Chapter 10

Computation of Taxable Income and Taxes Payable for Individuals

1

Calculation of Taxable Income

Division B

Subsection 3(1)Net Income for Tax Purposes

Division C deductions

Sections 110–114.2

Subsections 2(1), 2(2)

Division E & E.1

Sections 117–127.55Tax Liability

Taxable Income

2

Division C Deductions

ITA Reference Division C Deductions

110(1)(d) Employee stock option deduction

110(1)(f) Social assistance receipts

110(1)(j) Home relocation loan

111(1)(a) Non-capital loss carryovers

111(1)(b) Net capital loss carryovers

111(8) Farm loss

110.6 Capital gains deduction

3

Stock Option Deduction

Division C deduction = 50% of benefit

Non-CCPC CCPC

If: FMV at date option granted ≤ exercise price

If: FMV at date option granted ≤ exercise price

Or

Shares held ≥ 2 years from date of purchase (except for deemed disposition at death)

Timing of deduction

PurchaseDisposition or deemed

disposition

4

Deduction for Certain Receipts

• Payments included in Division B but not intended to be taxed are deducted under Div. C– Guaranteed Income Supplement,

– Social assistance payments,

– Workers’ compensation, and

– Amounts that are exempt from tax by virtue of a tax treaty.

5

Home Relocation Loan

“Loan used to acquire a home which is at least 40 km closer to an employee’s new work location than his/her older residence.”

• Deduction is least of:a) Interest on the whole loan as computed using the “lesser of” rule

minus interest paid during that year and 30 days thereafter;

b) Interest on $25,000 loan using the “lesser of” rule, but restricted to a max. of 5 years; and

c) Total benefits from all low-interest or no-interest loans.

6

Loss Carryovers

• Non-capital loss carryover– If current year’s loss from non-capital sources exceeds

income from all other sources in the current year

Carry Back

Carry Forward

For taxation years ending before March 23, 2004

3 7

For taxation years ending after March 23, 2004 and before 2006

3 10

For taxation years ending 2006 and later 3 20

7

Loss Carryovers

• Net Capital Loss Carryovers– Excess of allowable capital losses over taxable capital

gains for that particular year plus ABILs not absorbed in the 10-year carryforward period

– Carried back three years, forward indefinitely

Years Inclusion Rate

1972–1987 ½

1988, 1989 ⅔

1990–Feb. 27, 200 ¾

Feb. 28, 2000–Oct. 17, 2000 ⅔

After Oct. 17, 2000 ½ 8

Farm Loss

• Farming as a chief source of income

• Sideline farming business

• Hobby farm loss

9

Capital Gain Deduction

• $750,000 of capital gains can be sheltered on qualified small business corporation shares, qualified farm property, or qualified fishing property.

• Note: The March 21, 2013 federal Budget proposes to increase the capital gains exemption limit to $800,000 starting in 2014. The exemption will be indexed for 2015 and future taxation years.

10

Ordering of Division C Deductions

As outlined in section 111.1, deductions under Div. C are deducted in the following order:

Sec. 110 Other deductions

Sec. 110.2 Lump-sum payments

Sec. 111 Loss carryovers (oldest should be applied first)

