FIP503 Textbook Revised

Advocis Core
Curriculum Program
Course 919 | Edition 2020
TAXATION
Module 9: Taxation
Advocis Core Curriculum Program for

CFP® and QAFPTM Certification
Important disclaimer
This publication is designed to provide accurate and authoritative
information about the subjects covered. While every precaution has been
taken in the preparation of this material, the authors and Advocis assume
no liability for damages resulting from the use of the information contained
in this publication. Advocis is not engaged in rendering legal, accounting,
or other professional advice. If legal, accounting, or other professional
advice is required, the services of an appropriate professional should be
sought.
About the Advocis Core Curriculum Program

Advocis is a proud founding member of FP Canada™ (formerly known as
Financial Planning Standards Council), which was established in November
1995 with the core mission of “promoting and enforcing professional
standards in financial planning through the Certified Financial Planner®
certification, and raising Canadians’ awareness of the importance of
financial planning.” Advocis continues to support and uphold this
commitment — to promote competency and ethical standards among
financial advisors and planners.
Working with industry experts, Advocis has developed an FP Canada

approved education program leading to both the QAFP and CFP
Certification. The Advocis Core Curriculum Program for QAFP and CFP
Certification is offered through 12 distinct modules, aligned with FP
Canada’s Body of Knowledge. The Advocis Advanced Topics Program for
CFP Certification consists of one course with a final integrative
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Copyright © 2020 The Financial Advisors Association of Canada
Module 9: Taxation
comprehensive exam. By focusing on the most important concepts and

required skills, practitioners are provided with a high degree of education
in the delivery of competent financial planning advice and service.
CFP designation holders are highly regarded for their ability to provide
clients with comprehensive financial planning services. They put clients’
interests first and ensure clients’ financial needs and objectives are being
met through the financial planning process.
About the Certified Financial Planner (CFP) Certification

The CFP Certification is an internationally recognized designation held by
more than 175,000 people in 26 territories around the world. FP Canada, a
member of the Financial Planning Standards Board (FPSB), has licensed
more than 16,500 individuals in Canada.
Qualifying to take FP Canada’s CFP Examination is a demanding process,

yet the professional rewards for successful candidates are significant. On
average, CFP professionals who have achieved this coveted certification
report a substantial increase in gross income and preferred clients in
comparison to non-designation holders.
This Advocis Core Curriculum Program is an accredited qualifying program

of study designed with the CFP Certification requirements in mind. By
successfully completing this program of study, students gain both the
knowledge and confidence needed to succeed in obtaining the designation,
and in building a thriving financial planning practice.
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Module 9: Taxation
Advocis Core Curriculum Program, 2020 Edition
CFP®, Certified Financial Planner® and are trademarks owned by Financial Planning
Standards Board Ltd. (FPSB) and used under license. All other trademarks are those of FP
Canada™.
Copyright © 2020 The Financial Advisors Association of Canada. All rights reserved.
Unauthorized reproduction of any images or content without permission is prohibited.
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Module 9: Taxation
Acknowledgements
First Edition, 2020
Authored by:
James W. Kraft, CPA, CA, MTAX, TEP, CFP, CLU
Deborah Kraft, MTAX, LLM, TEP, CFP, CLU
Legislation in-force, Summer 2019
With past contributions from:
Michael Callahan, B.Sc., CHS, CIM, CFP
Jamie Aldcorn, CPA, CA, CFP, MBA, M.Ed.
Robert Ransom, CLU, ChFC
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Module 9: Taxation
Module Requirements
For more information on the requirements of this module (course outline,
instructions and assessments), please refer to the Syllabus, accessible
from the module homepage of the learning environment.
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Module 9: Taxation
Table of Contents
LEARNING OBJECTIVES .................................................................... 1
INTRODUCTION .............................................................................. 10
Defining taxation ............................................................................ 10
Income tax ..................................................................................... 10
GST, HST and sales tax .................................................................... 11

Excise tax ....................................................................................... 12
Property tax .................................................................................... 12

Impact of taxation on income and consumption ............................. 13
Income taxation structures ............................................................... 13

Evaluating tax rates from multiple perspectives: marginal, average and
effective ......................................................................................... 15
Effective marginal tax rate ................................................................ 19

Factors affecting income taxes ....................................................... 21
Fair market value ............................................................................. 21

Adjusted cost base ........................................................................... 21
Liquidity of assets ............................................................................ 24
RELATIONSHIPS ............................................................................. 25
Definition of spouse ........................................................................ 25
Definition of child ........................................................................... 26

Relationships matter with income tax ............................................ 27
Overview ........................................................................................ 27
Non-arm’s length ............................................................................. 28
Related ........................................................................................... 29
INCOME TAX ADMINISTRATION ..................................................... 32

Residency of a taxpayer ................................................................. 32
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Resident of Canada ......................................................................... 32
Primary factors ................................................................................ 33

Secondary factors ............................................................................ 34
Emigrating ...................................................................................... 35
Immigrating .................................................................................... 36
Part-time resident ............................................................................ 37

Deemed resident ............................................................................. 38
Dual resident ................................................................................... 38
Non-resident ................................................................................... 39
Taxing authority ............................................................................. 40
The federal departments ................................................................... 41

Planning considerations .................................................................... 41
Municipal and regional governments ................................................... 42
Concept of tax planning .................................................................. 42

Overview ........................................................................................ 42
Tax minimization ............................................................................. 43

Timing ............................................................................................ 43
Tax deferral .................................................................................... 43

Tax avoidance and tax evasion .......................................................... 44
General Anti-Avoidance Rule ............................................................. 45
Sources of tax information ............................................................. 46

T-slips ............................................................................................ 46
Other sources of information ............................................................. 46

Self-assessment system ................................................................. 47
Types of taxpayers ......................................................................... 47
Individuals ...................................................................................... 47
Corporations ................................................................................... 48
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Trusts............................................................................................. 48
Requirement to file a tax return ..................................................... 48

Who must file? ................................................................................ 48
Who should file? .............................................................................. 49

Who does not have to file? ................................................................ 50
Tax return filing dates .................................................................... 50

Individual ....................................................................................... 51
Self-employed taxpayer and spouse ................................................... 52
Deceased taxpayer........................................................................... 52
Partner in a partnership .................................................................... 54
Corporation ..................................................................................... 55
Trust .............................................................................................. 55
Assessment and appeals ................................................................ 58
Assessment ..................................................................................... 58
Notice of Assessment ....................................................................... 58
Reassessment ................................................................................. 61
Notice of Objection ........................................................................... 61
Amending a tax return...................................................................... 62

Income tax instalments .................................................................. 62
Requirements .................................................................................. 62
Due dates ....................................................................................... 63

Calculating the instalment amount ..................................................... 63
Alternative minimum tax ................................................................ 64

Interest and Penalties .................................................................... 65
Penalties ......................................................................................... 65
Tax refunds ..................................................................................... 68

Third-party civil penalties .................................................................. 68
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PERSONAL INCOME TAX ................................................................. 70
Introduction ................................................................................... 70
Income tax framework ................................................................... 70
Income tax calculation ................................................................... 72

(I) Calculating total income ............................................................ 77
Employment income ......................................................................... 79

Taxable benefits and allowances ........................................................ 81
Non-taxable benefits ...................................................................... 103
The financial planner ...................................................................... 118

Registered Retirement Savings Plan ................................................. 123
Pension and retirement income ........................................................ 124

Registered Retirement Income Fund ................................................. 124
Registered annuities ....................................................................... 125
Pension income splitting ................................................................. 125

(II) Deductions from total income ................................................ 181
RRSP, PRPP and RPP contributions ................................................... 183

Deduction for elected split pension amount ....................................... 183
Annual union, professional, or like dues ............................................ 185

Child care expense ......................................................................... 185
Disability supports deduction ........................................................... 190
Allowable business investment losses ............................................... 192

Moving expenses ........................................................................... 193
Support payments ......................................................................... 197

Carrying charges and interest expense ............................................. 197
CPP/QPP contributions on self-employment ....................................... 199
Other employment expenses ........................................................... 200

Other deductions ........................................................................... 204
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Social benefit repayment ................................................................ 204
(III) Net income ........................................................................... 205

(IV) Deductions from net income ................................................. 205
Security options deductions............................................................. 206

Losses — carryforwards and carrybacks ............................................ 207
Capital gains deductions ................................................................. 207

(V) Taxable income ...................................................................... 208
(VI) Calculating initial federal tax ................................................ 208
Federal tax payable ........................................................................ 208

Provincial tax payable ..................................................................... 210
(VII.I) Deductions of non-refundable federal tax credits ............. 211

Basic personal amount ................................................................... 212
Age amount .................................................................................. 212
Spouse or common-law partner amount ........................................... 213

Canada caregiver amount for spouse or common-law partner or eligible
dependant .................................................................................... 214
Amount for an eligible dependant .................................................... 215
Canada caregiver amount for infirm dependants under age 18 ............ 217
CPP/QPP contributions through employment and self-employment ....... 217
Employment Insurance premiums .................................................... 218
Canada employment amount ........................................................... 218

Volunteer firefighter and search and rescue volunteer ........................ 218
Home buyers’ amount .................................................................... 219

Pension income amount .................................................................. 220
Disability amount for self ................................................................ 221
Disability amount transferred from a dependant ................................ 222

Interest paid on student loans ......................................................... 223
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Tuition amount .............................................................................. 224
Transfer of tax credits to a spouse or common-law partner ................. 225

Transfer of tax credits from a child to a parent or grandparent ............ 225
Medical expenses ........................................................................... 226

Donations and gifts ........................................................................ 229
Dividend tax credit ......................................................................... 233

Foreign tax credit........................................................................... 234
(VII.II) Deduction of refundable federal tax credits..................... 234
Working income tax credit .............................................................. 235

Goods and services/harmonized sales tax credit ................................ 235
(VIII) Basic federal tax ................................................................ 235

Surtaxes ....................................................................................... 238
2019 federal tax brackets ............................................................... 239
(IX) Deductions and additions ...................................................... 239

(X) Basic provincial/territorial tax ............................................... 240
Tax brackets ................................................................................. 240

Provincial/territorial tax deductions and credits for individuals ... 242
Conclusion .................................................................................... 243

THE CAPITAL GAINS SYSTEM ........................................................ 244
Types of capital property .............................................................. 246
Personal-use property .................................................................... 246

Listed personal property ................................................................. 246
Other property .............................................................................. 247

Basic formulas .............................................................................. 248
Capital loss ................................................................................... 250
Non-capital loss ............................................................................ 250

Disposition ................................................................................... 251
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Involuntary disposition ................................................................... 252
Proceeds of disposition ................................................................... 252

Inadequate consideration ............................................................. 253
Adjusted cost base ....................................................................... 255

Taxable capital gain...................................................................... 256
Allowable capital loss ................................................................... 258

Superficial loss ............................................................................. 260
Business investment loss ............................................................. 261
Capital gains reserve .................................................................... 262

Personal-use property and listed personal property ..................... 264
Personal-use property .................................................................... 264

