1

  2

Canada Tax Memo 2012 2012 Income Tax Rates & Brackets 2012 Both the federal and provincial governments have imposed income taxes on individuals and the federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income residents. Income Tax Rates for the Year 2012:

15% on the first $42,707 of taxable income 22% on the next $42,707 of taxable income (on the portion of taxable income

between ($42,707 and $85,414) 26%on the next $85,414 of taxable income (on the portion of taxable income

between ($85,414 and $132,406) 29% of taxable income over $132,406

Canadian personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) and tax sheltered savings accounts (which may include mutual funds and other financial instruments) that are intended to help individuals save for their retirement.

  3

Canadian Tax Brackets 2012: Listed below are the combined provincial and federal personal income tax rate brackets for the Year 2012. Rates are subject to change in accordance with federal and provincial budgets.

Provincial / Federal Tax Rates (combined chart)

Taxable Income Tax Rate(s)

$20,000 – $40,000 9.9% on the first $20,000 of taxable income 13.3%on the first $30,000 of taxable income 15.2% on the first $40,000 of taxable income

$42,000 – $58,000 15.7% on the first $42,000 of taxable income 18.2%on the first $50,000 of taxable income 20.0% on the first $58,000 of taxable income

$60,000 – $70,000 20.3% on the first $60,000 of taxable income 21.3%on the first $66,000 of taxable income 22.0% on the first $70,000 of taxable income

$72,000 – $82,000 22.3% on the first $72,000 of taxable income 22.8%on the first $76,000 of taxable income 23.9% on the first $82,000 of taxable income

$84,000 – $94,000 24.4% on the first $84,000 of taxable income 25.6%on the first $90,000 of taxable income 26.4% on the first $94,000 of taxable income

$96,000 – $115,000 26.7% on the first $96,000 of taxable income 28.2%on the first $105,000of taxable income 29.5% on the first $115,000 of taxable income

$120,000 – $150,000 30.1% on the first $120,000 of taxable income 30.6%on the first $125,000of taxable income 33.2% on the first $150,000 of taxable income

$200,000 – $400,000 36.5% on the first $200,000 of taxable income 39.8%on the first $300,000 of taxable income 41.4% on the first $400,000 of taxable income

$500,000 42.4% on the first $500,000 of taxable income 21.3%on the first $66,000 of taxable income 22.0% on the first $70,000 of taxable income

  4

CPP EI Rates, Contributions, Deductions 2012 If you reach the maximum CPP/EI in 2012, you will see an increase in the amount of your net pay. Many employees reach their maximum level of CPP EI contributions sometime during the year. If you reach the maximum level of CPP / EI, you will see an increase in the amount of your net pay as there will no longer be CPP / EI deductions withheld. Beginning with the new year, you will recommence paying CPP EI contributions until such time as you reach the maximum CPP EI contribution level for 2012.Check out 2012 CPP EI Maximum Contributions below. The maximum CPP contribution to the plan for 2012 will be increased by $89.10 to $2,306.70, representing an increase of about 4% over the last year and the maximum self-employed CPP contribution for 2012 will be $4,613.40. The CPP maximums for the Year 2011 were $2,217.60 and $4,435.20. The CPP Rates, effective January 1, 2012, forecast to remain unchanged at 4.95% of pensionable earnings. The basic exemption amount for 2012 expects to remain $3,500. Individuals who earn less than that amount do not need to contribute to the CPP. EI Maximum 2012 Your rate of EI premiums (excluding employees working in the province of Quebec), for the 2012 taxation year forecasts to remain at 1.73% of insurable earnings. The annual maximum insurable earnings will be increasing from $44,200 to $45,900. The maximum EI contribution to the plan for 2012 will be $839.97. The EI maximum for the Year 2011 was 786.76. Once you reach the annual maximum premium deduction of your EI maximum in 2012, you will see an increase in the amount of your net pay as there will no longer be EI deductions withheld from your pay. Maximum CPP Contribution 2012 At the beginning of the year 2012, the lowest rate of the two possible rates of contribution to the public service pension plan is used until the maximum level of contribution for that rate is reached. Then, the higher rate of contribution is used for the remainder of the year. Beginning with the new year, public service pension plan contributions recommence at the low rate, until such time as they reach the maximum level of the contributions for the low rate. Therefore, if you are a contributor under the public service pension plan and you compare your last pay in December to your first pay in January, you may see that you have paid a larger amount to the plan in December than in January Tax Deadline 2012 There are a number of tax deadline dates during the year 2012 when returns are due to be filed or payments are due to be paid as follows. Tax Return Filing Deadline for Personal Income Tax: Generally, your tax return for the Year 2011 has to be filled on or before April 30, 2012. Tax Return Filing Deadline for Self-Employed Persons: If you or your spouse or common-law partner carried on a business in 2011 (other than a business whose expenditures are primarily in connection with a tax shelter), your return for 2011 has to be filed on or before June 15, 2012. However, if you have a balance owing for 2011, you still have to pay it on or before April 30, 2012.

