CHAPTER 10:

Individuals: Determination
of Taxable Income and
Taxes Payable

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

Individuals: Determination of Taxable

Income and Taxes Payable
I. Determination of Taxable Income
II. Loss Carry-Overs
III. Loss Utilization Impact on Decision
Making
IV. The Capital Gain Deduction
V. Calculation of Tax for Individuals
VI. Special Adjustments to the Tax Calculation
VII. Final Returns of Deceased Taxpayers

I.

Determination of Taxable Income

Net income for tax purposes must be converted to taxable

income.
Taxable income = Net income Division C deductions
Net income consists of the aggregation of the five sources
of income (Chapters 4 9)
Deductions are grouped in Division C of the Income Tax
Act

I.

Determination of Taxable Income

Most important reductions are:

Loss carryover provisions
Lifetime capital gain deduction
Stock options (Chapter 4)

Taxable Income Formula - revisited

Net income for tax purposes:
a) Employment Income
Business Income
Property Income
Other items
Plus
b) Net taxable capital gains
Less
c) Other items of deductions
Less
d) Aggregate of losses from employment,
business, property and ABILS
= Net Income for tax purposes
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Taxable Income Formula

Net income for tax purposes
XXX
Less
2. Special Reductions:
a) Stock options deduction
(XXX)
b) Home relocation loan deduction
(XXX)
d) Social Assistance, workers compensation
and amounts exempt by treaty
(XXX)
e) Losses not utilized in other years
(XXX)
e) Capital gain deduction
(XXX)
= Taxable Income

II. Loss Carry-Overs

Losses incurred in a particular year can be offset against
other sources of income.
as part of the net income calculation.

Capital losses deductible only to extent of capital gains

realized in the year
Losses incurred in a year are available for carry-over to
other years
Such carry-overs have limited application

A. Net Capital Losses

Allowable capital losses incurred in current year but cannot
be utilized,
can be carried back three years and
forward indefinitely
only deductible against capital gains

Exception upon the death,

unused losses may be deducted against any type of income
earned in the year of death or in the preceding year

B. Non-Capital Losses
Unused business, property and employment losses and
ABILs
can be carried back three years and
forward 20 years
Deducted in arriving at taxable income
used against any source of income

Allowable Business Investment Losses

(ABILs)
Special Treatment:
Only carried forward ten-years.

ABIL unused after ten-years:

reclassified as a net capital loss and
can be carried forward indefinitely
to be used only against future capital gains.

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C. Farm Losses and Restricted Farm Losses

Farm losses - chief source of income is farming or
fishing.
Farm losses are treated the same as business losses.

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C. Farm Losses and Restricted Farm Losses

Restricted farm losses - farming is not primary source
of income.
Max deduction in current year- $17,500
$2,500 plus
x next $30,000

Unused losses - classified as restricted farm losses and

can be:
carried back three years and
forward twenty years
only deducted against farming losses.

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III. Loss Utilization Impact on Decision

Making
Create returns on investments by delaying
recognition of income for tax purposes
Similarly, the sooner losses are utilized, the sooner
cash flow increases due to reduced taxes
Losses must be utilized against sources of income
and
Within a specified time period

Taxpayer must consider method potential losses

could be used if an investment results in a loss.

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A. Forms of Business Organization

Organizational structure chosen has an influence on loss
utilization.
Proprietorship
Not a taxable entity
Profits or losses incurred belong to the individual
proprietor
Losses can be offset against owners other income
sources in the same year, or
Carried over to other years and against
all sources of income

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A. Forms of Business Organization

Corporate structure the individual and corporation are two
separate entities.
Business losses of the corporation can only be offset
against corporations own income
Losses must be carried over to years in which
corporation generates income
Diminishes the opportunity to use the losses as
quickly as possible

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A. Forms of Business Organization

Consideration should be given to:
Risk of business failure
Losses would remain in the corporation and not be available to
the shareholder
Increased risk that losses may expire
Restricted carry-over period
Shareholder would recognize the business loss when shares
disposed of at a loss
Loss would be capital rather than business
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A. Forms of Business Organization