Listed personal property ................................................................. 266
Replacement property .................................................................. 267
Summary ...................................................................................... 269

Transfers of capital property ........................................................ 270
Principal residence exemption ...................................................... 271

Special exemption .......................................................................... 271
Defining a principal residence .......................................................... 271

Calculating the exemption ............................................................... 273
Change in use ............................................................................... 274
Partial change in use ...................................................................... 275

Larger properties ........................................................................... 276
Farmers ........................................................................................ 276

Value of exemption ........................................................................ 277
CAPITAL COST ALLOWANCE.......................................................... 280
Introduction ................................................................................. 280

Capital cost allowance classes ...................................................... 281
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Basic capital cost allowance formula ............................................ 283
First-year rule .............................................................................. 284

Short taxation year ....................................................................... 285
General principles......................................................................... 285

Purpose ........................................................................................ 285
Change in purpose ......................................................................... 286

Passenger vehicles ......................................................................... 286
ATTRIBUTION ............................................................................... 291
Introduction ................................................................................. 291

Designated person ........................................................................ 291
Transfers and loans to a spouse or common-law partner ............. 292

Attribution rule .............................................................................. 292
Fair market value exception ............................................................ 293
Prescribed rate loan exception ......................................................... 293

Second-generation income exception ............................................... 294
Death of transferor ........................................................................ 295

Long-term holding of asset ............................................................. 295
Summary of exceptions to the spousal attribution rules ...................... 298

Anti-avoidance rule ........................................................................ 300
Transfers and loans to minors ...................................................... 301
Attribution rule .............................................................................. 301

Income only, not capital gains ......................................................... 302
Second-generation income exception ............................................... 303

Fair market value exception ............................................................ 304
Prescribed rate loan exception ......................................................... 304
Death of transferor ........................................................................ 305

Loans to non-arm’s length persons .............................................. 306
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Avoiding attribution ........................................................................ 306
Loan for value exception ................................................................. 306

Gift exception ................................................................................ 307
Other considerations related to attribution .................................. 307

Tax liability ................................................................................... 307
Dividend income ............................................................................ 307

Capital gains exemption.................................................................. 308
Property income versus business income .......................................... 308
Loans and transfers to a trust .......................................................... 309

Borrowed funds ............................................................................. 309
Loan guarantee ............................................................................. 309

INCOME SPLITTING ...................................................................... 310
Introduction ................................................................................. 310
Suitability ..................................................................................... 311

Pension income splitting .............................................................. 312
Spouses and common-law partners .................................................. 312

Canada Pension Plan/Quebec Pension Plan sharing ..................... 313
Spouses and common-law partners .................................................. 313

Amount eligible for sharing ............................................................. 313
Timeline for sharing ....................................................................... 314
Impact ......................................................................................... 314

Spousal RRSP ............................................................................... 315
Value to family unit ........................................................................ 315

Withdrawals .................................................................................. 316
Attribution rules ............................................................................. 316
Tax-Free Savings Account ............................................................ 317

Value to family unit ........................................................................ 317
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Registered Education Savings Plan ............................................... 318
Potential value............................................................................... 318

Suitability of strategy ..................................................................... 318
Registered Disability Savings Plan ................................................ 319

Potential value............................................................................... 320
Suitability of strategy ..................................................................... 320

Income splitting summary ............................................................ 320
TAXATION FOR FIRST NATIONS PEOPLE OF CANADA ................... 322
Employment income ..................................................................... 322

Business income ........................................................................... 322
Interest income ............................................................................ 323

Capital gain .................................................................................. 324
Dividend income ........................................................................... 324
Rental and other income from property ........................................ 324

Royalty income ............................................................................. 325
RRSP ............................................................................................ 325

Old Age Security benefits ............................................................. 325
Income from the United States ..................................................... 326

Support payments ........................................................................ 326
Trust income ................................................................................ 326
Payroll deductions ........................................................................ 326

GST/HST ....................................................................................... 327
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List of Figures and Tables

Figure 1: 2019 Federal Tax Rates ......................................................... 16
Table 1: Effective Marginal Tax Rate for Dividends .................................. 20

Table 2: How the Adjusted Cost Base Affects the Taxable Capital Gain ......... 22
Table 3: How the Fair Market Value Affects the Allowable Capital Loss .......... 23
Table 4: Defining Spouses and Common-law Partners ............................. 25

Figure 2: How the Income Tax Act Defines Blood relationship .................. 29
Table 5: Summary of Tax Return Filing Due Dates .................................. 56

Figure 3: Notice of Assessment ............................................................ 60
Table 6: Calculating an Individual’s Income Tax Liability .......................... 71
Figure 4: Total Income ........................................................................ 78

Table 7: Prescribed Interest Rates ........................................................ 93
Table 8: Group wage-loss replacement program tax treatment............... 113

Table 9: Summary of Taxable and Non-Taxable Benefits ....................... 116
Figure 5: T4 Slip, “Statement of Remuneration Paid” ............................ 119

Table 10: Workspace in the Home Deductible Expenses ........................ 175
Figure 6: Income Impact ................................................................... 178
Figure 7: Calculating Net Income ........................................................ 182

Table 11: Opportunity to Deduct Additional Expenses — Employee vs.
Commission Employee ...................................................................... 203
Figure 8: Determining Taxable Income ................................................ 206
Table 12: 2019 Federal Personal Tax Brackets and Rates....................... 209
Figure 9: Basic Federal Tax ................................................................ 236
Table 13: Provincial and Territorial Tax Rates ....................................... 241
Figure 10: Capital Property ................................................................ 248

Table 14: Capital Gains System Terminology........................................ 269
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Table 15: Capital Cost Allowance Classes ............................................. 281
Table 16: Summary of Income Splitting Opportunities ........................... 321
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Module 9: Taxation
Learning Objectives
This module addresses the key knowledge candidates require to
understand and interpret an individual’s tax profile, including being able to
explain and identify the income tax rules, as well as the implications for
various types of income. The module also explores tax deductions and
credits, as well as the benefits of engaging in income splitting.
The first section introduces taxation. It defines key terms, outlines the
impact of taxation on income and consumption, and explains the factors
affecting income tax.
The second section defines various relationships as they relate to income tax.
A discussion of income tax administration follows in the third section,

which examines the residency of a taxpayer and its connection to taxation,
the taxing authorities, the sources of tax information, the self-assessed
system, the types of taxpayers, the requirements for filing a tax return,
assessment and appeals, income tax instalments, alternative minimum
tax, and interest and penalties.
The fourth section explains key elements of the personal tax system and
its application, and how income tax is calculated.
The fifth section examines the capital gains system.
The sixth section discusses capital cost allowance, including the principles
of the capital cost allowance system, the capital cost allowance classes,
key formulas, the first-year rule, short taxation years and the disposition
of depreciable property.
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The seventh section discusses attribution as it relates to a designated

person, transfers and loans to a spouse or common-law partner, transfers
and loans to minors, loans to non-arm’s length persons and other
considerations pertaining to attribution.
The eighth section examines income splitting with respect to its suitability,
pension income splitting, Canada Pension Plan and Quebec Pension Plan
sharing, spousal Registered Retirement Savings Plans, Tax-Free Savings
Accounts, Registered Education Savings Plans and Registered Disability
Savings Plans.
The final section discusses taxation for First Nations People in Canada.
After completing the coursework for this module, the learner will be able to:
 Compare a marginal and average income tax rate
 Compare tax avoidance and tax evasion, including understanding:
 Letter of the law versus spirit of the law
 Potential for criminal consequences
 Explain the factors that may affect income taxes, such as:
 Fair market value of assets
 Adjusted cost base of assets
 Liquidity of assets
 Ownership structure of assets
 Potential for capital gains/losses
 Availability of capital gains exemptions
 Availability of capital losses
 Sources of income
 Eligible tax deductions and credits

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 Marginal tax rates
 Family circumstances
 Business interests
 Government legislation
 Other beneficiaries who may benefit from funds
 Estimate the combined income tax rates for an individual, including:
 Marginal tax rate
 Average tax rate
 Marginal effective rate
 Estimate taxes payable for an individual, including:
 Federal taxes
 Provincial/territorial taxes
 Explain income tax and reporting penalties for individuals
 Explain remedies available to the Canada Revenue Agency for non-

payment of income taxes, omission of information or falsifying
information
 Explain the purpose of the Canada Revenue Agency’s General Anti-

Avoidance Rule (GAAR)
 Explain the purpose and sections of a personal Notice of Assessment
 Explain when the Canada Revenue Agency may consider an individual

to be:
 A factual resident
 A deemed resident
 A non-resident
 Explain the tax obligations, individual benefits and tax credit

entitlement for an individual:
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 As a factual resident
 As a deemed resident
 As a non-resident
 Explain the income tax impact of a change in residency status from

resident to non-resident
 Explain how deductions are treated for tax purposes, including:
 Canada Pension Plan contributions
 Employment Insurance premiums
 Explain the tax treatment of income earned from the investment of

non-taxable income
 Estimate the income tax impact of interest income received by an

individual
 Explain the income tax impact of interest income received by a

Canadian-controlled private corporation (CCPC) — specifically,
knowledge such as:
 Aggregate investment income subject to Part I tax
 Ineligible for small business or general rate reduction in tax rate
 Impact on refundable dividend tax on hand (RDTOH) account
 Explain the income tax impact of interest income received by a trust:
 When maintained in the trust
 When distributed to beneficiary(ies) of the trust
 Estimate the tax impact of receiving the following:
 Income received by students
 Income received by individuals
 Explain the tax impact of inadequate consideration
 Explain ways in which former business property may be disposed of:

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 Involuntary
 Voluntary
 Explain the impact of a capital gain when property transfers between

spouses or common-law partners on:
 Taxation
 Adjusted cost base
 Calculate the capital gain and taxable capital gain resulting from the
disposition of capital property, including:
 Non-depreciable capital property
 Personal-use property
 Listed personal property
 Other property
 Depreciable capital property
 Estimate the income tax impact to an individual from a capital gain
 Estimate the tax impact of the following:
 Income received by an individual with a disability
 Income received from pensions or registered savings plans
 Calculate the capital loss and allowable capital loss resulting from the
disposition of capital property, including:
 Non-depreciable capital property
 Other property
 Estimate a superficial loss
 Estimate the tax impact to an employee from the receipt of a taxable

benefit
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 Calculate the dividend gross-up for dividend income received from a

