AFM 206

Tax Credits and Tax Payable

Module C
Week 5 Lecture
Topics: Tax Credits and Tax Payable
§ Compute tax on taxable income

§ Overview of credits

§ Common types of credits

§ Personal
§ Employment related
§ Other (tuition, medical, donations)

§ Finishing the process to taxable income

VIDEO 5(1)
Overview of Credits
Recap of process
Key concept #6: Basic structure of computing taxes payable

𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝒕𝒂𝒙 𝒓𝒂𝒕𝒆 𝑡𝑎𝑥 𝑡𝑎𝑥𝑒𝑠

𝑎𝑑𝑑 𝑙𝑒𝑠𝑠 × − = 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 𝒔𝒄𝒉𝒆𝒅𝒖𝒍𝒆 𝑐𝑟𝑒𝑑𝑖𝑡𝑠
Calculation of Taxable Income
§ Let’s review the T1 ‘jacket’ again (that is pages 1-8 of Form T1 itself)
Page 1 and 2 of Form T1
Step 1- Identification & Other Information
§ Identification
§ Email address- why? Terms of use! Caveats!
§ Information about your residence
§ Information about you- why?
§ Deceased person- why?
§ Marital status From Module A slides
§ Info about your spouse or common-law partner
§ Elections Canada- why?
§ Foreign property
Next Steps on Form T1
§ Step 2- Total income (all sources)

§ Step 3- Net income (various deductions)

§ Step 4- Taxable income (more deductions – advanced topics)

§ Step 5- Federal tax (tax rate table and credits)

§ Step 6- Refund or balance owing

including provincial or territorial tax (Form 428)- not in scope for this course
§ Bottom half of page 8 additional questions to be answered
Step 5 of Form T1
§ Step 5 (has 3 parts….):

§ Part A- calculate federal tax on taxable income

§ Part B- calculate federal non-refundable credits

§ Part C- calculate net federal tax by subtracting tax credits from federal
tax on taxable income
§ Reminder: Tax credits reduce federal tax ! (but not below zero- these are non-
refundable)
Step 5
Part A- federal tax
§ Part A- CALCULATE FEDERAL TAX on taxable income using our graduated tax
rates
VIDEO 5(2)
Overview of Credits
Tax credits vs. tax deductions
§ Tax deductions reduce income

§ Tax credits reduce tax payable

§ If the taxpayer has previously computed their federal tax on income of $30,000 to
be, say, 2,500 (assuming a 15% rate and basic 2,000 of credits), then
§ she found an additional $1,000 deduction

§ Income would now be $29,000 and taxes would fall to $2,350

§ OR, she found an additional $1,000 credit

§ Credits would not rise to $3,000 and taxes would fall to $1,500
Three Types of Credits
§ Non-refundable credits

§ these go on Part B of the T1 jacket reduce federal tax payable (possibly to zero)

§ the focus of these videos

§ Refundable credits

§ these are on page 8 of the T1 jacket-they increase your tax refund even if
there is no tax to pay!
§ Other credits

§ these are based on the tax return but are paid to the taxpayer, if eligible,
completely separately from the tax return filing process
Non-refundable credits
§ We will focus on 5 types of non-refundable credits:

§ Personal credits
§ Employment-related credits
§ Tuition credit
§ Medical credit
§ Donations credit

§ There are other credits when caring for mentally or physically infirmed relatives,
etc.
First part of tax credits on the T1
Personal credits
§
Second part of tax credits on the T1
Employment-related credits
§
Third part of tax credits on the T1
Tuition credits
§

Medical credit

Donation credit
Credit amounts and Credits
§ Credits are are computed as eligible amounts multiplied by a rate.

§ For example, the basic personal credit in 2022 was $14,398 x 15% = 2,160

§ So, for a taxpayer in the 15% tax bracket, an additional amount eligible for a credit
(such as a tuition expenses), the credit and deduction would reduce taxes by the
same amount.
§ Why do we have credits instead of deductions? Key concept #1:
Tax laws appear
arbitrary but guided
by economics and
social goals
 VIDEO 5(3)
Personal and Employment Credits
Personal credits Key concept #1:
Tax laws appear
§ Line 74: Basic personal amount:
arbitrary but guided
§ $14,398 in 2022 for taxpayers with income below 29% bracket, by economics and
§ $12,719 if above 29% bracket (linearly changing in between)
social goals

§ So as income ranges from 151,978 to 216,511, BPA reduces from 14,398 to 12,719.
§ Why do we have this???

