is carried on for a profit or with a reasonable expectation of profit. Restricted non-capital losses may only be deducted against income from the same business that generated the loss, or against income from a similar business.

Answer 43

Allows to elect to have deemed disposition of any depreciable or non-depreciable capital property on which capital gains or recapture have been accrued. Election permits to trigger capital gains and/or recapture (income from business) to reduce amount of net capital losses or non-capital losses that would otherwise expire The elected amount or deemed proceeds of disposition are equal to the lesser of: * the fair market value of the property, and * the greater of: * The adjusted cost base (ACB) of the property, and * An amount designated by the corporation May elect any amount between the ACB of the property and the fair market value of the property. * If losses the company wishes to use up are less than accrued gains, the company may elect an amount just sufficient to use up the losses. For depreciable capital properties, an elected amount greater than original cost will trigger both a capital gain and recapture to the extent that CCA has previously been claimed on the property. * If a taxpayer only wishes to use up net capital losses, the taxpayer may not want to make this election on depreciable capital property.

Answer 44

* Corporations * Interest income is recorded based on accrual method * Individuals * Interest income recorded on cash basis or accrual on anniversary date if cash not received before anniversary date

Answer 45

* Rental income Less Eligible expenses * Utilities * Repairs * Maintenance * Interest * Insurance * Property taxes * Advertising * Management fees * CCA — Generally cannot create or increase a rental loss

Answer 46

Corporations: Included in net income for tax (Division B), deducted to determine taxable income (Division C) Private corporations: May need to pay a refundable tax (“Part IV tax”) on dividends received Individual or trust: depends on the type of dividends * Eligible: grossed up by 38% * Ineligible: grossed up by 16% * Stock dividends: treated in same way as cash dividends * Capital dividends: paid out of the CDA tax free * Foreign dividends: not grossed up, full amount included in income. Foreign tax credit for withholding tax paid.

Answer 47

Carrying charges on vacant land — interest on loans used to acquire land and property tax on land * Only deductible to the extent of income earned on the land; otherwise added to the cost of the land Soft costs: interest, legal, accounting, insurance, property taxes * Not deductible during construction, renovation or alteration of a building * Added to cost of building Interest: generally deductible if borrowings are used to produce income, must be able to tie use borrowed funds to acquisition of an income producing assets * Section 21 allows certain borrowing costs and interest costs to be added to the cost of the depreciable property

Answer 48

* RRSP, RRIF. RPP * Included in income when withdrawn *

Answer 49

* A taxpayer may make a joint election to allocate up to 50% of his or her eligible pension income to his or her spouse. * The amount allocated to the transferee spouse is deducted from the transferor spouse's net income and added to the transferee spouse's net income

Answer 50

* The accumulated income of the plan is taxed when withdrawn either in the hands of the beneficiary or in the hands of the contributor if payments are not made to a qualified beneficiary.

Answer 51

* The full amount of the annuity payment received in the year is included in the taxpayer's income, and a deduction is allowed for the capital element. The deduction is determined as follows: (Amount paid to acquire the annuity / Total payments to be received) × (Annuity payment)

Answer 52

* Canada Pension Plan (CPP) payments are included in the income of the individual receiving the payment. * Spouses and common-law partners may elect to split their CPP income equally. * The amount that can be shared is 50% of the combined CPP benefits received but pro-rated by the length of time the individuals have been living together in relation to the period over which they have been contributors. * A non-contributing spouse must be at least 60 years of age at the time of this election. * The spouses must make an application to Service Canada to split their CPP income. * If the application is approved, the split amount is paid separately to each spouse and is included in that spouse's income.

Answer 53

* Included in income but there is deduction * OAS Clawback

Answer 54

* Retiring allowances may be transferred on a tax-free basis, within certain dollar and time limits, to an RRSP or an RPP. * The amount that may be transferred on a tax-free basis is the lesser of: * $2,000 for each year or part year during which the individual was employed by the employer or related employer with respect to service before 1996, plus an additional $1,500 for each year or part year, the taxpayer was employed by the employer prior to 1989 for which the employer's contributions to an RPP or DPSP had not vested by the time the retiring allowance was paid. * The amount of the retiring allowance received in the year. * The amount must be transferred to an RPP or an RRSP in the year or within 60 days after the year in which the retiring allowance is received. The full amount of the retiring allowance is included in income, and a deduction is allowed for the amount transferred within the dollar and time limits noted above.