Canadian corporation
 Estimate the income tax impact of dividend income received from the
following:
 A Canadian corporation
 A non-resident (foreign) corporation
 A trust
 Estimate the tax impact of claiming a federal tax deduction or credit for
the following:
 Students
 Employees
 Seniors
 Individuals with disability
 Families and caregivers
 Individuals with a pension or Registered Retirement Savings Plan
 Estimate the tax impact of claiming a provincial or territorial tax credit

for individuals
 Explain the impact on taxes payable:
 Of a tax deduction
 Of a tax deduction as income varies
 Of a non-refundable tax credit when taxes payable exist
 Of a non-refundable tax credit when taxes payable do not exist
 Of a refundable tax credit when taxes payable exist
 Estimate the tax impact of claiming a federal tax deduction or credit for
individuals
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Module 9: Taxation
 Explain how the Canada Revenue Agency views dealings between

individuals with respect to arm’s length:
 When they are related persons
 When they are unrelated persons
 Explain criteria that the courts generally use in determining whether

parties to a transaction are not dealing at arm’s length
 Estimate the potential income tax impact that may occur due to the
transfer of property:
 Between spouses or common-law partners
 Between a parent and an adult child
 Between a parent and a related minor child
 Evaluate how each of the following factors may affect the suitability of
splitting income with students, using registered plans, with seniors and
with individuals with disability:
 Marginal tax rate differential between the taxpayer and student, tax
payer and annuitant, tax payer and spouse, and tax payer and
individual with a disability:
 In current year
 In future years when withdrawals are made, if applicable
 Impact on net taxes paid by the taxpayer and student, tax payer and
annuitant, tax payer and spouse, and tax payer and individual with a
disability
 Income attribution rules
 Potential impact on government benefits
 Potential impact on government-sponsored savings plans, including

grants and bonds
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 Potential impact on ownership of assets
 Potential impact on creditor protection of assets
 Potential for Canada Revenue Agency to deem method unreasonable

and used only for tax avoidance under the GAAR
 Costs and fees associated with implementing the strategy to split

income
 Explain how income for a First Nations person (“Indian” according to the
Canada Revenue Agency and the Indian Act) is treated for tax
purposes:
 For employment income
 For self-employed business income
 For interest and investment income
 For rental income
 For royalty income
 For capital gains
 For Registered Retirement Savings Plan income
 For Old Age Security benefits
 For United States Social Security benefits
 For pension income from the United States
 For support payments
 For income received from a trust
 Explain how purchases made by a First Nations person are treated for
tax purposes:
 For purchases made on a reserve
 For purchases made off a reserve
 Explain how deductions are treated for tax purposes:

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 Canada Pension Plan contributions
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Introduction
Defining taxation
The term taxation refers to the compulsory charge a government levies
against sources such as income or profits. The charge could also be a levy
added to the cost of goods and services or a transaction. The terms
assessment, charge, duty, excise amount or fee may be used
interchangeably for some types of compulsory charges the government
applies to generate revenue to finance its expenditures on services or pay
government obligations.
In Canada, taxation occurs at a federal, provincial and municipal level. The

federal government derives its revenue from a variety of sources, including
income taxation and value-added taxes such as the goods and services tax
(GST). Provinces and territories also run a system of income tax that
closely parallels the federal income tax system. In addition, most provinces
and territories either charge a direct provincial sales tax (PST) or combine
their PST with the federal government’s GST for a combined consumption
tax referred to as the harmonized sales tax (HST). Provinces and
territories also collect taxes when land and buildings transfer to new
owners. Municipalities charge annual property taxes.
Income tax
Income tax is a tax the federal and provincial governments levy on income
that individuals, corporations and trusts earn. Individuals may be subject
to tax, for example, on income sources such as employment earnings,
business income and investment earnings including dividend income,
interest income and gains on the disposition of capital property.
Corporations may be subject to tax on income sources such as business
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income, dividends and interest income. Canadians are obligated to pay the
tax governments levy on earned income.
GST, HST and sales tax

The federal GST and HST are value-added taxes. In simple terms, this
means they are taxes added based on the value of an item at each stage
of its production or distribution.
The federal government charges GST at a rate of 5% on the supply of

most goods and services produced in Canada. Most provinces levy a sales
tax on the purchase of many goods and services.
Some provinces integrate their sales tax with the federal GST. Where there
is integration of the federal GST and provincial sales tax, the term HST is
used to refer to the combined taxes, and typically mirrors the application
of GST but at a combined rate. The Canada Revenue Agency handles
administration of both GST and HST.
For example, the HST rate in Ontario is 13%, representing 5% GST and
8% provincial sales tax.
Three provinces continue to retain a separate retail sales tax and the
supporting department responsible for administration of the provincial
sales tax (British Columbia, Saskatchewan and Manitoba). In these three
provinces, the GST and PST are applied according to separate and unique
sets of rules.
The province of Alberta and the three territories — Northwest Territories,

Nunavut and Yukon — do not impose any retail sales tax, although federal
GST continues to apply in these jurisdictions.
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Excise tax
In Canada, excise duties are charged on products that fall within the scope
of tobacco, wine, beer, spirits and cannabis products. When these goods
are manufactured in Canada, the excise duty tax is payable on the value of
the good at the point of packaging rather than at the point of sale.
Alternatively, when these goods are imported into Canada, the duty tax is
payable by the importer at the time they are imported.
Generally, excise tax is imposed on automobile air conditioners and fuel-

inefficient automobiles, in addition to aviation fuel, gasoline, and diesel
fuel. There is an exception for certain types of wholesalers. A 10% federal
excise tax is imposed on premiums paid for insurance against a risk in
Canada if the insurance is placed by insurers through brokers or agents
outside Canada or with an insurer that is not authorised under Canadian or
provincial/territorial law to transact the business of insurance. Premiums
paid under contracts for life, personal accident, marine, and sickness
insurance, as well as reinsurance and insurance not available in Canada,
are exempt.
Property tax
Municipalities in Canada levy a property tax on the estimated market value
of real property within their boundaries. Owners of the property receive an
annual assessment for property taxes from the respective municipality.
Some municipalities charge a separate business tax to the occupants of
business-occupied premises.
School taxes also apply to property within pre-defined districts; depending

on the geographic region, the school board or provincial government may
set the rate.
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Land transfer tax is another tax on property and is typically applied at a

provincial level when property transfers from one owner to another. The
purchaser of the property is subject to the tax on the value of the
property, often using a sliding scale. The city of Toronto, in Ontario, has
been granted the right to apply its own land transfer tax to property that
transfers to a new owner within its boundaries. This means that the
transfer of property in Toronto is subject to double taxation, since a
purchaser must pay both the Ontario and Toronto land transfer tax.
In recent years, taxing authorities have opted to charge higher or

additional fees when property transfers to certain foreign entities and
trusts in pre-defined regions. For example, Ontario imposes an additional
15% tax on foreign entities purchasing property in its boundaries, which is
in addition to the general Ontario rate and any Toronto land transfer tax.
British Columbia imposes a similar additional 20% tax on foreign entities
when land is purchased in specific regions of the province.
Impact of taxation on income and consumption
Income taxation structures

Taxation is the method by which individuals and entities share in the cost
of funding government programs and initiatives. It is after-tax income that
individuals use to fund personal consumption such as basic necessities
including food and shelter. The greater an individual’s after-tax income,
the more funds that individual has to fund lifestyle choices such as the
purchase of goods and services for personal enjoyment.
There are three basic income taxation structures: progressive, flat and
surtax.
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Progressive structure
Canada uses a progressive tax rate structure to tax the income of
individuals whereby individuals pay a marginally higher percentage of
income tax as their income increases. The progressive system uses
brackets to adjust the amount of tax payable at each level of earnings. The
federal income tax brackets begin at 15% of taxable income and increase
to a top rate of 33%.
On top of the federal brackets, each province has a set of income tax
brackets that, similar to the federal rate structure, imposes a tax rate that
increases as an individual’s taxable income increases. This means
individuals pay two levels of income tax: one at the federal level, based on
the federal government’s set of progressive brackets, and another at the
provincial level, based on a separate set of brackets established by the
province in which the individual resides.
To summarize, a progressive tax rate structure increases the percentage of

income tax applicable to each successive income bracket.
Flat structure
A flat income tax rate structure is one where everyone pays the same
percentage of income tax, regardless of how much he or she earns. In a
flat structure, there are no brackets; instead, one single rate of tax applies
to every dollar of taxable income.
Surtax
Another common application for imposing additional income tax is a
surtax. A surtax is an additional tax imposed in addition to the basic tax
payable. From time to time, the federal and some provincial governments
use surtaxes as a means by which to charge an additional income tax
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amount to individuals whose earnings are typically at the top of the

progressive income tax brackets.
A surtax targets a particular segment of individuals without changing the

income tax brackets. Often, it is a way to target a narrower group of
individuals than would be affected by changing the progressive tax bracket
structure.
Evaluating tax rates from multiple perspectives:

marginal, average and effective
There are various ways to look at an individual’s income tax liability. The
term marginal tax rate is commonly used to refer to the rate of tax that
applies to the next dollar of taxable income an individual earns. The term
effective marginal tax rate refers to the rate of tax that applies to the
individual’s next dollar of taxable income, taking into account income
inclusion rates and tax credits. The term average tax rate describes total
taxes paid divided by total taxable income.
The examples that follow use the 2019 federal tax brackets, a progressive
tax rate structure, to illustrate these concepts.
The 2019 federal tax rates are:
 15% on the first $47,630 of taxable income, plus
 20.5% on the next $47,629 of taxable income (over $47,630 up to

$95,259), plus
 26% on the next $52,408 of taxable income (over $95,259 up to

$147,667), plus
 29% on the next $62,704 of taxable income (over $147,667 up to

$210,371), plus
 33% on taxable income over $210,371
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The federal government adjusts tax brackets annually to reflect inflation

and/or other government policy objectives.
Figure 1 illustrates these federal tax brackets, showing both the marginal
and average tax rates for different taxable incomes.
Figure 1: 2019 Federal Tax Rates
Recall that a taxpayer has both a marginal tax rate and an average tax
rate.
The marginal tax rate represents the amount of tax due on the next dollar
earned and is useful for analyzing such things as the amount of income
taxes due on additional income or the amount of tax saved by contributing
to an RRSP. For example, if John’s marginal tax rate is 20%, he will pay
tax at a rate of 20% on each additional dollar of income beyond his current
level of income. If John earns an additional $1,000 of regular income, he
will pay an additional $200 in taxes (20% marginal tax rate). Similarly, if
John contributes $1,000 to an RRSP, it will lower John’s taxable income by
$1,000, resulting in a tax savings of $200 (20% marginal tax savings).
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The average tax rate, representing the ratio of total taxes divided by total
taxable income, is useful for estimating an individual’s total tax liability
given a certain amount of income.
Using the federal tax brackets above and adding the relevant provincial tax
brackets, these two examples examine the tax liability for Cameron and
Samantha, two individuals with different levels of taxable income.
EXAMPLE 1
If Cameron’s taxable income is $85,000 for 2019, he is subject to federal income tax
payable of $14,805, derived as follows:
 15% on the first $47,630 of taxable income = $7,145, plus
 20.5% on taxable income between $47,630 and $85,000 = $7,661
Cameron’s total federal income tax payable is $14,805 ($7,145 + $7,661) on taxable
income of $85,000. Cameron’s federal marginal tax rate is 20.5%, and his federal
average tax rate is 17.4%.
If Cameron resides in British Columbia, his provincial income tax liability is:
 5.06% on the first $40,707 of taxable income = $2,060, plus
 7.7% on the next $40,709 of taxable income = $3,135, plus
 10.5% on the next $3,584 of taxable income = $376
Cameron’s total provincial income tax payable is $5,571 ($2,060 + $3,135 + $376).
Combined federal and provincial outcome:
Cameron’s total income taxes are $20,376, his marginal tax rate is 31%, and his
average tax rate is 24%.
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EXAMPLE 2
If Samantha’s taxable income is $225,000 for 2019, she is subject to federal income
tax payable of $53,546, derived as follows:
 15% on the first $47,630 of taxable income = $7,145, plus