Sec. 110.6 Capital gains deduction

Sec. 110.7 Residing in prescribed zone

11

Taxable Income of Non-Residents

• Part-year residence– Entitled to Division C deductions reasonably

applicable to the period of part-year residence

• Non-residents– Pay tax on their “taxable income earned in

Canada”– Division C deductions may be claimed as

appropriate to Canadian-source income

12

Computation of Tax for Individuals

2013 Federal Income Tax Brackets

Taxable Income Tax

$43,561 15%

In excess of $43,561 $6,534 + 22% on next $43,562

In excess of $87,123 $16,118 + 26% on next $47,931

In excess of $135,054 $28,580 + 29% on remainder

13

Summary of Income Tax CalculationTotal federal income tax on taxable income $xxx

Subtract: Total non-refundable tax credits $xxx

Federal dividend tax credit xxx xxx

Basic Federal Tax $xxx

Subtract: Federal foreign tax credit xxx

Federal tax $xxx

Subtract: Federal political contributions tax credit

$xxx

Other federal tax credits xxx xxx

Net federal tax $xxx

Add: Tax on Old Age Security Benefits xxx

Total federal tax $xxx

Add: Provincial tax $xxx

Provincial surtax xxx xxx

Total Payable $xxx14

Summary of Income Tax Calculation

Total payable $xxx

Subtract: Total income tax deducted at source $xxx

Federal refundable tax credits xxx

Tax paid by instalments xxx

Provincial refundable tax credits xxx xxx

Balance payable or refundable $xxx

15

Types of Non-Refundable Tax Credits• Basic personal amount

• Spousal amount

• Equivalent-to-spouse

• Infirm dependent children

• Child amount

• Additional personal amounts

• Caregiver amount

• Age amount

• Canada employment amount

• Adoption expense amount

• Public transit tax credit

• Children’s fitness amount

• Children’s arts tax credit

• First-time home buyer’s tax credit

• Volunteer firefighters tax credit

• CPP or QPP contributions

• EI premiums

• Pension income amount

• Mental/physical impairment amount

• Disability amount transferred from a dependant other than spouse

• Tuition, education, and textbooks amounts

• Tuition, education, and textbooks amounts transferred

• Amounts transferred from spouse

• Medical expense

• Charitable gifts (donations)

• First-time donor’s super credit

• Interest paid on student loans

• Dividend tax credit

16

Section 118 Tax Credits

A x B

Where: A is the lowest % rate of individual tax (i.e., 15% for 2013), and

B is the aggregate of the following tax credit bases:

(a) married or common-law status;

(b) wholly dependent person;

(b.1) child amount;

(c) single status;

(c.1) in-home care of relative;

(d) infirm dependants; and

(e) additional amount (dependant).

17

Non-Refundable Tax Credits

• Basic personal tax credit (single status)– Tax credit base (2013) - $11,038

• Married or common-law partnership credit– Tax credit base (2013) - $11,038 less spouse’s Div. B

income

18

Non-Refundable Tax Credits

• Equivalent-to-married status for wholly dependent person credit– $11,038 less Div. B income of dependant

– Dependant must: • Live with the taxpayer and be wholly dependent for support from

taxpayer• Be related to the taxpayer by blood, marriage, or adoption• Be under 18 years of age or be mental or physically infirm unless

dependant is parent or grandparent of taxpayer• Not be claimed as equivalent-to-married by another taxpayer• Be resident of Canada

– Taxpayer cannot be entitled to married credit

– Taxpayer can claim only one credit each year19

Non-Refundable Tax Credits

• Child amount– $2,234 x 15% = $335 for each child under 18

• Caregiver credit for in-home care of relative– 15% x [$4,490 – (Dependent’s Div. B - $15,334)]

– For relative who is dependent due to mental or physical infirmity or a parent/grandparent who has reached age of 65

– If equivalent-to-spouse claimed for a dependant, caregiver cannot be claimed

– Only one caregiver credit allowed each year

20

Non-Refundable Tax Credits

• Infirm dependant credit– 15% x [$6,530 – (Dependant’s Div B - $6,548)]

– Dependant must be:• A child, grandchild, parent, grandparent, brother/sister, uncle,

aunt, niece, or nephew of taxpayer or taxpayer’s spouse

• > 18 years of age

• Dependent on taxpayer due to mental/physical infirmity

21

Non-Refundable Tax Credits

• Age credit– 15% x $6,854

– Taxpayer must be at least 65

• Pension income amount– 15% of the lesser of:

1. $2,000, and

2. The “pension income” (or “qualified pension income” if taxpayer under 65)

22

Non-Refundable Tax Credit

• Canada employment credit– 15% x lesser of:

• Individual’s employment income for the year, and

• $1,117.