Partnership structure
Like a proprietorship, is not a taxable entity
Losses are allocated to individual partners
Can immediately offset against individuals other
sources of income or carried over to other years

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B. Preserving Tax Losses

Risk of loss expiration can be minimized with
decisions that create taxable income
Defer expenses for tax purposes, where possible
Realized accrued gains sooner rather than later

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B. Preserving Tax Losses

Reducing expenses:
Expenses that can be claimed at a time that is at the
discretion of the taxpayer:
Capital cost allowance
Reserve for accounts receivable

Creating income:
Trigger disposition of assets or investments that have
appreciated in value
If do not wish to actually dispose of the asset, sell to a spouse
or a corporation owned by the individual.
Retain use of asset through a sale-leaseback arrangement

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C. Future Investment Strategies

Existence of loss carry-overs can change investment
strategies
Especially when capital losses exist can only be offset
against future capital gains

May change the return on investment

Re-examine strategies relating to investment and
business-asset replacement decisions when loss carryovers are available

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IV. The Capital Gain Deduction

Final step in arriving at taxable income of an individual is
to apply the capital gain deduction.
Lifetime Capital Gain Deduction available for
1. Qualified small business corporation share
Deduction is one-half of $824,176 (2016)

2. Qualified farm property and fishing property

Deduction is one-half of $1,000,000

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IV. The Capital Gain Deduction

A qualified small business corporation must be a SBC
at the time the shares are sold:
a private corporation that is Canadian-controlled and
that uses all or substantially all of its assets (at least 90%) to
conduct an active business.

Additionally:
Shares must not have been owned by another non-related
person in last 24 months, and
During that time, 50% of the FMV of assets used in active
business
The deduction is discretionary
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IV. The Capital Gain Deduction

Ability to claim is limited by two items:
1.Capital losses incurred (including ABILs)
only to extent that lifetime capital gains exceed capital
losses.

2.Accumulated investment losses (CNIL)

Capital gains deduction available is reduced by the total
CNIL balance.
CNIL does not eliminate or reduce total available capital
gain exemption;
it simply delays its use until a later year.

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V. Calculation of Tax for Individuals

Income tax is imposed by the federal and
provincial governments:
Federal tax - % of taxable income
Provincial tax - % of taxable income

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A. Overall Tax Calculation

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B. Federal Tax
Progressively higher tax rates to higher levels of annual
income.
Each rate of tax is applied separately to the portion of the
individuals income that falls within the applicable range.

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B. Federal Tax
Taxable Income Range (2016)

Rate

Up to $45,282

15%

$45,283 to 90,563

20.5%

$90,564 to 140,388

26%

$140,389 - $200,000

29%

Over $200,000

33%
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B. Federal Tax
Individual has taxable income of $100,000 calculates
federal tax of:
15% x $45,282 $ 6,792
20.5% x $45,281
9,283
26% x $9,437 2,454
Total federal tax $ 18,529

Effective tax rate = 18.5% (18,529 / 100,000)

Marginal rate is 26% until income of $140,288 is
reated
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C. Personal Federal Tax Credits

Tax credit:
Specific reduction of the tax otherwise payable
Value equal to its stated amount
Benefit all taxpayers equally
Tax deduction:
Reduces taxable income
Amount of tax savings depends on the marginal tax
bracket
Provide a greater benefit to those in higher tax brackets
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C. Personal Federal Tax Credits

Basic
15% x $11,474= $1,721

Spouse or equivalent to spouse

15% x $11,474= $1,721
Reduced by 15% of the spouses net income.

