Explore key terms and concepts in Canadian taxation, including capital gains, RRSPs, TFSAs, and more, essential for the CSC® Exam Prep Guide: Volume 2.
Understanding Canadian taxation is crucial for financial professionals and investors navigating the financial landscape. This glossary provides detailed explanations of key terms and concepts related to Canadian taxation, essential for mastering the Canadian Securities Course (CSC®) and applying these principles in real-world scenarios.
Accrued capital gain refers to the increase in the value of an investment that has not yet been realized through a sale. For example, if you purchase shares of a Canadian company for $10,000 and their market value rises to $15,000, the $5,000 increase is your accrued capital gain. This gain is not taxed until the asset is sold, allowing for potential tax deferral.
The Adjusted Cost Base (ACB) is the original cost of an asset plus any additional costs associated with acquiring and disposing of it. It is used to calculate capital gains or losses. For instance, if you buy a property for $200,000 and incur $10,000 in legal fees and renovations, your ACB is $210,000. When you sell the property, the difference between the sale price and the ACB determines your capital gain or loss.
Attribution rules are provisions that attribute income or capital gains back to the original taxpayer when income-producing assets are transferred to family members. This prevents tax avoidance by shifting income to individuals in lower tax brackets. For example, if a parent transfers a dividend-paying stock to a child, the dividends may still be taxed in the parent’s hands.
A capital gain is the profit realized from the sale of a capital asset, such as stocks or real estate, exceeding its purchase price. In Canada, only 50% of the capital gain is taxable. For example, if you sell shares for $20,000 that you purchased for $15,000, your capital gain is $5,000, and $2,500 is subject to tax.
Carrying charges are expenses incurred to earn investment income, which may be deductible for tax purposes. These include interest on money borrowed to invest, investment management fees, and certain legal fees. Deducting these charges can reduce taxable income and overall tax liability.
The Canada Education Savings Grant (CESG) is a government grant that matches contributions to Registered Education Savings Plans (RESPs) to encourage saving for a beneficiary’s education. The government provides a 20% match on the first $2,500 contributed annually, up to a lifetime maximum of $7,200 per beneficiary.
A capital loss occurs when a capital asset is sold for less than its adjusted cost base. Capital losses can be used to offset capital gains, reducing taxable income. For example, if you sell shares for $8,000 that you purchased for $10,000, you incur a $2,000 capital loss, which can offset other capital gains.
Contribution room is the maximum amount an individual can contribute to a registered plan, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), in a given year. Unused contribution room can be carried forward to future years, allowing for flexible saving strategies.
A deferred annuity is an annuity contract where income payments begin at a future date, allowing funds to grow tax-deferred. This is beneficial for individuals seeking to accumulate savings for retirement while deferring taxes on investment growth.
Deemed disposition is a tax event where the taxpayer is considered to have sold an asset, triggering capital gains or losses, even if an actual sale did not occur. This can occur upon emigration from Canada or death, ensuring that unrealized gains are taxed.
The high-water mark is a provision in hedge fund fee structures ensuring that managers only earn performance fees on new profits. This protects investors from paying fees on gains that merely recover previous losses.
Income splitting is a tax strategy where income is distributed among family members in lower tax brackets to reduce overall tax liability. This can be achieved through spousal RRSPs, pension income splitting, or family trusts.
The marginal tax rate is the rate of tax applied to the last dollar of an individual’s income, determining the tax impact of additional earnings. Understanding marginal tax rates is crucial for effective tax planning and investment decisions.
Option expiry is the date on which an option contract becomes void, and the holder can no longer exercise their right to buy or sell the underlying asset. Investors must decide whether to exercise, sell, or let the option expire worthless.
An offset is a deduction or credit used to reduce the amount of tax payable. Common offsets include charitable donations, medical expenses, and tuition credits, which can significantly lower tax liability.
The Pension Adjustment (PA) is a calculation that determines the reduction in RRSP contribution room based on pension benefits earned through a registered pension plan. This ensures that total retirement savings are within allowable limits.
The prescribed interest rate is the minimum interest rate set by the Canada Revenue Agency (CRA) for loans between family members to prevent income attribution. This rate is reviewed quarterly and affects income-splitting strategies.
A Registered Education Savings Plan (RESP) is a tax-deferred savings plan designed to help save for a beneficiary’s post-secondary education. Contributions grow tax-free, and withdrawals for educational purposes are taxed in the student’s hands, often at a lower rate.
A Registered Retirement Income Fund (RRIF) is a retirement income vehicle into which RRSPs must be converted by the end of the year the holder turns 71. RRIFs mandate minimum withdrawals, providing a steady income stream in retirement.
A Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement savings plan where contributions are tax-deductible, and investment income grows tax-free until withdrawal. RRSPs are a cornerstone of Canadian retirement planning, offering significant tax advantages.
A Spousal RRSP is an RRSP held in one spouse’s name, allowing the higher-income spouse to contribute for tax-efficient income splitting at retirement. This strategy can reduce overall family tax liability by shifting income to the lower-income spouse.
A superficial loss is a non-deductible capital loss arising when the same asset is repurchased within a specified period around its sale. The CRA disallows these losses to prevent tax avoidance through artificial transactions.
A Tax-Free Savings Account (TFSA) is a registered account enabling tax-free growth and tax-free withdrawals, with annual contribution limits. TFSAs offer flexibility for short-term and long-term savings goals without tax implications on withdrawals.
Taxable income is the portion of an individual’s income that is subject to income tax after deductions and exemptions. Understanding taxable income is essential for effective tax planning and compliance.
Withholding tax is the amount of tax deducted at the source of income, such as retirement withdrawals, and remitted directly to the tax authorities. This ensures timely tax collection and compliance.
The withholding tax rate is the percentage of income withheld by the payer before it is distributed to the recipient, often applied to investment income or retirement withdrawals. Understanding withholding tax rates is crucial for accurate tax planning and cash flow management.
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