§ Line 76 and 77: Spouse or common-law partner amount OR amount for an eligible
dependent - see Schedule 5
§ Doubles the basic personal amount
§ Phased out with income of ”spouse” or dependent
Amounts for spouse, common-law partner, or dependent
§ Taxpayer needs to be financially supporting the spouse or dependent

§ Tied to net income of the spouse or dependent (their net income must be less than
the basic personal amount)
§ Can claim spouse (married/common-law) credit if ‘spouse’ can’t use their personal
credit fully
§ Claiming for dependants is tricky

§ You can only claim ONE

§ taxpayers CAN’T claim BOTH the spouse and dependent credit
Tests to claim a dependant
§ Taxpayer may be able to claim this credit for one other person if at any time in the
year she met all of the following conditions at once:
§ The taxpayer did not have a spouse or common-law partner, or are separated
§ The dependant must have been either:
§ the taxpayer’s parent or grandparent by blood, marriage, common-law partnership, or
adoption, or
§ her child, grandchild, brother, or sister by blood, marriage, common-law partnership or
adoption and under 18 years of age or had an impairment in physical or mental functions
§ The taxpayer supported a dependant in the year, and
§ The dependant lived with the taxpayer (in most cases in Canada)
Age credit
§ Who: A credit for taxpayers over 65

§ How much: $7,898, phased out as income rises from about $40,000 to about
$90,000.
§ The phase-out and the ability to split pension income can create some interesting
optimization calculations for senior taxpayers
§ Software may not get the optimum correct if both taxpayers qualify for the age credit and there
is pension income to split

§ Economic goal?
CPP/EI credits & Canada employment amount
§ CPP* or QPP and EI – employed people must pay these amounts

§ Amounts are taken from all T4s of the taxpayer

§ Max CPP (Canada Pension Plan) is $ 3,500 for 2022

§ if self employed, you pay both the employee AND the employer amount

§ Max EI (Employment Insurance) is $926 for 2022

§ Max Canada Employment Amount is up to $1,287

* CPP has an exemption amount is $3,500

you don’t pay CPP on this amount of earnings
 VIDEO 5(4)
Students, Medical and Donation Credits
Tuition credit
§ Calculated on Schedule 11

§ Who: Post-secondary students; some conditions on type of program

§ How much: Official tuition receipt amount (min $100) on Form T2202
§ UW will provide this form to you!

§ Unused amounts carryforward !!!

§ Up to $5,000 can be transferred to another individual each year (your parents

usually! But not if they are nonresidents) - line 32400 on THEIR return
Tuition credit – More details 26

§ Also calculated at a rate of 15%, however, is subject to special rules

§ If your income is high enough to use the tuition tax credits, current plus
carryforwards must be used by you in that year
§ If your income is not high enough to use all of the tuition tax credit, a maximum of
$5,000 can be transferred to an eligible individual (partner, parent, or
grandparent—depends on family dynamics and maybe who pays the tuition)
§ And/or, the unused portion can be carried forward to next year

Each of you should have filed a tax return so

you could claim this and use it in the future!!!!!
Medical Expenses There is a MINIMUM to
§ Does not have its own tax form
exceed before you can claim!

§ Who: Claim for yourself, your spouse or common-law partner and your
dependant children aged 18 or younger (older, if disabled…)
§ How much: Add all amounts up

§ Credit for amounts that exceed lesser of:

§ $2,479 (in 2022) or

§ 3% of net income
§ Elderly taxpayers OFTEN claim this and sometimes parents in high orthodontic
cost years!
Medical expenses - more good things to know
§ What: CRA has a huge list of eligible expenses

§ Can claim medical expenses for any 12-month period ending in the tax year
(apply a sliding test, to help you get over the 3% of income limit)
§ Can’t claim expenses that are reimbursed by a health plan - watch this when
clients provide receipts! Claim the net out of pocket after drug plan paid
§ Can claim expenses incurred outside of Canada (like during a vacation for example
or if seek medical treatment outside Canada)
§ Some expenses are only eligible with a disability certificate
You MUST read every receipt
you are given and question it!
In case you’re wondering… From CRA’s website, of course
§ Cosmetic surgery – generally, not creditable.
§ An expense will continue to qualify as a medical expense if it is necessary for medical or
reconstructive purposes, such as surgery to address a deformity related to a congenital
abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.
§ In vitro fertility program – the amount paid to a medical practitioner or a public
or licensed private hospital. Fees associated with obtaining eggs or sperm from a
donor or a donor organization (including the service of locating a donor) are not
eligible.
§ Organ transplant – reasonable amounts paid to find a compatible donor, to
arrange the transplant including legal fees and insurance premiums, and
reasonable travel, board and lodging expenses for the patient, the donor, and their
respective attendants.
Donations and gifts
§ Calculate on Schedule 9, flows to Step 5 Part B, after the 15% calculation for all
other credits
§ What: Donation must be to a registered charity - some non-Canadian
Not to a
donations are allowed (for example, universities outside Canada, GoFundMe
United Nations, etc.) but some “charities” are not registered cause!!

§ Combine donations together for you and your spouse or common-law partner

§ How much: LIMIT: 75% of your net income !! (from line 23600)

§ Can claim amounts paid in the year OR

any of the previous 5 years that have not Why would you want to save
been claimed before donations to claim in a future year?
30
Donations and gifts - more good things to know
§ Need official receipts to claim donations

§ the value of the donation is the amount other than any ‘advantage’ received or enjoyed (for
example, charity dinner may include a donation and the cost of dinner…)

§ Donations can include gifts of taxable property (like shares, art, etc.)