 20.5% on taxable income between $47,630 and $95,259 = $9,763, plus
 26% on taxable income between $95,259 and $147,667 = $13,627, plus
 29% on taxable income between $147,667 and $210,371 = $18,184, plus
 33% on taxable income between $210,371 and $225,000 = $4,428
Samantha’s total federal income tax payable is $53,547 ($7,145 + $9,763 + $13,627 +
$18,184 + $4,828) on total taxable income of $225,000. Samantha’s federal marginal
tax rate is 33%, and her federal average tax rate is 23.8%.
If Samantha resides in Manitoba, her provincial income tax liability is:

 10.8% on the first $32,670 of taxable income = $3,528, plus
 12.75% on the next $37,940 of taxable income = $4,837, plus
 17.4% on amounts over $70,610 of taxable income = $26,864
Samantha’s total provincial income tax payable is $35,229.
Combined federal and provincial outcome:
Samantha’s total income taxes are $88,776, her marginal tax rate is 50.4%, and her
average tax rate is 39.5%.
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Effective marginal tax rate

Similar to the marginal tax rate, the effective marginal tax rate measures
the rate of tax on the next dollar received. However, the effective marginal
tax rate is used as a tax measure when there are items entitled to special
tax preferences such as dividends and capital gains. A separate distinction
is necessary because marginal tax rates are based on items subject to
ordinary tax rates, whereas an extra dividend received or capital gain
realized is entitled to preferential tax treatment (i.e., taxed at a lower
overall rate than regular income). As such, these different types of income
need to be accounted for differently.
The effective marginal tax rate for a capital gain is 50% of the marginal
tax rate, because the capital gain inclusion rate is 50%. For example, if an
individual is in the 50% marginal tax bracket, his or her effective marginal
tax rate on a capital gain is 25%.
The effective marginal tax rate for dividends is far more complicated,
because of the gross-up factors and corresponding dividend tax credit.
Table 1 presents four unique scenarios in which different individuals
receive a $1,000 cash dividend. The $1,000 dividend paid to individuals A
and B is an eligible dividend, whereas the $1,000 dividend paid to
individuals C and D is a non-eligible dividend. Individuals A and C are in
the 35% marginal tax bracket, and individuals B and D are in the 50%
marginal tax bracket.
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Table 1: Effective Marginal Tax Rate for Dividends
Individual Individual Individual Individual

A B C D
Amount of dividend1 $1,000 $1,000 $1,000 $1,000
Type of dividend2 Eligible Eligible Non-eligible Non-eligible
Dividend gross-up rate3 38% 38% 15% 15%
Gross-up amount4 $380 $380 $150 $150
Taxable amount5 $1,380 $1,380 $1,150 $1,150
Marginal tax rate6 35% 50% 35% 50%
Income taxes payable7 $483.00 $690.00 $402.50 $575.00
Dividend tax credit8 25% 25% 13% 13%
Dividend tax credit9 $345.00 $345.00 $150.00 $150.00
Net tax payable10 $138.00 $345.00 $252.50 $425.00
Effective marginal tax rate11 13.8% 34.5% 25.3% 42.5%

1
This is the actual amount of dividend received (cash received).
2
Dividends are classified as eligible and non-eligible, which impacts the amount of the
dividend gross-up and dividend tax credit.
3
This is the 2019 gross-up factor for eligible and non-eligible dividends.
4
This is the gross-up amount or the extra that has to be recognized on the receipt of a
Canadian dividend.
5
This is the amount that must be reported for income tax purposes (it is the sum of the
actual dividend and the gross-up amount).
6
This is the assumed marginal tax bracket (reflecting combined federal and provincial tax
rates) of the individuals who received the $1,000 dividend.
7
This is the individual’s taxes payable before the application of the dividend tax credit
(taxable amount x marginal tax rate).
8
This is the assumed rate for the dividend tax credit (combined federal and provincial).
The actual rate will differ based on the specific facts of each situation.
9
This is the dividend tax credit (combined federal and provincial) that will reduce the
individual’s tax liability.
10
This is the individual’s extra taxes payable because of the receipt of a $1,000 dividend.
11
This is the effective marginal tax rate each individual would pay if he or she receives
additional dividends.
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The effective marginal tax rate is significantly different from the marginal
tax rate for the individuals in the table. This is because dividends are
subject to a special tax regime that involves the dividend gross-up and
dividend tax credit. As such, the marginal tax rate does not reflect the true
tax liability of an additional dividend; it is the effective marginal tax rate
that accurately reflects the special tax treatment of dividends.
Factors affecting income taxes
Fair market value

The concept of fair market value (FMV) is fundamental to the Canadian
income tax system. There is a basic premise that all transactions take
place at fair market value unless otherwise expressly permitted within the
rules of the Income Tax Act. Fair market value is defined as “the highest
price, expressed in the terms of money or money’s worth, obtainable in an
open and unrestricted market between knowledgeable, informed and
prudent parties acting at arm’s length, neither party being under any
compulsion to transact.”1
Adjusted cost base

In very general terms, the adjusted cost base (ACB) represents the cost
paid by the owner for capital property (depreciable and non-depreciable).
Each capital property has only one adjusted cost base, and any
transactions involving the property could affect the property’s adjusted
cost base as an increase or a decrease.
1
Government of Canada, Canada Revenue Agency, “Information Circular 89-3: Policy
Statement on Business Equity Valuations,” paragraph 3(a)
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The adjusted cost base of a capital property is used to calculate any capital
gain (or capital loss) arising on the disposition of the property. A capital
gain is derived as the difference between the fair market value of the
property and the adjusted cost base of the property. The higher a
property’s adjusted cost base, the lower the capital gain and ultimately the
tax liability arising from the disposition (i.e. sale) of the property.
Similarly, the lower the property’s adjusted cost base, the higher the
capital gain and ultimate tax liability arising from the disposition.
Table 2 assumes the fair market value of the property (a piece of land)
remains constant at $250,000, while the adjusted cost base of the
property is changed to show the effect of a higher and lower adjusted cost
base.
Table 2: How the Adjusted Cost Base Affects the Taxable Capital Gain
Asset Fair Market Adjusted Capital Gain Taxable
Value Cost Base (FMV less ACB) Capital Gain
(50% of capital
gain)
Example 1 $250,000 $125,000 $125,000 $62,500
Example 2 – $250,000 $100,000 $150,000 $75,000
lower ACB
Example 3 – $250,000 $150,000 $100,000 $50,000
higher ACB
Tax rates are applied against the taxable capital gain. In Table 2, because
the fair market value is held constant, you can see that changes to the
adjusted cost base affect the capital gain in each example. In example 2,
the lower adjusted cost base increases the capital gain and taxable capital
gain, resulting in a higher overall income tax liability associated with the
disposition of the property. Similarly, increasing the adjusted cost base
reduces the capital gain and taxable capital gain, resulting in a lower
overall income tax liability.
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In addition to a capital gain, the disposition (i.e. sale) of a property (a

piece of land) could result in a capital loss that could potentially reduce the
taxpayer’s overall income tax liability. Table 3 provides an overview of the
impact of changes to the fair market value of a property, assuming the
adjusted cost base remains constant at $200,000.
Table 3: How the Fair Market Value Affects the Allowable Capital Loss
Property Fair Market Adjusted Capital Loss Allowable
Value Cost Base (FMV less Capital Loss
ACB) (50% of
capital loss)
Example 1 $150,000 $200,000 ($50,000) ($25,000)
Example 2 – $100,000 $200,000 ($100,000) ($50,000)
lower FMV
Example 2 – $175,000 $200,000 ($25,000) ($12,500)
higher FMV
In each of these scenarios, the taxpayer incurred an allowable capital loss

on the disposition of the land. An allowable capital loss can only be used to
reduce a taxable capital gain (assuming an inter vivos disposition). So, if
the taxpayer has other capital dispositions that created a taxable capital
gain in the current year (or prior three years), he or she could use the
allowable capital loss to offset the current or prior taxable capital gain,
resulting in a lower income tax liability.
If there is no taxable capital gain for the allowable capital loss to offset,
the current year’s allowable capital loss can be carried forward indefinitely
to offset taxable capital gains in future years. Note that this is intended as
a simple example and that the implications associated with the death of a
taxpayer or a testamentary disposition are beyond the scope of the current
discussion.
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Liquidity of assets
The term liquidity, in a financial context, refers to the ease with which and
timeframe within which an asset can be converted into cash. Cash is
considered the most liquid asset. Shares of a private company would
typically be at the opposite end of the continuum, as they are far less
liquid. It would typically require a specific and unique buyer to turn the
shares into cash. Stocks and bonds that trade on the open market tend to
be more liquid than private company shares, as they can be turned into
cash but are subject to market conditions at the time of disposition.
Taxpayers must pay their tax liabilities when due, and as such require
sufficient liquid assets to pay any liability. The ability to pay taxes when
due is an ongoing planning consideration for both living and deceased
taxpayers.
The disposition of a capital asset with an accrued gain typically results in a

tax liability, so any plans for the use of the funds arising from the
disposition should consider the need for liquid assets to pay the liability.
Similarly, individuals are subject to a deemed disposition of capital

property at the time of death. Although the assets are not actually
disposed of, the tax liability still arises, and the estate will require
sufficient liquid assets to pay the income taxes arising from the deemed
disposition.
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Relationships
Definition of spouse
Many aspects of the Income Tax Act refer to a spouse or common-law
partner of the taxpayer. In doing so, very specific definitions are utilized
with regards to relationships and the breakdown of those relationships. For
this reason, a review of the definitions of a spouse or common-law partner
is important. Table 4 summarizes these definitions.
Table 4: Defining Spouses and Common-law Partners
Definition of
Terminology Definition of Common-law Partner
Spouse
A person of the same or opposite sex,

living in a conjugal relationship with the
taxpayer:
Spouse and common- - For 12 continuous months;* or

Legally married
law partner - Who is the natural or adoptive parent
of the taxpayer’s child, or has custody
and control of the taxpayer’s child and
that child is wholly dependent on that
person for support
A spouse who is A common-law partner, separated from

Separated spouse
separated due the taxpayer, for fewer than 90 days
and separated
to marriage due to a conjugal relationship
common-law partner
breakdown breakdown
A common-law partner becomes a