  5

The first day for using TELEFILE or NETFILE to electronically file your 2011 tax return with CRA on February 11, 2012. For TELEFILE, call 1-800-959-1110 RRSP Deadline: You RRSP deadline for contributing to your RRSP for the 2011 tax year has to be before March 01, 2012. Last day for the electronic filing of your 2011 personal income tax and benefit return using NETFILE: September 30, 2012 Quarterly installment due if you pay taxes to CRA by installments: March 15, 2012- June 15, 2012-September 15, 2012- December 15, 2012 Note: We do not warrant the accuracy of the information and advise all users to consult Canada Revenue Agency, your provincial / territorial government, and/or a taxation professional to confirm all dates and deadlines as they pertain to your personal situation. 2012 RRSP Contribution Limit | RRSP Deduction Limits How much can I contribute to my own RRSPs for the year 2012? The maximum RRSP contribution limit 2012 is $22,970. However, if you did not use all of your RRSP contribution limit for the years 1991-2011, you can carry forward the unused amount to 2012. Therefore, your RRSP contribution limit for 2012 may be more than $22,970. The maximum RRSP contribution limit for subsequent years is as follows:

2012 maximum RRSP contribution limit: $22,970 2011 maximum RRSP contribution limit: $22,450 2013 maximum RRSP contribution limit: $23,500 plus inflation index amount 2014 maximum RRSP contribution limit: Indexed to inflation 2015 maximum RRSP contribution limit: Indexed to inflation

Generally, the amount you can contribute to your own RRSPs or your spouse’s RRSPs, or your common-law partner’s RRSPs for a given tax year without tax implications is determined by your RRSP deduction limit. This is often called your “contribution room”. Amounts that you contribute above this limit may be considered excess contributions. Your RRSP deduction limit is shown on the latest Notice of Assessment, Notice of Reassessment, or on a T1028, Your RRSP Information for 2012, that Canada Revenues Agency sent you after processing your 2012 return. You can also find out about your contribution room by registering for My Account. Once you’ve registered and received your password, you can sign in and access your RRSP Deduction Limit Statement online. RRSP Deduction Limit 2012 The amount of RRSP contributions that you can deduct on your tax return for a given year is determined by your RRSP deduction limit. Your RRSP deduction limit can be found on the RRSP Deduction Limit Statement which appears on your latest Notice of Assessment or Notice of Reassessment or on a T1028, Your RRSP Information for 2012. On your 2012 income tax return, you can deduct contributions you made to your RRSPs between January 1, 1991, and February 29, 2012. You can deduct these contributions if you did not deduct them for any other year and if they are not more than your RRSP deduction limit for 2012.

  6

If you can no longer contribute to your RRSPs in 2012 because of your age (the year after you turn 69; beginning in 2012, under proposed legislation, the year after you turn 71) you can still deduct the contributions you made in a previous year, up to your RRSP deduction limit. Please note that repayments under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP) are not deductible on your return even though the RRSP issuer will give you an official receipt for the contribution. You will record your repayments on Schedule 7, which you will file with your tax return. Please note that generally, amounts you transfer directly to your RRSP do not affect your RRSP deduction limit. However, you may need to include an amount in income and claim an offsetting deduction. The maximum RRSP deduction limit for 2012 is $22,970. However, if you did not use your entire RRSP deduction limit for the years 1991-2011, you can carry forward the unused amount to 2012. Therefore, your RRSP deduction limit for 2012 may be more than $22,970. The maximum RRSP deduction limit for subsequent years is as follows:

2012 maximum RRSP deduction limit: $22,970 RRSP Terms:

RRSP contribution – This is the amount you pay, in cash or in kind, at the time you contribute to an RRSP.