Answer 55

* Death benefits are payments made to the spouse or other beneficiary of a deceased employee upon the death of the employee in recognition of the employee's service of employment. These are included in the income of the surviving recipient(s), with a one-time maximum exemption of $10,000 per deceased employee. * Where death benefits are paid to multiple beneficiaries, the following rules apply to the $10,000 exemption: * A beneficiary who is the surviving spouse is allocated the exemption up to a maximum of $10,000. * If any amount of the $10,000 remains after the allocation to the surviving spouse, the remaining amount is allocated on a pro rata basis to beneficiaries other than the spouse.

Answer 56

* Payments received under an Employment Insurance (EI) plan are included in income. See the e-book chapter on other deductions for the EI clawback for higher-income earners.

Answer 57

* The following amounts are included in net income and deducted under Division C: * social assistance benefits (welfare) * Workers' Compensation * Guaranteed Income Supplement * These amounts are included in net income. * Thus, they will impact various amounts that depend on net income, such as the spousal, age and medical expense tax credits. * It is not the government's intention to tax these amounts, so they are deducted under Division C in the determination of taxable income.

Answer 58

* Indirect payments are payments or transfers of property that normally would have been taxed in the hands of the taxpayer if he or she had received the payment or property transferred. * The decision to pay or transfer property must have been made by or with the concurrence of the taxpayer. The following conditions must hold: * The taxpayer must have benefited from the transfer. * The payment or value of the transferred property would have been included in the taxpayer's income if the transfer had not been made.

Answer 59

* Any amount received by a student in a year as a scholarship, fellowship or bursary is exempt from tax if the student was in full-time attendance at a post-secondary educational institution or a secondary or elementary school.

Answer 60

Research grants provided to an individual to allow that individual to carry out research are included in the taxpayer's income to the extent the grant exceeds expenses incurred in carrying out the research. The following expenses are not allowed: * personal or living expenses * expenses the taxpayer has been reimbursed for * expenses deductible in the year under other provisions of the ITA * expenses that are unreasonable in the circumstances * expenses paid by someone else on behalf of the taxpayer

Answer 61

Amounts paid for spousal support are deductible to the payer and taxable to the recipient if the following five tests are met: * The payments are made on a periodic basis. * The payments are considered an allowance for the maintenance of the recipient. * The payments are made during a time that the spouses or former spouses were living apart as a result of marital breakdown. * The recipient has discretionary use of the amount (he or she can use the amount in any way). * The payments are made as a result of a decree, order or judgment of a competent tribunal or a written agreement.

Answer 62

Do not qualify under the rules above — that is, they are neither tax deductible to the payer nor are they an income inclusion to the recipient. If a lump-sum payment is required to be paid by instalment, it is still considered a lump-sum payment and is not deductible to the payer. To establish the payments are periodic, the taxpayer should ensure the court order or agreement requires: * amounts be payable at regular intervals * amounts be fixed and predetermined A taxpayer may also agree to make payments for medical expenses or education of the former spouse. These amounts are not normally fixed or predetermined so should be set out separately in the court order or written agreement.

Answer 63

Instead of making a payment directly to the former spouse, a taxpayer may make payments to third parties. These are deductible to the person making the payment and taxable in the hands of the former spouse who benefits from the payment if the following criteria are met: * The payments are made in the current year or the preceding year as a result of an order of a competent tribunal or a written agreement. * The expense was incurred for the maintenance of a former spouse or common-law partner. * The court order or written agreement specifically refers to ITA

Answer 64

* Amounts paid for the support or maintenance of a child are not deductible to the person making the payment and are not taxable to the recipient. * Child support payments are defined as any amount not identified in the agreement or order under which it is made as being solely for the support of the recipient spouse or former spouse or the parent of the taxpayer's child. * If the full amount of the required support payments is not made in the year, only payments in excess of the required child support payments are included in the recipient's income and deductible to the person making the payment.

Tax Flashcards

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