A spouse former common-law partner on the first
becomes a day after a 90-day separation.
Former spouse and
former spouse Reconciliation after the 90-day
former common-law
when the separation results in common-law
partner
divorce partner status only after the current
becomes final. relationship with the person lasts at
least 12 continuous months.*
* Note: Separations of fewer than 90 days do not affect the 12-month period.
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While the definition of a spouse and a common-law partner differ, both

groups are treated the same for purposes of the Income Tax Act.
Throughout this module, the term spouse also refers to a common-law
partner, unless otherwise noted.
The terms spouse and common-law partner both include same-sex

spouses and common-law partners.
Definition of child
In a number of places throughout the Income Tax Act, reference is made
to the phrase child of the taxpayer. The term child is defined as outlined
below, unless otherwise noted:
 A child to which the taxpayer is the legal parent
 A child to which the taxpayer is the adopted parent
 A child who is wholly dependent on the taxpayer for support
 A child of a spouse or common-law partner in any of the above

categories
 A child of the spouse or common-law partner of the taxpayer
 A spouse or common-law partner of the taxpayer’s child
The term dependent child will differ depending on the circumstances and
the tax issue at hand. Typically, a dependent child is considered one who
meets all of the following three conditions:
 The child is wholly dependent on the taxpayer for support
 The child is under age 19
 The child is, in law or in fact, under the taxpayer’s custody and control
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Relationships matter with income tax
Overview
Relationships, for income tax purposes, can involve people, corporations
and trusts. Throughout the Act, the term person is used regularly;
however, the term cannot be interpreted using the simple dictionary
definition. Instead, the word person is a defined term that includes an
individual, a corporation, and a trust.
Understanding relationships is essential because the application of many

tax rules often depends on the relationship between the parties involved in
a transaction, particularly for transactions between related persons.
The Income Tax Act pays special attention to transactions that take place
between parties who are considered not to be dealing at arm’s length.
Notice the terminology –not to be dealing at arm’s length. In other words,
they are considered to be non-arm’s length. There are anti-avoidance rules
throughout the Income Tax Act based on relationships, but there is also
favorable tax treatment that is dependent on relationships.
The Income Tax Act uses a series of terms to specifically define different
types of relationships. Depending on the transaction, there may be
restrictions or enhancements based on the relationship of the parties
involved in the transaction. Relationships, from an income tax perspective,
can be viewed as a series of concentric circles. The most encompassing
circle is non-arm’s length relationships.
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Non-arm’s length
The term non-arm’s length is not directly defined within the Income Tax
Act. Rather, it is defined indirectly through the definition of arm’s length, a
term discussed above. For example, related persons are deemed not to
deal with each other at arm’s length. In general terms, a taxpayer and a
personal trust are deemed non-arm’s length if the taxpayer, or any person
not dealing at arm’s length with the taxpayer, would be beneficially
interested in the trust (with some exceptions).
As well, persons not related to each other could be viewed as non-arm’s

length depending on the specific facts of the situation. When individuals
who would normally be considered arm’s length “act in concert” with
respect to an element of common interest, the courts have found that they
could be considered to be non-arm’s length. This typically could arise when
two or more parties demonstrate behaviour that is not truly independent.
They could, for example, be working in concert to derive a benefit that
they would not offer to a true arm’s length party. It is generally not one
factor that indicates acting in concert, but rather an assessment of the
overall behaviour to determine how interdependent the decision-making is
between the two parties. Simply having a common economic interest in a
transaction or investment does not necessarily create a non-arm’s length
relationship.
Although two arm’s length parties are typically viewed as transacting at

fair market value, this premise can be overridden by the courts when the
two arm’s length parties are considered to be acting in concert. In other
words, the courts would evaluate whether the transaction occurred on
terms and amounts to which true arm’s length parties would agree. If the
answer is no, the arm’s length parties could be viewed as non-arm’s
length.
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Related
The term related is defined in the Income Tax Act for income tax purposes.
Individuals are considered related when they are connected in any of the
following circumstances:
 Blood relationship
 Marriage or common-law partnership
 Adoption
The Income Tax Act specifically defines the phrase blood relationship and,
as Figure 2 shows, it is not the usual dictionary definition. In general
terms, an individual is related to his or her direct ascendants (i.e., parents,
grandparents and great-grandparents), direct descendants (i.e., children,
grandchildren and great-grandchildren), siblings (i.e., sisters, brothers and
their spouses), spouse or common-law partner, and siblings of the
individual’s spouse or common-law partner.
Figure 2: How the Income Tax Act Defines Blood relationship
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EXAMPLE
Jane, age 33, is the daughter of Tom and Hilda. Jane is married to Sam, and they
have a two-year-old son, Terry. Jane’s only sibling is Micky, who is married to Sarah.
Micky and Sarah have one child, Shannon, age one.
Jane is related to:
 Her parents, Tom and Hilda (ascendants)
 Her husband, Sam (spouse)
 Her brother, Micky (sibling)
 Her son, Terry (descendant)
 Her sister-in-law, Sarah (sibling’s spouse)
Jane is not related to:
 Her niece, Shannon (sibling’s child)
As outlined above, individuals can be related to individuals but, in addition,

corporations and individuals can be related, as can two corporations.
Without getting too complex, the following is an overview of when a
person and a corporation are related and when two corporations are
related.
A corporation is related to:
 A person who controls the corporation, if the corporation is controlled

by one person
 A member of a related group that controls the corporation
 Any person related to a person described in either of the two bullets

above
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Two corporations are related when:
 The same person or group of persons control the two corporations
 The two corporations are each controlled by a different person (A &

B) but A & B are related to each other
These are simple examples; a discussion of more complex relationships is

beyond the scope of this module.
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Income Tax Administration
Residency of a taxpayer
Canada imposes tax on the dual basis of residency and income source. As
such, it taxes residents of Canada on their worldwide income and non-
residents on income earned in Canada. This means analyzing if an
individual is considered resident in Canada for tax purposes is the start for
determining if Canadian taxes may apply.
Resident of Canada
Under Canadian tax law, a resident in Canada includes an individual who
normally or ordinarily resides in Canada (factual resident) and an
individual who is deemed a resident of Canada by statute (deemed
resident).
The Income Tax Act does not define the term ‘ordinarily resident’ in
Canada; rather, the definition has evolved through common law principles.
Generally, individuals who ordinarily live in Canada are considered a
resident of Canada and are referred to as factual residents. Factual
residents are subject to tax in Canada on their worldwide income for the
taxation year.
Two questions often arise:
 Has an individual, who has left Canada, become a non-resident
 Has a non-resident, now living in Canada, become resident
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The answer to both questions depends totally on the facts specific to the
given situation. The Canada Revenue Agency publishes a folio2 in which it
sets out the criteria it uses when determining an individual’s residency. A
series of primary and secondary factors developed through common law
principles is used to establish if an individual has residential ties to
Canada.
Primary factors
While not an exhaustive list, the primary factors include:
 The dwelling place, owned or leased, normally occupied by the
individual
 Where the individual’s spouse or common-law partner resides
 Where the individual’s dependants reside
The dwelling an individual maintains in Canada plays an important role in

the evaluation. When a dwelling remains available for an individual’s use,
this is often viewed as a residential tie to Canada. Alternatively, leasing
out the property at market rates and terms so that it is not available to the
taxpayer can help break the residential ties.
When the taxpayer’s spouse and/or dependant children remain in Canada,

this too is often viewed as maintaining a residential tie. The analysis,
however, also considers the relationship between the parties. For example,
if the individuals were living separate and apart prior to the analysis, this
may have an influence.
2Government of Canada, Income Tax Folio S5-F1-C1, Determining an Individual’s

Residence Status, November 24, 2015.
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Secondary factors
Even if a taxpayer’s situation appears to indicate non-residency based on
the primary factors, the Canada Revenue Agency looks at a group of
secondary factors on a collective basis. It is unusual for any single
secondary factor to determine residency status, but evidence of several
factors may tip the scale in the determination.
Secondary factors include:
 Personal property in Canada (e.g. furniture, vehicle)
 Social ties with Canada (e.g. membership in recreational organizations)
 Economic ties with Canada (e.g. bank accounts, relationship with

Canadian employer)
 Landed immigrant status or appropriate work permits in Canada
 Hospitalization and medical insurance coverage from a province or

territory of Canada
 Driver’s license from a province or territory of Canada
 Vehicle registered in a province or territory of Canada
 A seasonal or leased dwelling place in Canada
 A Canadian passport
 Memberships in Canadian unions or professional organizations
Other considerations when an individual maintains residential ties with

Canada while abroad include:
 Regularity and length of visits to Canada
 Intention to permanently sever ties with Canada
 Residential ties outside of Canada
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The list of secondary factors is not intended to be exhaustive but rather is

representative of the type of additional criteria used when assessing the
issue of residency. The cumulative presence of several secondary ties
could tip the scales in favour of a determination of tax residency. The
weighting given to each depends on the Canada Revenue Agency’s
judgment, in any set of circumstances. For example, a summer cottage
that contains personal property, and to which the taxpayer returns every
summer, will be two factors that could potentially demonstrate residential
ties to Canada.
A taxpayer who wants to break tax ties with Canada may want to close all
Canadian bank accounts, cancel his or her driver’s license, sell any
automobiles, and cancel any golf or other memberships, to avoid the
additional accumulation of secondary factors.
Emigrating
Canadian residents do not become non-residents unless they sever all
significant residential ties upon leaving Canada. For example, a Canadian
who accepts a job in a foreign country and leaves the country with his or
her family may still be considered a Canadian resident while abroad. If the
family maintains their residential ties to Canada during the period of
absence, they are subject to Canadian tax on worldwide income.
Individuals may be considered to have maintained their Canadian

residency under tax law, if they maintain a year-round dwelling, a cottage,
bank accounts, health cards, professional memberships, driver’s licence, or
other evidence that their absence from Canada is temporary. Any of these
individual or combination of items may be considered evidence of
residential ties.
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When an individual departs from Canada, it is a question of fact that must

be determined as to whether the individual intended to permanently sever
residential ties. While the individual’s length of stay abroad may be
considered in making such a determination, there is no particular length of
stay abroad that, on its own, would cause an individual to become non-
resident. The Canada Revenue Agency would look at factors to establish if
the individual has established a “clean break” from Canada.
There are steps that can be taken by the individual to indicate a complete
sever of residency, often referred to as a clean break. In addition to the
primary and secondary factors, this would include the payment of the tax
liability arising, or posting of acceptable security, with respect to the tax
consequences arising from the deemed disposition of all property upon
departure. The deemed disposition and addressing the resulting tax
consequences would be a strong indication to the Canada Revenue Agency
of the individual's intention to permanently sever residential ties with
Canada at the time of departure.
An individual who has successfully achieved a clean break from Canada is

considered a part-time resident of Canada for the part of the taxation year
prior to the clean break, and is subject to tax on his or her worldwide
income for that part year of residence. For the period in the taxation year
after the clean break, the individual is considered a non-resident of
Canada.
Immigrating
The primary and secondary factors are also used to determine if a non-
resident becomes resident in Canada at any time in a taxation year. When
a non-resident is assessed, based on the criteria, to have become resident
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of Canada, that individual is a part-time resident of Canada for the part of