§ Donations include gifts to Canada, a province or a territory

§ Contributions to political parties are a separate credit

NOT reported on Schedule 9 or line 34900 of T1

31
Donation calculation – 2022 (federal non-refundable tax
credit rates)
§ Tax credit equals:
§ 15% of total gifts up to $200
§ 33% on total gifts above $200, to the extent of taxable income above threshold for top marginal
rate
§ 29% for total gifts in excess of 1) and 2)
High income taxpayers get
a ‘super credit rate’!
VIDEO 5(5)
Other topics
Form TD1 - Personal Tax Credits Return
§ Super duper handy and important form (like a mini Step 5 - Part B form)

§ Must be completed each time you start new job so your employer knows which
personal tax credits you qualify for
§ this helps them calculate the tax that should be withheld from your employment income more
accurately (but it is still never perfect)

§ Bottom of TD1 page 1 = Total claim amount

§ your employer uses this to determine the amount of tax withheld from you

§ Two sides- important questions on the back!

§ Provincial TD1 to complete also - different credits

Then what??
Form 428 - Calculate provincial tax
§ Provincial taxes are calculated on Form T1 for all provinces and territories other
than Quebec (they file their own separate Quebec personal tax return)
§ Our tax software will calculate the provincial taxes for you, based on the province
of residence at December 31 as you noted on page 1 of the return

Each province has its own credits

and sometimes different deductions
(and its own tax guides!)
Taxes Due??
§ Add up everything that is owed (federal tax, CPP, EI, provincial tax) = TOTAL
PAYABLE
§ Add up everything that has been paid (tax withheld by employers on T4s or by
banks on T5s etc., tax instalments made, etc.) = TOTAL CREDITS
§ The difference between TOTAL PAYABLE and TOTAL CREDITS is the REFUND
or BALANCE OWING

And you already learned

when taxes must be paid….
Instalments
Required instalments
§ Who said anything about instalments? is minimum of three
amounts
§ Tax instalments are required to be made by an individual:
§ If tax payable in current year and either of prior 2 years exceeds tax withheld by more than
$3,000

§ Tax software will calculate these for you but prior year info must be in the online
tax file
§ CRA will calculate for taxpayers and advise through CRA MyAccount (CRA uses
one method as standard, but taxpayer can use a different method)
§ CRA charges interest (and sometimes penalties) if you don’t pay or if you pay late!
What are tax instalments???
§ Instalments apply when taxes withheld are low in comparison to taxes payable

§ instalments are made during the year in the place of normal withholdings.

§ Basically, instalments are required if the taxpayer has large sources of income on
which withholdings are not taken
§ leading to more than $3,000 owing consistently after withholdings

§ Payment deadlines for instalments (ignoring COVID):

§ 15th of March, June , September, December

CRA does not want you to owe

them more than $3,000 every year!
 VIDEO 5(6)
Finishing the process
After the tax return is filed
What’s next?
§ CRA will assess the tax return, sometimes within hours or days (CRA goal is 2
weeks if file online, 8 weeks if paper file)
§ A Notice of Assessment (NOA) will be sent to CRA MyAccount (if set up) or by
mail
§ Refund will be direct deposited (sometimes within days)(if set up) or sent by mail

§ If taxes are owing, the taxpayer (you or the client) will have to pay by the tax
payment deadline…which is
Then what happens?
CRA follow-up
§ It is extremely common for taxpayers to get letters (through CRA MyAccount, if
set up, or by mail) asking for additional information AFTER the tax return has
been assessed (NOT an audit…it’s a review)
§ Usually, CRA will ask for proof of certain tax deductions or credits using their data
analytics
§ Tax advisors will typically upload to CRA MyAccount or write to CRA (on the
taxpayer’s behalf) and supply the requested info
§ CRA may agree/disagree and then may issue a Notice of Reassessment (NOR)
What if we disagree with a NOA or Reassessment?
§ Taxpayer or their representative can appeal by filing a Notice of Objection (NOO)

§ NOO due date (the later of):

§ Within one year of tax return filing due date OR
§ Within 90 days of the day the Notice of Assessment was sent – VERY important to track this
date if there is a concern!!

§ If unhappy with results of NOO, next step is to make a second appeal to the Tax
Court of Canada (remember those tax cases we talked about?)
§ If still unhappy, can then appeal to Federal Court of Canada and sometimes even
Supreme Court of Canada (rare and expensive, of course)
How do we change a return after it’s filed?
§ Why? Taxpayer forgot to report some income or claim some deduction or credit…

§ Can request changes for any of the previous TEN (10) tax years

§ 3 methods:
§ If file online, can use ReFILE service (also online)
§ Use CRA MyAccount (soooo useful!!) and use ‘Change my return’ section
§ Send a paper form T1 Adjustment or a signed letter
Summary
§ We have finished tax returns and have put it all together

§ By now you should understand major elements of employment income, key

deductions and credits PLUS understand how taxes due are calculated and how
and when they are paid by individual taxpayers
§ Taxes are complex but interesting and can be fun!

Think like a reviewer - check the

lines of the T1 jacket and schedules.
Is the tax return complete?
Is it accurate?