RRSP deduction – Refers to the amount you indicate on line 208 when you file your return.

RRSP deduction limit – This refers to the maximum amount you can deduct from contributions you made to your RRSPs or to a spousal or common-law partner RRSP for a year. The calculation is based, in part, on your previous year earned income (excluding transfers to your RRSPs of certain types of qualifying income). Pension adjustments (PAs), past service pension adjustments (PSPAs), pension adjustment reversals (PARs), and your unused RRSP deduction room, are also used to calculate the limit. RRSP Deadline and Contribution 2011 RRSP Contribution Deadline for 2011 Tax Year: February 29, 2012 Your RRSP deadline for contributing to your RRSP for the 2011 tax year has to be before February 29, 2012. The maximum RRSP contribution limit for 2011 is $22,450. However, if you did not use your entire RRSP contribution limit for the years 1991-2009, you can carry forward the unused amount to 2011. Therefore, your RRSP contribution limit for 2011 may be more than $22,450. 2011 maximum RRSP contribution limit: $22,450 A Registered Retirement Savings Plan (RRSP) is a retirement investment plan registered with the government to which you or your spouse can contribute through RRSP-eligible investments, such as some stocks and mutual funds. For information on what investments are RRSP eligible, please contact a financial advisor and/or your financial institution. Deductible RRSP contributions can be used as a means to reduce your taxes. Amounts earned in the RRSP investment is usually exempt from tax for the time the funds remain in the plan. When you cash in or receive payments from the plan (typically at retirement) you will then pay tax on those amounts.

  7

Some useful definition : Accruals When the accrual basis of accounting is used, accruals are done at the end of an accounting period (usually monthly) to record costs which have been incurred but not paid for or previously recorded, and to record revenue which has been earned but not received or previously recorded. Canadian Controlled Private Corporation (CCPC) A CCPC is a private corporation which is controlled by Canadian residents. A corporation will not qualify as a CCPC if it is controlled directly or indirectly by a public corporation or non-residents, or a combination of the two. A CCPC is eligible for the small business deduction, which provides a reduction in corporate income tax on active business income. When the shares of a qualifying CCPC are sold, the shareholder(s) may avoid capital gains tax by utilizing all or part of the $750,000 lifetime capital gains deduction. This exemption was increased from $500,000 to $750,000 by the 2007 Federal budget. Canada Revenue Agency (CRA) Canada Revenue Agency, formerly Canada Customs and Revenue Agency, and formerly Revenue Canada Taxation. The CRA administers tax laws for the Government of Canada, and for most provinces and territories. The CCRA became the CRA on December 12, 2003. Capital Gain A capital gain or loss is the gain or loss resulting from the sale of a capital asset, such as stocks, bonds, art, stamp collections, and real estate. Some assets are considered personal-use property, such as cottages, cars, boats, and furniture (unless these are business assets). Some personal-use property is considered listed personal property (LPP), such as works of art, and stamp collections. The gains and losses for personal-use property and LPP are calculated separately from gains and losses on other capital assets. See our articles on Listed Personal Property and Personal-use Property for more information. Currently 50.00% of realized capital gains are taxed in Canada at an individual's tax rate. Some exceptions apply, such as selling one's primary residence which may be exempt from taxation. Capital gains made by investments in a Tax-Free Savings Account (TFSA) are not taxed. For example, if your capital gains (profit) are $100, you are only taxed on $50 at your marginal tax rate. That is, if you were in the top tax bracket, you would be taxed at approximately 43%. A formula for this example using the top tax bracket would be as follows: Capital gain x 50.00% x marginal tax rate = capital gain tax = $100 x 50.00% x 43% = $50 x 43% = $21.50 In this example your capital gains tax on $100 is $21.50, leaving you with $78.50. The formula is the same for capital losses and these can be carried forward indefinitely to offset future years' capital gains; capital losses not used in the current year can also be carried back to the previous three tax years to offset capital gains tax paid in those years. For corporations as for individuals, only 50% of realized capital gains are taxable. The net taxable capital gains (which can be calculated as 50% of total capital gains minus 50% of total capital losses) are subject to income tax at normal corporate tax rates. If more than 50% of a small business's income is derived from specified investment business activities (which include income from capital gains) they are not even allowed to claim the small business deduction. Capital gains earned on income in an RRSP are not taxed at the time the gain is realized (i.e. when the holder sells a stock that has appreciated inside of their RRSP) but they are taxed when