the taxation year after which a “fresh start” is established.
The point in time when residency begins based on the factors is referred to
as a fresh start. That individual will be non-resident for the period in the
year leading up to the fresh-start but will be a part-time resident of
Canada for the part of the taxation year following the fresh start. The
individual is a part-time resident of Canada and subject to tax on his or her
worldwide income for the portion of the taxation year following the fresh
start. In the subsequent taxation year, the individual will be an ordinary
resident of Canada for the full taxation year, assuming nothing in his or
her circumstances changes.
Part-time resident
Individuals immigrating to or emigrating from Canada are typically
assessed as part-time residents of Canada for the year in which they arrive
or depart. Individuals who immigrate and become resident in Canada are
subject to a part-time residence status in the year they arrive. The point in
time when they arrive creates a fresh start and is the point from which
residency is measured for the taxation year.
Similarly, individuals who emigrate and cease to be residents of Canada

are considered part-time residents for the year of departure. The point at
which individuals make a clean break is the time at which they are no
longer considered resident. For tax purposes, emigrating individuals are
considered a Canadian resident up to the point of the clean break.
In summary, a part-time resident is an individual who is considered non-

resident but who has a factual entry or exit from Canada within the
taxation year. Part-time residents are subject to income tax on their
worldwide income for the part year in which they are a factual resident of
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Canada. During the part year the individual is non-resident, his or her tax
obligation to Canada is the same as any other non-resident.
Deemed resident
Canada has a deeming rule under which individuals who sojourn or visit
Canada for a total of 183 or more days (not necessarily consecutively)
during the year are deemed to be Canadian residents. In most situations,
once an individual has spent 183 days in Canada, he or she is resident for
tax purposes and subject to Canadian tax on worldwide income for the full
taxation year.
Confusion may arise when individuals think that they will not be
considered Canadian residents until at least 183 days have passed. This is
not true. The 183-day period relates to the deeming rule for sojourning
purposes only. Individuals who make a fresh start in Canada, and quickly
develop residential ties to Canada, will be considered residents of Canada
when those ties are developed, even if that occurs long before 183 days
have elapsed. The 183-day rule applies only to individuals who have not
established residential ties to Canada but have spent more than 183 days
in the country during a taxation year.
Individuals who are deemed to be a resident of Canada under the 183-

days sojourning rule must pay tax on worldwide income earned throughout
the entire taxation year.
Dual resident
Under Canadian tax law, it is possible for an individual to be a resident of
more than one country for tax purposes. In the case of dual residency,
Canada has signed tax treaties with many different countries that mediate
ultimate residency for tax purposes. Each treaty contains a tie-breaker rule
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used to determine ultimate residency for the purposes of avoiding being

taxed in two countries (commonly referred to as double taxation). For
example, if an individual is a resident of both Canada and the United
States, the Canada–US Income Tax Convention provides tie-breaker rules
to determine the individual’s residency for tax purposes using the following
elements:
 Permanent dwelling
 Centre of vital interests
 Habitual abode
 Citizenship
 Competent authorities (i.e. arbitration committee)
Similar rules apply with respect to Canada’s tax treaties with other
countries.
Non-resident
Canada also taxes non-residents on the income they earn in Canada. Non-
residents are everyone who is neither a factual nor deemed resident. Non-
residents are taxed under both Part I and Part XIII of the Income Tax Act.
Part I covers income received from each of the following:
 Employment earnings
 A business carried on in Canada
 Gains from the disposition of taxable Canadian property
Part I tax requires a personal tax return be filed by the non-resident

individual declaring his or her Canadian source employment income,
business income and any gains realized on the disposition of taxable
Canadian property. When filing their personal tax return, non-resident
taxpayers are entitled to all of the non-refundable tax credits for which
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they meet the qualifying criteria but on a pro-rata basis comparing their
Canadian income to their worldwide income.
Under Part XIII of the Income Tax Act, non-residents must pay a basic
withholding tax of 25% on income earned in Canada from such sources as
management fees, interest, estate and trust income, rents, royalties, and
pension benefits. The 25% rate can be lower depending on the treaty that
Canada has with the country in which the non-resident taxpayer resides.
This withholding tax could be considered a flat tax.
Parts I and XIII of the Income Tax Act are supposed to be mutually
exclusive and, therefore, do not apply to the same types of income.
Taxing authority
The Constitution Act, 1867 (formerly the British North American Act, 1867)
grants both the federal and provincial governments the exclusive authority
to impose income taxes.
The constitutional powers of the federal government to levy taxes are

virtually unlimited. On the other hand, the taxation powers of the
provincial governments are constitutionally limited. Provinces have the
authority to impose direct income taxes only on income earned in the
province or income earned by residents of the province.
All provinces and territories have their own income tax legislation. While it
is the responsibility of each province and territory to update and maintain
its own acts governing income taxes for its residents, provincial legislation
tends to mirror many aspects of the federal Income Tax Act. Provincial
income tax rates are set and managed by each province.
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The federal departments

The amount of federal income tax owed by a taxpayer, in a given year, is
established in law by the Income Tax Act. Three federal departments are
intimately involved in the workings of the Canadian tax system:
 Department of Finance
 Canada Revenue Agency
 Department of Justice
The Department of Finance is the government ministry responsible for

drafting and revising the Income Tax Act. The Canada Revenue Agency
(CRA) is responsible for administering the Income Tax Act and collecting
the taxes taxpayers owe. When legal disputes arise between a taxpayer
and the Canada Revenue Agency (often over the amount of money owed),
the Department of Justice handles any litigation.
It is important to keep in mind that when parliament passes legislation

revising the Income Tax Act, different stakeholders may form different
views on how to best interpret the changes. The myriad of stakeholders
includes the Department of Finance, the Canada Revenue Agency,
taxpayers and tax practitioners. The job of adjudicating the correct or
legally binding interpretation of the Income Tax Act falls to the judicial
system.
Planning considerations
Jurisprudence plays an important role in clarifying tax law through
precedent-setting court rulings. In fact, when tax practitioners advise
clients on tax-planning initiatives, they must often take into consideration
the Income Tax Act, the regulations, jurisprudence, the Canada Revenue
Agency’s administrative guidelines, and peer review to arrive at an
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appropriate decision. All the while, tax practitioners must remember that
all of the jurisprudence and much of the Canada Revenue Agency
administrative guidance is limited to the facts of the situation that
precipitated the specific ruling in question.
Municipal and regional governments

Municipal and regional governments have no constitutional standing
themselves and levy taxes solely through the legislative prerogative of the
province/territory in which they are located.
Concept of tax planning
Overview
Tax planning is an important component of financial planning. A dollar of
reduced taxes puts more money in an individual’s pocket than a dollar of
incremental income, because a dollar of tax savings is ready to spend
whereas a dollar of incremental income still has to be taxed.
The Canadian income tax system relies on self-assessment; taxpayers

declare their income and take appropriate deductions and credits to
determine their own income tax liability. The Canada Revenue Agency has
the right to reassess a different income tax liability for individuals or ask
individuals for additional information to explain how they determined their
income tax liability.
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Tax minimization
While Canada has clearly defined rules about who is subject to income tax,
legitimate tax planning can lower or minimize an individual’s overall
income tax liability and do so in a legal way. Tax minimization means
looking for legitimate strategies to reduce the individual’s tax liability that
might otherwise be payable. For example, individuals who make a
charitable donation can use the accompanying tax credit to lower their
overall taxes payable in the current year, depending on their income level,
or may carry it forward for up to five years.
Timing
Decisions related to the timing of the donation and claim for the
corresponding tax credit could involve tax planning to minimize the
individual’s overall income tax liability, taking into account his or her
personal affairs. This is an example of minimizing the amount of income
tax that might otherwise be payable. By using legitimate tax planning
strategies, individuals are able to lower or minimize their income taxes
payable.
Tax deferral
Similarly, the deferral of income taxes owing will push the tax
consequences into the future, leaving the taxpayer with a larger sum of
money between the time of the deferral and the time of the actual tax
payment. A contribution to a Registered Retirement Savings Plan (RRSP) is
an example of a tax deferral opportunity. When individuals make
contributions into an RRSP, they are entitled to a tax deduction within
prescribed limits, lowering their overall income tax liability that would
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otherwise be payable. Furthermore, the funds held within the RRSP do not
attract income tax while retained within the RRSP structure.
Income tax on the contributions and investment earnings of assets held

within the RRSP is deferred until the individual makes withdrawals from
the registered plan. This planning concept defers the income tax liability
and provides individuals with the benefit of tax-sheltered growth during
the deferral period.
A focus on after-tax wealth creation as part of the planning process makes

the concept of tax minimization and tax deferral essential elements of
effective financial planning.
Tax avoidance and tax evasion

It is, however, important to distinguish tax planning from tax avoidance
and tax evasion. Tax planning involves activities and transactions that
reduce or eliminate tax. They are not only completely legal, but they also
operate within the intended and accepted intention of the law from the
perspective of the Canada Revenue Agency.
The concept of tax avoidance involves using tax planning to minimize the
amount of income tax payable and doing so within the boundaries of
Canadian tax laws. The Canada Revenue Agency, however, views tax
avoidance as tax planning that reduces taxes in a way that is inconsistent
with the overall spirit or intent of the laws. As such, the Canada Revenue
Agency has placed increased scrutiny on transactions it views as
unacceptable and abusive in nature. The term aggressive tax planning has
evolved and is defined by the Canada Revenue Agency as arrangements
they feel are “pushing the limits.” For this reason, the Canada Revenue
Agency will often challenge tax-avoidance transactions by the various
means available to it.
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Finally, tax evasion occurs when taxpayers deliberately deceive the Canada
Revenue Agency. This may occur through a variety of intentional actions
such as knowingly not reporting income, omitting material information or
claiming false deductions and credits to which the taxpayer is not entitled.
Tax evasion is illegal and can subject the taxpayer to both criminal and
civil prosecution. The Canada Revenue Agency has introduced a reward
program to encourage individuals to provide the Canada Revenue Agency
with information on international tax non-compliance that results in
recovery of at least $100,000 of federal income taxes. Awards will be paid
based on 15% of the federal income tax collected.
General Anti-Avoidance Rule

To better equip the Canada Revenue Agency to deal with abusive tax
avoidance schemes, in 1988 the Department of Finance revised the
Income Tax Act to include a General Anti-Avoidance Rule (GAAR). The
Department of Finance explained at the time that the “intent of the GAAR
is to prevent abusive tax avoidance transactions or arrangements but at
the same time it is not intended to interfere with legitimate commercial
and family transactions.”3 It also noted that “transactions that comply with
the object and spirit of other provisions of the Act read as a whole will not
be affected by the application of the GAAR. This anti-avoidance rule is
intended to apply as a provision of last resort after the application of the
other provisions, including specific anti-avoidance measures.”4
3
Government of Canada, Department of Finance, Explanatory Notes, Income Tax Act,
Section 245, 1988.
4
Ibid.
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Sources of tax information
T-slips
As part of filing a personal income tax return, it is important for a taxpayer
to ensure that he or she has complete information on income received
from all sources. This information typically comes in the form of a T-slip.
The most common T-slips a taxpayer will receive are:
 T3 — Trust Income
 T4 — Employment Income
 T4A(OAS) — Statement of Pension, Retirement, Annuity, and Other