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C. Personal Federal Tax Credits

Infirm dependants
Tax credit of $1,018 (equivalent to $6,788 of taxable income)
reduced by 15% of dependants net income in excess of
$6,720.
Available for individuals supporting a
related person
At least 18 years of age and
dependent by reason of physical or mental infirmity
Not necessary for dependant to be living with supporting
individual.
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C. Personal Federal Tax Credits

Caregiver
Provide in-home care for:
a parent or grandparent who is 65 or older, or
dependent relative who is infirm
$700 ($4,667 x 15%) tax credit against federal tax.
Reduced by 15% of the dependents income in excess of
$15,940.
Eliminated if dependants income >$20,607

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C. Personal Federal Tax Credits

Family Caregiver
Following amounts are increased by $2,121 if dependant is infirm:
Spouse or Equivalent to spouse ($11,474 to $13,595)
Child under 18 ($2,121)
Caregiver amount ($4,667 to $6,788)

Credit is 15% of the increased amounts.

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C. Personal Federal Tax Credits

Age Amount - 65 years of age or older
15% x $7,125 = $1,069
$7,125 reduced by 15% of net income > $35,927.
If unused can be transferred to a spouse.

Pension
15% on first $2,000
qualified pension income received in a year.
Spouses who split pension income can double up on this credit

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C. Personal Federal Tax Credits

Employment Credit
Employed individuals
Designed to cover expenses incurred by employees
15% x $1,161= $174

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C. Personal Federal Tax Credits

Adoption Expenses
15% of expenses to maximum of $15,453

Public Transit Pass

15% of monthly cost for unlimited travel
Local busses, streetcar, subway, commuter train and ferries

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C. Personal Federal Tax Credits

Childrens arts tax credit
15% of fees pair up to $500
Artistic, cultural, recreational or development activities.

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C. Personal Federal Tax Credits

First-time home buyers credit
Maximum Credit = 15% x $5,000.
To claim cannot have owned a home in the past
Most types of housing located in Canada qualify

Volunteer firefighters
Maximum Credit = $450 (15% x $3,000).
Perform a minimum of 200 hours of volunteer hours

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C. Personal Federal Tax Credits

Charitable donations
15% x first $200 of annual contributions and
29% x the remainder.
If individuals income exceeds $200,000, credit of 33% is
available
Annual donations cannot exceed 75% net income
Unused Donations can be carried forward for 5 years

Additional tax credit of 25% for first time donor:

40% (15% + 25%) on first $200
54% (29% + 25%) on remaining
Available until the end of 2017.
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C. Personal Federal Tax Credits

Medical expenses
15% of qualified medical expenses that exceed the lesser
of:
3% of taxpayers net income for the year, or
$2,237

Available for medical expenses paid on behalf of taxpayer,

spouse or children under 18
Include amounts paid in any 12-month period ending in the year

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C. Personal Federal Tax Credits

Disability - a severe & prolonged mental or physical
impairment
15% x 8001 = $1,200
Can be transferred to spouse if individual cannot use

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C. Personal Federal Tax Credits

Tuition fees
attend a university, college, or other certified post-secondary
institution
15% x tuition fees paid.

Education amount and textbook credit (eliminated effective

January 1, 2017)
Full-time students 15% x $465 x each month of full-time
attendance.
Part-time education 15% x $140 x each month of part-time
attendance.

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Tuition and Education credits

The student may not have sufficient income to utilize the
above credits.
The unused portion is transferable - up $750 (15% x
$5,000) annually to a spouse, parent, or grandparent.
Less any credits used by student.

Alternatively, the student may keep the unused credit and

carry it forward indefinitely.

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Transferrable credits
Unused credits for the following are transferrable to a
spouse:
Age
Pension
Disability
Tuition
Education and textbooks

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C. Personal Federal Tax Credits

Student loan interest
Entitled to deduct 15% x interest paid on student loans.
Only on interest on loans under:
Canada Student Loan Program and
Provincial student loan programs.

The credit may be claimed in the year of interest payment or in

any of the following five years.

CPP and EI
15% of maximum allowable CPP and EI contributions

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D. Dividend Tax Credit

Dividend tax credit Eligible Corporations
Equal to 15% (6/11 x 38%) of the taxable amount of dividends
received from Canadian corporations.