23

Non-Refundable Tax Credits• Adoption Expense Tax Credit

– 15% × $11,669

• Public Transit Passes Credit• Children’s Fitness Credit

– 15% × (up to $500) for children under 16

• Children’s Arts Tax Credit– 15% ×(up to $500) for children under 16

• First-Time Home Buyer’s Credit and Disability Home Purchase Credit– 15% × $5,000

• Volunteer Firefighters Tax Credit– 15% × $3,000

24

Charitable Gifts Credit

• 15% of the first $200 and 29% of gifts in excess of $200

• Eligible donations limited to 75% of Div. B income

• Five-year carryforward

25

First-time donor’s super credit

• Proposed in March 21, 2013 Budget– An additional 25% non-refundable credit for

first-time donors on up to $1,000 of donations as a supplement to the regular charitable donation tax credit

– Subject to a number of conditions

26

Medical Expense Credit

A x [(B – C) + D]Where:

A is 15%

B is medical expenses for individual, spouse and children < 18

C is the lesser of: • $2,152 (2013), and• 3% of individual’s net income

D is the lesser of: • $10,000, and• E – F

where:

E is the total medical expenses incurred by taxpayer on behalf of any other dependant, and

F is the lesser of:• $2,152 (2013), and• 3% of other dependant’s net income 27

Medical Expense Credit

• Qualifying expenses listed in ITA

• Expenses can be incurred in any 12-month period ending in the year

28

Disability Tax Credit

• 15% x $7,697 for 2013• For taxpayers who have “one or more severe and

prolonged impairments in physical or mental functions”

• Must be certified by medical doctor• Supplement ($4,490) for disabled child under 18• Transfer available

29

Tuition, Education, and Textbook Credits

• Tuition Fees– 15% × eligible tuition fees

• Education Credit– Full-time: 15% × $400 × number of qualifying months

– Part-time: 15% × $120 × number of qualifying months

• Textbook Credit– Full-time: $65 × number of qualifying months

– Part-time: $20 × number of qualifying months

30

Tuition, Education, and Textbook Credits

• Indefinite carryforward• Transfer to spouse/common-law partner and

parent/grandparent– Must designate in writing amount transferred

– Amount transferred is lesser of:a) Lesser of:

a) $750, and

b) Students tuition credit and education credit for the year

Less student’s Part I tax payable after deducting certain credits

b) Amount designated by student to transfer.

31

Credit for EI and CPP

• 15% credit of:– EI premiums payable by individual– CPP/QPP contributions by individual

32

Transfer of Unused Credits to Spouse or Common-Law Partner

• Transferable credits include:– Tuition, education, and textbook credits– Age amount– Pension income amount– Mental or physical impairment credit– Child amount

33

Dividend Tax Credit

• Non-refundable tax credit available to individual at either:– 2/3 of the gross-up on dividends paid before 2014 by CCPC from

income subject to tax at the low corporate tax rate applicable to ABI and AII;

– 13/18 of the gross-up applies to dividends paid after 2013 by a CCPC from income subject to tax at the low rate applicable to ABI and AII; and

– 6/11 of the gross-up applies to dividends paid out of income taxed at the general corporate rate by:

• A public corporation resident in Canada, and

• A CCPC.

34

Dividend Tax CreditAlternative Calculations

Source of Dividend

CCPC, on income taxed at

the low rate(before 2014)

CCPC, on income taxed at

the low rate(after 2013)

Canadian-resident public corporation or

other on income taxed at general

rate (2010)

Fraction of gross-up

2/3 13/18 6/11

Fraction of dividend paid

16 2/3% 13% 20.7%

Fraction of grossed up dividend

13 1/3% 11% (rounded) 15% (rounded)

35

Dividend Tax Credit

• Provincial Rates (for purposes of textbook)– 1/3 where the 25% gross-up applies for

dividends before 2014,– 5/18 where the 18% gross-up applies (for

dividends paid after 2013), and– 5/11 where the 38% gross-up applies

36

Election to Transfer Dividends to Spouse

• Subsection 82(3) Election– If spouse/common-law partner cannot use the dividend

tax credit due to low income

– Only available if married personal tax credit claimed by higher income spouse is increased or created by transferring the dividend income in this way

– If election made, taxpayer must include grossed-up dividend transferred from spouse but may claim the dividend tax credit

37

Credits for Part-Year Residents

• Tax credits prorated for number of days individual is resident:– Basic personal amount, married amount, equivalent-to-married

amount, dependant amount, and caregiver amount;

– Age amount;

– Disability amount, either for the taxpayer or transferred from a dependant;

– Unused credits transferred from a spouse; and

– Unused tuition and education amounts transferred from a child or grandchild.