Income
 T4A(P) – Statement of Canada Pension/Quebec Pension Plan and

Benefits
 T4E – Statement of Employment Insurance and Other Benefits
 T4RIF – Statement of Income from a Registered Retirement Income

Fund
 T4RSP – Statement of RRSP Income
 T5 — Investment Income
Other sources of information

In addition to T-slips, it is equally important to obtain other sources of
information before filing a taxpayer’s income tax return. Examples include:
 Financial statements (for self-employed)
 Tuition and education receipts
 RRSP contribution receipts
 Charitable donation receipts
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 Medical-type receipts
 Interest expenses (related to investments)
 Childcare receipts
 Property tax information (depending upon province)
Self-assessment system
Canada uses a self-assessment and self-reporting tax system, like most
industrialized countries. This puts the onus on the taxpayer to calculate his
or her income tax and to self-report the result to the government. With the
exception of a deceased taxpayer, it is the taxpayer’s responsibility to pay
the required tax owing by April 30 of the year following the taxation year.
The onus is on the taxpayer to substantiate any claims made in a tax
filing.
Types of taxpayers
In very general terms, there are three types of taxpayers: individuals,
corporations and trusts.
Individuals
An individual may have a variety of sources of income including
employment income, business income or passive income such as
investments or rental income. An individual operating a business as a sole
proprietor would include the income from the proprietorship as personal
business income. Individuals could also be partners of a partnership and
would include their share of the partnership income on their personal
income tax return.
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Corporations
A corporation is a legal entity, generally with share capital owned by its
shareholders. A corporation is taxed as a separate legal entity.
Trusts
In simple terms, a trust is a relationship under which one party (trustee)
holds title to property (trust property) for the benefit of another party
(beneficiaries). The property held by a trust belongs to the beneficiaries
(beneficial owner), but legal title is held by the trustee on behalf of the
beneficiaries under the terms of the trust documents. A trust is generally
treated as a separate taxpayer.
Requirement to file a tax return
Who must file?

An individual must file a tax return for a taxation year if the taxpayer:
 Owes tax for the year in excess of amounts already withheld on the
taxpayer’s behalf
 Has income greater than the minimum threshold beyond which Canada
Pension Plan (CPP) contributions are required
 Is entitled to receive the Canada Child Benefit or if the taxpayer’s

spouse is entitled to receive the Canada Child Benefit
 Disposed of taxable Canadian property
 Has a taxable capital gain
 Must repay any portion of the Old Age Security or Employment

Insurance benefits
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 Has an outstanding balance on an RRSP withdrawal under the Home

Buyers’ Plan or Lifelong Learning Plan
 Received a demand from the Canada Revenue Agency requesting the

filing of a return
 Elected to split pension income with his or her spouse or common-law

partner
 Received Working Income Tax Benefit advance payments
 Is paying Employment Insurance premiums on self-employment and

other eligible earnings
 Wants to obtain a refund of income taxes because the amount of

income tax withheld exceeds the amount required
Who should file?

While an individual may not be required to file an income tax return based
on the rules previously outlined, the filing of a return may be to the
taxpayer’s advantage and should be done. The following are examples of
when filing an income tax return can be advantageous for the taxpayer:
 If tax has been withheld and is greater than what is required, a

taxpayer must file a return to obtain the refund owed to him or her
 If there are federal or provincial credits to which the taxpayer may be

entitled (i.e. Canada Child Benefit or GST/HST credit)
 To record a non-capital loss so it is available to use as a carryforward

or carryback amount in other years
 If a student has excess tuition/education credits to be carried forward
 Where there is RRSP contribution room resulting from earned income
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 To record a capital gain on the disposition of a qualified farm property

or shares of a qualified small business corporation for future use with
the capital gains exemption
 To continue to receive the Guaranteed Income Supplement or

Allowance benefits under the Old Age Security program; if the taxpayer
does not file a return, he or she will need to send a renewal form to
Service Canada
Who does not have to file?

Under the Income Tax Act, certain individuals or groups are exempt from
the requirement to file an annual income tax return. For example, an
individual is not required to file a tax return if he or she:
 Has no income tax payable for the year and did not receive a demand
from the Minister to file a return
 Was considered non-resident for the taxation year and was not
employed in Canada, did not carry on business in Canada, and did not
dispose of any taxable Canadian property
Tax return filing dates

The Income Tax Act stipulates when the income tax return of a taxpayer
must be filed. Dates can differ depending on the nature of the taxpayer.
The more common due dates described in this section are in respect of:
 Individual taxpayer
 Self-employed taxpayer and spouse or common-law partner
 Deceased taxpayer
 Partner in a partnership
 Corporation
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 Trust
Individuals filed their income tax return using paper-based returns and the
regular mail system for many years. Technological advancements have
expanded the options available to individuals to meet their required filing
obligations.
Individuals can now use the following services recognized by the Canada
Revenue Agency:
 Netfile — electronic filing using certified tax preparation software
 EFile — electronic filing by authorized service providers on the

taxpayer’s behalf
 File My Return — a free service available through the Canada Revenue

Agency for individuals with low or fixed income who answer a series of
questions through a Canada Revenue Agency automated phone service
 Paper return – the traditional paper return is still available, although

the number of taxpayers choosing this method decreases each year
Regardless of the filing method, an individual taxpayer submits information

to complete his or her income tax return, which is more formally referred
to as the T1 General, Income Tax and Benefit Return. The content of the
form includes federal information and details specific to the individual’s
province of residence.
Individual
The income tax return for an individual is due on or before April 30 of the
year following the taxation year, unless noted otherwise in the following
sections. Any income tax owing is also due by April 30.
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Self-employed taxpayer and spouse

If the taxpayer is self-employed or the spouse/common-law partner of a
self-employed individual, the tax return filing due date is June 15 of the
year following the taxation year. Despite this filing extension, the taxpayer
must still remit any taxes owing by April 30 of the year following the
taxation year.
EXAMPLE
Ling Chu is a tech specialist operating her business as a sole proprietorship. Ling and
her spouse Effie must file their income tax returns by June 15 each year (for the prior
taxation year), although the balance of income tax owing must be paid by April 30 of
the year following the taxation year.
Deceased taxpayer
Year of death
A taxpayer’s income tax return for income earned in the year of death
(commonly referred to as the final or terminal return) is due the later of:
 Six months after the date of the taxpayer’s death
 April 30 of the year following the taxpayer’s death
If a deceased taxpayer was self-employed, or was the spouse or common-

law partner of a self-employed individual, and:
 if death occurred on or between January 1 and December 15, the tax

return filing due date is June 15 of the year following death
 if death occurred on or between December 16 and December 31, the

tax return filing due date is six months after the date of death
The due date for the balance of taxes owing on a final return for a
deceased taxpayer is:
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 April 30 of the year following death, if the taxpayer died on or

between January 1 and October 31
 six months after the date of death, if the taxpayer died on or

between November 1 and December 31
If testamentary debts are being handled through a spousal or common-law

partner trust, the due date for filing the final return is extended to 18
months after the date of death, although taxes owing are generally due by
the normal dates for deceased taxpayers.
Return for year prior to death

When a deceased taxpayer has not filed his or her tax return by its due
date for income earned in the year prior to death, the return and any
balance owing is due within six months after the date of death.
The idea behind these rules is that the legal representative of the deceased
taxpayer should have at least six months before being required to submit a
return. If the taxpayer dies on January 1, the return for income earned in
the year prior to death must be filed by July 1, at the latest (would have
been April 30 if the taxpayer was not deceased). If the self-employed rules
apply, the legal representative has until July 1 (would have been June 15 if
the taxpayer was not deceased).
EXAMPLE 1
Heddie, a retired individual, died on June 18, 2019. Her 2019 income tax return is due
April 30, 2020.
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EXAMPLE 2
Steven, a single individual, died on December 9, 2019. Steven was an employee of
Justin Time Manufacturing, where he had worked for 5 years. His final tax return,
which captures his 2019 income, is due June 9, 2020.
EXAMPLE 3
Sheri, a 42-year-old widow and employee of Ace Tools, died January 24, 2019. Her
2018 income tax return had not yet been filed. Sheri’s 2018 return is due by July 24,
2019, while her final return for 2019 is due by April 30, 2020.
Partner in a partnership
The Income Tax Act designates that a partner in a partnership is carrying
on the business of the partnership for the purposes of determining when
the tax return is due. For that reason, a partner in a partnership will also
have a June 15 filing due date. Although these individuals have until June
15 to file their return, the tax liability is due on April 30 and any interest
owing is calculated from that date.
EXAMPLE
Don is in partnership with Pat, and together they operate a law practice as joint
partners. June 15 is the due date for Don, Pat and their respective spouses to file
their annual income tax returns for the prior taxation year. The due date for any
outstanding tax liabilities is April 30 of the year following the taxation year.
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Corporation
Corporations must file their tax return within six months of their fiscal
year-end.
Taxes owing must be remitted within 60 days after the corporation’s fiscal
year-end. As an exception, a corporation has three months after the year-
end to pay the final balance owing, if the following conditions both apply:
a) the corporation is a Canadian-controlled private corporation

throughout the tax year
b) the corporation is claiming the small business deduction for the tax
year, or was allowed the small business deduction in the previous
tax year
In addition to (a) and (b), the corporation and all associated corporations
together must have total taxable income less than the small business
deduction.
EXAMPLE
Charlene is the sole shareholder of Charbo Inc., a small corporation with an April 30
year-end. The income tax return for Charbo Inc. must be filed by October 31. The
filing due dates for Charlene’s personal income tax return and the corporate income
tax return for Charbo Inc. are independent of each other.
Trust
A trust must file its income tax and information return within 90 days after
the trust’s year-end. As well, any balance of income taxes owing is due
within 90 days after the trust’s year-end.
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Table 5: Summary of Tax Return Filing Due Dates
Situation Filing Due Date Comments
Individual April 30 of the year following Balance of taxes owing is

the taxation year, unless any of due by April 30 of the year
the situations indicated below following the taxation year.
apply.
Self-employed June 15 of the year following Balance of taxes owing is

individual and the taxation year. due by April 30 of the year
his/her spouse or following the taxation year.
common-law
partner
Deceased Normally, the later of six If death occurred January 1

individual months after death or April 30 to October 31, the balance
of the year following death.* of taxes owing is due by
April 30 of the year
For self-employed or a spouse following death.
or common-law partner of a
self-employed person: If death occurred between
- June 15 of the year following November 1 and December
death if death occurred January 31, the balance of taxes
1 to December 15 owing is due six months
- Six months after the date of after the date of death.
death if death occurred
December 16 to December 31
Partner in a June 15 of the year following Balance of taxes owing is