  8

the funds are withdrawn from the registered plan (usually after converting to a registered income fund.) These gains are then taxed at the individual's full marginal rate. Capital gains earned on income in a TFSA are not taxed at the time the gain is realized. Any money withdrawn from a TFSA, including capital gains, are also NOT taxed. Unrealized capital gains are not taxed. An allowable capital loss is 50% of a capital loss. It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income. When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year. Capital gains can be reduced, deferred, or eliminated by:

$750,000 capital gains exemption Principal residence exemption Donating capital property instead of cash can eliminate capital gains or increase your

donations limit Capital gain reserve Election to designate the amount of proceeds on donated capital property

Capital personal property There are special rules for GST registrants for claiming input tax credits on the purchase of capital personal property. Capital personal property includes movable capital property, such as office furniture, computers, photocopiers, movable machinery and equipment, and free-standing appliances. Built-in appliances are fixtures, and are usually considered part of capital real property. Capital property Capital property includes fixed assets, and items which are purchased for investment purposes, such as stocks and bonds. Any gain or loss on the sale of capital property is considered a capital gain or loss for tax purposes. Capital real property Capital real property includes land and buildings, and any items which are installed in and attached to the buildings or land. Capital cost allowance can be claimed on buildings and attachments, but not on land. There are special rules for charging GST/HST and for claiming GST/HST input tax credits on capital real property. Consumer price index (CPI) The consumer price index (CPI) is a measurement produced by Statistics Canada which is meant to reflect the increase in the cost of living. Current and historical CPI data can be obtained from the Bank of Canada and Statistics Canada web sites. Dividend An amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders. Dividends on preferred shares will usually be for a fixed amount. Dividends on common shares may fluctuate depending on the profits of the company. Some companies pay dividends on common shares, and some do not. See also dividend tax credit, and dividend tax credit rates. Dividend reinvestment plan (DRIP) A DRIP is a dividend reinvestment plan, whereby when a dividend is issued to the shareholder, it is used to purchase further shares of the company instead of paying out a cash dividend. These

  9

purchases are usually done with no brokerage fees. Shareholders can only participate in a DRIP if they have shares registered in their own name, instead of in street name. The dividends that are reinvested in more shares are still considered taxable dividend income. Dividend tax credit Starting in 2006, an enhanced dividend tax credit is available for dividends received after 2005 from:

public corporations resident in Canada other corporations resident in Canada that are not Canadian-controlled private corporations

(CCPCs) and are subject to the general corporate tax rate CCPCs resident in Canada to the extent that their income (other than investment income,

which is eligible for a special refundable tax) is subject to tax at the general corporate tax rate With the enhanced dividend tax credit, 145% of the dividend received will be included in income. The additional 45% is referred to as the gross-up. The tax credit is calculated as 11/18ths of the gross-up. The result is a federal tax credit of

18.97% of the taxable (grossed-up) dividend, or 27.5% of the actual dividend

For an individual with no income other than taxable Canadian dividends which are eligible for the enhanced dividend tax credit, approximately $66,000 can be earned before any federal taxes are payable. See the page on federal and provincial dividend tax credit rates for regular dividend tax credit rates and enhanced dividend tax credit rates. Dividend yield This is the % obtained by dividing the dividend per share by the current market price per share, x 100. Example: market value per share $37, annual dividend $1.85, yield = 1.85/37 x 100 = 5% Management expense ratio (MER) The MER is the percentage of the value of the assets of an investment company (eg mutual fund, closed-end fund, unit investment trusts), that is deducted by the fund manager to cover the costs of managing the fund. This is not part of the front end or back end fees paid to purchase the mutual fund, and are not a cost that is seen by the investor. However, it reduces the return to the investor. The MER is usually in the range of 1.5% to 3% per year. A much lower MER is charged by Exchange Traded Funds, or ETFs. The MER rate can make a huge difference in investment returns over a period of 20 years. Margin If you have securities at a brokerage in a margin account, the brokerage will allow you to borrow a percentage of the value of your holdings. A higher percentage is allowed for large cap stocks, and you cannot borrow anything against some small cap stocks. Margin call If you have bought stocks on margin, and the amount you have borrowed exceeds the margin limit that the brokerage has allowed you, you will receive a call from the broker asking you to either sell some stocks or transfer money into your account.