• All other personal amounts may be fully claimed if they relate to the period of residence.

38

Credits for Non-Residents

• Tax credits for the following amounts may be deducted:– Charitable donations– Impairment amount for the taxpayer, but not for

a dependant;– Tuition credit; and– EI, CPP (or QPP) credits.

39

Ordering of Credits

• Section 118.92 outlines ordering rule for computing basic federal tax payable

40

Income Not Earned in a Province

• Surtax of 48% imposed on federal tax of an individual applicable proportionally to income for the year not earned in a province.

41

Credit for Employment Outside Canada

• Available for employee who is employed outside of Canada temporarily but will be phased out over 4 years starting in 2013

• Tax credit based on the proportion of tax otherwise payable.

• Fraction is lesser of:– $80,000, prorated on a daily basis, and

– 80% of the employment income attributed to those specified duties, to his/her income;

Reduced by:

– Certain deductions provided in Division C

42

Refundable Tax Credits

• Refundable GST/HST Credit

• Refundable Medical Expense Supplement

• Refundable Canada Child Tax Benefit

• Working Income Tax Benefit (WITB)

43

Foreign Tax Credits

• Resident of Canada subject to tax on worldwide income

• To prevent double taxation on foreign income (in foreign country and in Canada), foreign tax credit provided

44

Foreign Tax Credit

• Foreign non-business tax credit is lesser of:a) Non-business income tax paid to a foreign country,

and

b)

45

Net non-business foreign incomeIncluded under Division B

Total income included underDivision B net of certain

adjustments

Tax for the year otherwise payable under Part I×

Foreign Tax Credit

• Foreign business tax credit is lesser of:a) Business income tax paid to a foreign country, and

b)

– Any business income tax paid but not deducted is available as an “unused foreign tax credit” to be carried back 3 years and forward 10 years

46

Net business foreign incomeincluded under Division B

Total income included underDivision B net of certain

adjustments

Tax for the year otherwise payable under Part I

×

Federal Political Contribution Tax Credit

• Available on contributions to– A registered federal political party, or– A candidate for election to the House of

Commons

• Maximum credit: $650 (reached with a contribution of $1,275 or more)

47

Tax on Old Age Security Benefits

• Part I.2 tax– Results in repayment of federal Old Age

Security benefits– Computed as the lesser of:

48

(a) Old Age Security benefits $xxx

(b) Income under Div. B without par. 60(w) deduction $ xxx

Less: 70,954

Excess, if any $ xxx

15% of excess, if any $ xxx

Tax Reduction on Retroactive Lump-Sum Payments

• Reduction of tax available on the following lump-sum payments:– Income from an office/employment/income received

because of termination of office/employment;

– Superannuation/pension benefits;

– Spouse or a child support payments; and

– EI and other benefits that may be prescribed by regulations.

49

Minimum Tax• To prevent some high-income individuals from

taking advantage of tax incentives to shelter virtually all of their income.

• Calculated as:

A × (B – C) – D

Where: A is 15%

B is adjusted taxable income

C is the basic exemption ($40,000)

D is the basic minimum tax credit

50

Minimum Tax

• Adjusted taxable income is taxable income but– Add:

• Portion of loss from certified film/videotape properties

• Losses on resource properties

• 30% of excess of capital gains over capital losses for the year

• 3/5 of employee stock option deductions

• Home relocation loan deduction and

• Losses of investments from tax shelters

– Deduct:• Gross-up of Canadian dividends

• Non-deductible fraction of ABIL claimed in the year

51

Minimum Tax

• Basic Exemption: $40,000• Basic minimum tax credit

– Sum of tax credits (sec. 118) that may be deducted in computing tax payable under Part I of Act

– Does not include dividend tax credit or political donation credit

– Allowed a special foreign tax credit

• Minimum carryforward – seven years

52