Dividend tax credit Non-Eligible Corporations

For 2016: Equal to 10.5% (21/29 x 17%) of the taxable amount
of dividends received from Canadian corporations.
Rate will change annually from 2016 through to 2019

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D. Dividend Tax Credit

Eligible Dividends:
Taxable dividends from Canadian public corporations
Taxable dividends from Canadian private Corporations not
Canadian controlled
Taxable dividends from CCPC from income not eligible for SBD

Non-eligible Dividends:
Taxable dividends from CCPC whose income is active
business income eligible for SBD
Taxable dividends from CCPC earning investment income or
non-eligible dividends from another corporation

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E. Other Federal Tax Credits

Foreign Tax Credit:
Income earned in a foreign country maybe be subject to tax on
that income in both:
Foreign country, and
Canada
Canadian taxes can be reduced through the foreign tax credit
Foreign business income credit
Foreign investment income credit
Limited to 15% of foreign income earned; unused amount can be
deducted from income
Unused credits from foreign business income can be carried
back three years and forward 10 years.
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E. Other Federal Tax Credits

Political contributions
Based on a graduated
scale.
Annual credit is:

Investment tax credits

Labour-sponsored fund
credit

75% of the first $400,

50% of the next $350,
and
33 1/3% of contributions
over $750.

Max. of $650 annually

These credits are all non-refundable tax credits

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E. Other Federal Tax Credits

Non-refundable tax credits
Can only be used to the extent of taxes otherwise
payable

Refundable tax credits

Paid to the taxpayer when the credit exceeds tax
otherwise payable
Examples: Canada Child Tax Benefit, GST/HST credit,
Working Income Tax Benefit, Refundable Medical
Expense Supplement and Childrens Fitness Tax Credit
(eliminated in 2017)
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F. Provincial Taxes
Determine their primary tax by applying specified tax
rates to the federal taxable income.
Rates vary from province to province.
Specify their own tax credits.
Individuals are subject to tax based on the province they
live in on December 31 of the taxation year.

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VI. Special Adjustments to the Tax

Calculation

Special rules apply that increase the amount of tax

payable beyond the normal amount.
Two basic areas where the normal tax calculation may
be adjusted to a higher amount:
1. The Alternative Minimum Tax (AMT)
2. Special Tax on Old Age Security Benefits

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A. The Alternative Minimum Tax

Designed to impose a minimum level of tax
When normal tax has been reduced by tax preference
items.
Example non-taxable portion of capital gains

Additional tax is not a permanent tax;

AMT paid in one year can reduce normal tax in following year.
can be carried forward for up to seven years

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Tax Preference Items

Taxable income is increased by the following:
30% of net capital gains earned.
Deductions claimed from certain specified tax shelter
investments, to the extent that any of these create losses.
3/5 of employee stock option deduction.
Other items see detailed list in Chapter 10.

Taxable income is reduced by the following:

The gross-up on Canadian dividends.
60% of ABILs deducted
A basic exemption of $40,000.

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A. The Alternative Minimum Tax

Entire income is subject to a federal tax rate of 15%.
Then deduct personal non-refundable tax credits.

If revised federal tax > the normal federal tax, you have
AMT.
Provincial taxes are then calculated on the revised
amount.

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B. Special Tax on Old Age Security Benefits

(Clawback)
Clawback is a special tax imposed on individuals
who:
received OAS benefits and
Earn > $73,756 in net income for tax purposes.

The special tax is equal to 15% of net income in excess

of $73,756
up to a maximum of the OAS payments.

Since all OAS benefits are included in income, the

Clawback is deducted in arriving at net income.

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VII. Final Returns of Deceased Taxpayer

Special rules apply
A. Taxable Income and Losses

Unused capital losses can be used against any income

source in year of death or previous year.
Restricted by any capital gains deducted in prior years

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VII. Final Returns of Deceased Taxpayer

B. Tax Returns and the Use of Tax Credits:
Final return required

Include all income accrued to date of death

All non-refundable tax credits can be claimed in full

May file up to 3 additional returns in addition to final

tax return.
Rights and Things return:

Amounts not paid but relating to period prior to date of death

i.e. employment earnings owed but not paid, dividends
declared but not paid.

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