  10

Marginal tax rate A person's marginal tax rate is the tax rate that will be applied to the next dollar he/she earns. The marginal tax rates on capital gains and Canadian dividend income are lower than on other types of income, because:

Only 50% of capital gains are included in taxable income Either 125% or 145% of Canadian dividends are included in taxable income, but a

dividend tax credit is deducted from taxes payable. See the Dividend Tax Credit page for more information. To see the marginal tax rates for different types of income for each tax bracket, see the marginal tax rate table for your province or territory. Marked to Market When an investment is marked to market, it is shown on the balance sheet at market value. This results in changes in the market value being shown on the income statement as a profit or loss. Mutual fund Also known as an open-end fund, this is an investment company which pools the money of many investors, and uses the money to invest in a variety of different securities. The securities may be stocks, bonds, money market securities, or a combination of these. The mutual fund has a fund manager to handle the buying and selling of securities. The fund company does the recordkeeping for individual investors, providing reports which detail cost basis, dividend income, capital gains, etc. For these services, the mutual fund company charges a management fee, which is usually expressed as a percentage of the asset value of the fund. This is called the management expense ratio (MER). This fee is taken from the fund by the fund manager to cover the costs of managing the fund. Many mutual funds also charge fees when the funds are purchased (front end fees or loads) or sold (back end fees or loads). The ones which do not charge these fees are called no-load funds. Over the counter (OTC) An OTC security is any equity security which is not listed on the major stock exchanges. OTC securities are not qualified investments for RRSPs. Real estate investment trust (REIT) An investment vehicle which allows people to invest in a portfolio of real estate holdings by purchasing units of the trust. This gives the holders more diversity and liquidity than investing directly in real estate. REITs are not taxed as corporations, but flow their income through to unit holders. Registered education savings plan (RESP) An RESP is an education savings plan that has been registered with Canada Revenue Agency (CRA). It is a method for parents to save for their children's post-secondary education. The payments to an RESP are not tax deductible, but the earnings in the RESP grow on a tax-free basis.

  11

Registered pension plan (RPP) Registered pension plans are pension plans that are regulated by federal or provincial pension legislation, and must be registered under the Income Tax Act. There are two types of registered pension plans - defined benefit pension plans (DB), and defined contribution pension plans (DC). Defined contribution plans are also known as money purchase RPPs. Registered retirement income fund (RRIF) Registered retirement savings plans (RRSPs) must cashed out (taxable) or converted to RRIFs (tax-free) no later than the year in which the RRSP holder turns 71. The 2007 Federal budget revised this age from 69 to 71, for both RRSPs and RPPs. See the article on conversion of RRSP to RRIF, on the RRSPs/RRIFs page, for special rules for RRIF holders who turn 70 or 71 in 2007. Once the RRSP is converted to a RRIF, the holder must withdraw a minimum amount each year, except in the first year. These withdrawals are taxable to the holder. The withdrawals qualify as pension income for purposes of the pension income tax credit for taxpayers 65 and over. Starting in 2007 the withdrawals may be split with a spouse (pension splitting). It may be beneficial to convert at least a portion of an RRSP to a RRIF when the taxpayer turns 65, in order to generate income eligible for the pension tax credit, and for pension splitting. The holder of the RRIF controls what investments are held in the account. Registered Retirement Savings Plan (RRSP) An RRSP, or Registered Retirement Savings Plan, is a savings or investment account which allows you to defer paying tax on funds deposited to it. When you make a contribution to your RRSP, you get a tax deduction for the amount contributed. The deduction reduces taxable income, so the higher your marginal tax rate, the greater the tax savings will be.