Chapter Objectives Be able to: n Identify other sources of income and deductions. n Explain the benefits of RRSPs and the related retirement options. n Calculate RRSP contribution limits. n Identify and apply the special rules in determining net income.

Other Sources of Income and Deductions n Other is a catch-all for all income items that are not included in one of the four primary sources and listed in sections of the ITA. n Examples are: pension benefits from RPPs, RRSPs, RRIFs, OAS, & CPP, payments from DPSP & RESP, E.I. benefits, scholarships, research grants, and receipt of alimony & maintenance. n Other is a catch-all for all deduction items that are not included in one of the four primary sources and listed in sections of the ITA. n Examples are: RRSP contributions, payment of alimony & maintenance, moving expenses, and child care expenses. n The other deductions category is important since it is the last test in the income tax scheme for determining the deductibility of an expenditure.

Registered Retirement Savings Plans n They offer a significant benefit to taxpayers since contributions to an RRSP and returns on accumulated funds are not taxed until withdrawn from the plan during retirement. However, there are annual contribution limits. n If an individual does not belong to an employer’s RPP or DPSP, the annual contribution limit will be the lesser of 18% of earned income and the stipulated maximum for that year. n If an individual does belong to an employer’s RPP or DPSP, the annual contribution limit will be the lesser of 18% of earned income and the stipulated maximum for that year and, from that result, less a pension adjustment. This pension adjustment is how RRSPs are integrated with RPPs and DPSPs. The amount of the pension adjustment will depend on circumstances, such as whether the RPP is a money-purchase plan or a defined-benefit plan.

Registered Retirement Savings Plans (continued) n Unused contribution limits are carried forward indefinitely and are added to the future annual contribution limits. n In general terms, earned income is employment income excluding RPP contributions, rental income, royalty income, alimony & maintenance income, and research grants net of expenses less employment losses, rental losses, and alimony & maintenance payments. n It is mandatory to convert the accumulated funds in an RRSP to a retirement income vehicle before December 31 of the year that an individual reaches 69. Retirement income vehicles available are RRIFs, guaranteed fixed term annuity, and life annuity. n From an individual’s total contribution limit, contributions can be made to his/her own plan and a spousal plan. n The long-term benefit to spousal contributions is that the withdrawals from the spousal plan will included in the spouse’s taxable income.

Special Rules for Net Income Determination n All items that are deductible from any source of income are only deductible to the extent that the expenditure is considered reasonable in the particular circumstances. n The CCRA has the ability to allocate or reallocate the total price amongst the assets included in a group purchase in accordance with the apparent fair market values of the individual properties. n When related parties are involved in a transaction, there are special rules that apply to prevent the elimination or reduction of tax by selling at a price other than fair market value. n Although salaries can be accrued when incurred, they must be paid within 180 days of the fiscal year-end in order to be deductible. n Special rules apply when a property has been disposed of in satisfaction of a debt (foreclosure) or there is a gain on the settlement of debt (such as in extreme financial difficulty).

Attribution Rules n Property transferred to a child is deemed to have been sold for fair market value, except for farm property. However, property transferred to a spouse is deemed to have been sold for its cost amount. n Subsequent income received by a spouse on transferred property must be attributed back to the original owner. These attribution rules do not apply if the transfer was made in a manner equivalent to an arm’s length transfer. n Subsequent income, except capital gains and losses, received by a child under 18 on transferred property must be attributed back to the original owner. n These attribution rules also apply to other minors such as nieces and nephews.