1CHAPTER TEN - COMPUTATION OF TAXABLE INCOME AND INCOME TAXES
PAYABLE FOR INDIVIDUALS (Div C, D & E; S110-111, S114-116 & S117-127)
S2(2) - TAXABLE INCOME = DIVISION B INCOME - DIVISION C DEDUCTIONS
DIVISION C DEDUCTIONS:
50% Deduction related to Employee Stock Options: Previouslydiscussed in Chapter 3, this
deduction is available in the same year as the related employment income inclusion provided the
required conditions are satisfied.
S110(1)(d) applicable to all employee stock options allows a deduction provided the FMV of the
stock was not greater than the option price at the grant date.
S110(1)(d.1) applicable to employee stock options of Canadian Controlled Private Corporations
allows a deduction provided the shares are held for a minimum2 years after exercise of the
option. (Only available if S110(1)(d) is not available.)
Deductions for certain amounts included in DIV B Income, but not intended to be taxable to the
recipient. The purpose is to increase Div B Income of the recipient for these amounts and thus
potentiallyrestrict various refundable and non-refundable tax credits available to the individual or
a supporting person. These credits are reduced or eliminated as Div B Income increases.
Examples of income which qualifies for this treatment are OAS Guaranteed Income Supplement,
Social Assistance (welfare), WSIB benefits, amounts exempted by virtue of a tax treaty with
A deduction equal to the S80.4 interest benefit included in employment income related to a
maximumoriginal low-interest “home relocation” loan of $25,000. Such a loan must be used for
the purchase of an owner-occupied home in conjunction with an “eligible” relocation. The
deduction is available for a maximum 5 year period.
Losses not available in the year incurred due to DIV B restrictions, may be carried over to other
years and deducted in DIV C according to rules contained in S111. The S111 rules contain
“timing” restrictions and “income streaming” restrictions which can be summarized as follows:
Non-Capital Losses - carry back up to 3 tax years, and forward up to 7 tax years (10 years for
losses arising after March 23, 2004 and before Jan 1, 2006; 20 years for losses arising after Dec
31, 2005); deductible against any type of income.
Net Capital Losses - carry back up to 3 tax years, and forward indefinitely; deductible only against
net taxable capital gains included in DIV B of the year applied.
(Net capital losses carried over represent allowable capital losses. Ie after inclusion rate for the
year of loss. When applying these net capital losses to other years, it is the inclusion rate for the
year of claim which must be used. This may require an adjustment of the carryover amount which
adds to the complexity of calculations. See page 554)
Farm Losses - carry back up to 3 tax years, and forward up to 10 tax years (20 years for losses
arising after 2005); deductible against any type of income.
Restricted Farm Losses - (any portion of farm losses restricted by S31) carry back up to 3 tax
years, and forward up to 10 tax years (20 years for losses arising after 2005); deductible against
farm income only.
Capital Gains Deduction - Canadian resident individuals can claima Division C deduction under
S110.6 to offset taxable capital gains included in DIV B income with respect to the sale of i)
shares in “qualified Small Business Corporation” stocks ii) “qualified farm property” and iii) “qualified fishing property”. The lifetime maximumdeduction
available to any individual resident is $375,000, thus sheltering total eligible capital gains of
$750,000 (or taxable capital gains of $375,000). The history of this provision from 1985 to
present is discussed brieflyin the text. It should be pointed out that individuals may have made an
election back in 1994 which could still affect the computation of taxable capital gains (and taxable
income) on dispositions occurring today.
PART YEAR- AND NON- RESIDENTS:
Part Year Residents (per S114) compute their Div B income for the part year resident in the
normal manner. Div C deductions reasonably applicable to the period of part year residence are
Non-residents with Canadian source income from employment or carrying on business, or the sale
of Taxable Canadian Property compute their taxable income under Div D (S115-116). Div C
deductions appropriate to the Canadian source income may be claimed. Non-residents are also
subject to Canadian withholding tax on Canadian source income from property (interest,
dividends, rents, royalties) and certain other income (alimony, pensions, RRSPs, etc.). These
latter incomes subject to withholding are not usuallyreported on a Canadian income tax return.
COMPUTATION OF TAXES PAYABLE FOR INDIVIDUALS:
Exhibit 10-2 in the text provides an excellent “framework” for computing taxes payable for an
individual, and indeed the balance owing or refund due for a tax year, in much the same way that
S3 provides a “framework” for computing DIV B income.
Since Quebec is the only province requiring the filing of a separate provincial tax return by
individuals, the completion of the federal tax return also requires the completion of the provincial
tax elements of a “combined” return for all other provinces and territories. Allthese other
provinces and territories have now adopted a TONI (tax on income) structure, which means that
although they currently employ the same taxable income definition used by the federal
government, they each have their own tax rates, tax credit bases and refundable tax credits. As
such, a second set of computations is required for provincial purposes in computing taxes
payable. The various tax brackets and rates, tax credit bases, etc can be found at the front of the
CCH ITA. For purposes of this course we willadopt the assumptions laid out by the authors on
page 563 with respect to provincial tax computations.
Federal Tax (prior to federal tax credits)- Although in recent history we have had as manyas 10
federal tax brackets and as few as 3, we currently have 4 such “brackets”. The federal and
provincial tax on individuals is progressive, meaning at certain levels of taxable income the rate of
tax increases. See Exhibit 10-1 in the text or the front pages of the CCH ACT. The federal tax
bracket thresholds and many tax credit bases are indexed to the annual increase in the CPI for the
fiscal year ending September 30 of the applicable calendar tax year.
Tax Credits are referred to as refundable or non-refundable. Non-refundable tax credits claimed in
excess of the Federal Tax computed above, willnot generate a refund. Some non-refundable
credits may alternativelybe claimed by a spouse (eg. child, adoption, children’s fitness, first-time
home buyers, medical expenses, charitable donations), while some may be transferred to spouses
or other taxpayers at the option of the qualifying taxpayer. (eg. tuition, education & textbook,
public transit, age, pension, disability) In most cases, these non-refundable tax credits cannot be carried forward and therefore are of no value to the taxpayer, or transferee, once taxes payable
are reduced to NIL. Some specific expenditures giving rise to non-refundable tax credits can
however, be carried forward within limits, if not claimed in the current year. (eg. charitable
donations – 5yrs, medical expenses – 1 yr, tuition, education & textbook amounts - indefinitely,
qualifying student loan interest – 5 yrs)
Refundable tax credits on the other hand, willgenerate a refund if cl