partnership the taxation year. due by April 30.
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Corporation Six months after the Balance of taxes owing is

corporation’s fiscal year-end. due within 60 days after
the corporation’s fiscal
year-end.
A corporation can qualify to
pay its balance of taxes
owing three months after
the corporation’s fiscal
year-end if the corporation
is a Canadian-controlled
private corporation and
claimed the small business
deduction in the current or
previous year. As well, the
corporation and all
companies associated with
it must have had total
taxable income lower than
the small business
deduction.
Trust 90 days after the trust’s year- Balance of taxes owing is

end. due 90 days after the
trust’s year-end.
* If testamentary debts are being handled through a spousal or common-law partner

trust, the due date for filing the final return is extended to 18 months after the date of
death, although taxes owing are generally due by the normal dates for deceased
taxpayers.
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Assessment and appeals
Assessment
Once a taxpayer files an income tax return, the Canada Revenue Agency
may request additional information or may move directly to issue a Notice
of Assessment. The purpose of the Notice of Assessment is to allow the
Canada Revenue Agency to respond to the taxpayer’s filing position and
either accept or challenge what the taxpayer has filed.
If the Notice of Assessment corresponds to the information included in the

original tax return, at that point the matter is likely closed for the time
being.
However, if a mistake in arithmetic has been made or the taxpayer has

misapplied the tax rules, the Notice of Assessment will include an
adjustment resulting in more or less tax owing than was originally reported
in the return filed.
Notice of Assessment
The Notice of Assessment is divided into four distinct sections.
 The first is a section that identifies the taxpayer including his or her
address
 A second section entitled “Notice Details” includes information related

to the return: the tax year, date the Notice of Assessment is issued,
the type of return and the individual’s social insurance number
 A third section, the Notice of Assessment section, describes the

outcome of the Canada Revenue Agency’s assessment together with
what actions, if any, may be required by the taxpayer
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 The fourth section entitled Account Summary includes the taxpayer’s

current balance due, based on the Canada Revenue Agency’s
assessment; the date by which the payment must be made; and, an
explanation indicating that, if the amount noted as due has already
been paid, no additional action is required
Taxpayers will receive a Notice of Assessment either in the mail from the
Canada Revenue Agency or an email instructing them to log into their
online account with the Canada Revenue Agency to download a copy
through the taxpayer’s account.
The Canada Revenue Agency can issue a Notice of Reassessment after it

has issued a Notice of Assessment. A Notice of Reassessment means the
Canada Revenue Agency has more information than was available when it
issued the Notice of Assessment and intends to change the taxpayer’s
amount of income taxes owing or information as filed.
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Figure 3: Notice of Assessment5
5Canada Revenue Agency. “Notice of Assessment.” www.canada.ca/en/revenue-agency/services/about-

canada-revenue-agency-cra/understanding-notices-letters/notice-assessment.html
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Reassessment
Although the Canada Revenue Agency may accept an individual taxpayer’s
return as originally filed, the return is open to reassessment for three
years. Subsequent to having sent a Notice of Assessment, it is common for
the Canada Revenue Agency to request copies of documents or
confirmation of details related to a return, particularly with the shift to on-
line filing.
Individual taxpayers are not required to submit receipts and supporting

documents when returns are filed electronically. It is, however, standard
practice for the Canada Revenue Agency to subsequently request copies of
documents for verification. A Notice of Reassessment is common following
the review of documents that may not support the taxpayer’s original filing
position.
After three years from the date of the original assessment, the return is
statute-barred. This means the Canada Revenue Agency cannot typically
reassess after the three-year period has expired unless the return includes
fraud or misrepresentation, in which case the three-year statute-barred
period does not apply.
Notice of Objection
If a taxpayer receives a Notice of Assessment or Reassessment with a
request to pay more tax, the Notice should be carefully reviewed. If the
taxpayer and/or his or her advisors conclude that the Notice of Assessment
or Reassessment is incorrect, the next step is to contact the Canada
Revenue Agency’s District Office to discuss the situation. If the discussion
results in an impasse, the taxpayer can consider filing a Notice of
Objection or write a letter to the Canada Revenue Agency. The taxpayer
must file the Notice of Objection or letter within 90 days of the date the
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Notice of Assessment was mailed, or within one year of the due date of the
return, whichever is later.
The Notice of Objection must be in writing and must detail the reason why
the taxpayer is objecting. It is sent to the Chief of Appeals at the
appropriate District Taxation Office. The result is an independent review of
the file by the Canada Revenue Agency. The Chief of Appeals then delivers
the results by either confirming the original assessment/re-assessment or
varying it. If the taxpayer feels this assessment does not accurately reflect
the amount of taxes owing, the next step is to appeal the assessment/re-
assessment to the Tax Court of Canada.
Amending a tax return

Generally, an individual can request a change to a tax return for a tax year
ending in any of the 10 previous calendar years. For example, a request
made in 2020 must relate to the 2010 return or a later tax year’s return to
be considered.
Income tax instalments
Requirements
Income tax instalments are designed for a variety of reasons, including
cash flow and fairness. Instalments provide a steady stream of cash to the
government from tax collections to finance ongoing government
expenditures. In addition, there is a fairness issue because many
individuals are subject to tax withholding at source, so they have already
submitted income taxes associated with the payment received. By
requesting instalments from individuals who have income that is not
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subject to a withholding obligation, all taxpayers are treated equally

through the pre-payment of their anticipated income tax obligation.
Instalments are required when an individual receives payments that are

not subject to the withholding system (i.e., income where deductions have
not been made by the payer and remitted to the government on the
taxpayer’s behalf). There is, however, a minimum threshold before
instalments are required on this type of income. Instalments apply to
taxpayers whose net tax owing in either of the two previous taxation years
was $3,000 or more (except Quebec) when the tax return was filed, or
when the taxpayer expects taxes owing in the current year to be $3,000 or
more.
Due dates
Tax instalments are due on the 15th of March, June, September, and
December for all individuals. There is an exception for individuals who earn
farming or fishing income, as their tax instalment is due on December 31.
Calculating the instalment amount

There are three methods for calculating the instalment amount, and
taxpayers may choose the method that favours their situation:
 One-quarter of the estimated tax payable for the current year
 One-quarter of the instalment base (total tax liability excluding certain

credits) from the prior taxation year
 One-quarter of the instalment base from the second preceding taxation

year for the March and June instalments plus one-half of the instalment
base for the preceding year in excess of the March and June payments
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Alternative minimum tax

Alternative minimum tax is a federal concept whereby each individual’s
income tax return is processed through a separate tax calculation that
removes or adjusts income that is subject to special tax preferences. This
process evaluates the impact of tax preferential treatment on the
taxpayer’s overall income tax liability.
Examples of tax preferential treatment for alternative minimum tax

purposes include items such as carrying charges on certain types of
investments, federal dividend tax credits, federal political contribution tax
credits and net capital gains.
The outcome of the special tax calculation is a tax liability that is compared
to the individual’s tax liability under the regular calculation for that
particular year. The taxpayer is required to pay the “higher of” amount
when comparing the two calculations. In order to ensure fairness in the
system, to the extent that an individual pays alternative minimum tax in a
particular year, the excess amount can be carried forward and claimed as
a refund when alternative minimum tax is less than regular tax within the
subsequent seven years.
In general terms, the federal alternative minimum tax calculation begins

with the individual’s taxable income as reported under the general rules,
and then adds back certain tax-preferred items and deducts other taxable
income adjustments to arrive at an adjusted taxable income amount for
alternative minimum tax purposes. This adjusted taxable income is then
reduced by a “basic exemption” of $40,000 to derive net adjusted taxable
income for the individual. The basic exemption of $40,000 is not indexed
annually as are other amounts in the Income Tax Act.
Most provinces also have an alternative minimum tax calculation, which

may mirror or differ somewhat from the federal calculation.
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In summary, alternative minimum tax is designed to ensure that high-

income individuals cannot structure their affairs to pay little or no tax. The
concept behind alternative minimum tax is to reduce or eliminate certain
tax preferences available as part of the general taxable income calculation
in a particular year.
Interest and Penalties

The Income Tax Act stipulates that interest must be paid on late
instalments from the time the instalment is due until the date the
instalment/final tax payment is made. Interest credits can be earned on
pre-paid or overpaid instalments. The effect of these credits can work to
the taxpayer’s advantage. If a taxpayer is late making an instalment, this
can be offset by making an early payment on a subsequent instalment or
by overpaying the subsequent instalment. Interest paid by the government
on an early payment can offset interest accrued due to a previous late
payment.
Penalties
Late filing penalty
If an individual is obligated to file a return but does not do so on time, the
government imposes a penalty of 5% of the unpaid tax. The government
imposes an additional 1% penalty for every additional month the tax
return is late, up to a maximum of 12%. These penalties are in addition to
the interest and penalties the government imposes on late or deficient
payments.
If a taxpayer fails for a second time to file a return, he or she may be

subject to a second occurrence penalty if the first occurrence penalty was
assessed for any of the three preceding years. A second occurrence
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penalty is calculated as 10% of the unpaid amount plus an additional 2%

per month to a maximum of 20 months.
Failure to report income

When individuals fail to report income, the government applies an
automatic penalty of 10% of the unreported amount if there has been
unreported income in any of the three preceding taxation years.
False statement or omissions penalty

If an individual has knowingly, or under circumstances that amount to
gross negligence, made a false statement or omission, he or she could be
subject to a penalty equal to the greater of $100 and 50% of the
understated tax or credits.
Failure to pay tax

When individuals pay their tax instalments or a balance due late or in
deficient amounts, the government imposes an interest charge on the late
or deficient taxes owed. The interest is set quarterly as the prescribed
interest rate plus 4%. The prescribed interest rate is the average rate of
90-day Government of Canada treasury bills during the first month of the
preceding quarter.
EXAMPLE
The average interest rate on 90-day treasury bills in the first month of 2019 (the
preceding quarter to April, May and June of 2019) was 2%. Therefore, the interest
rate charged to taxpayers on late or deficient payments was 6% (2% + 4%) for
amounts outstanding during April, May and June 2019.
Interest charges apply to late or deficient amounts from the time the
payment was due until any payments are made. This is in addition to any
penalties that may be applied because of the late or deficient payment.
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When individuals file a Notice of Objection to the Canada Revenue

Agency’s assessment of their filing position and ultimately lose their
appeal, interest accrues on the disputed taxes owing from the original date
on which the taxes were due. This can result in a considerable amount of
interest, and possibly penalties, which may actually exceed the amount of
taxes owing. Individuals who file objections should assess the potential
cost of interest owing on the amount payable and determine if they would
be better off paying all or part of the taxes the Canada Revenue Agency
assessed as owing and await a refund if the appeal is successful. Interest
accrues on the refund owing to the taxpayer if the taxpayer pays the
assessed amount and subsequently wins the appeal.
Collecting taxes, interest and penalties owing

Taxpayers who cannot pay the amount owing in full on the due date should
contact the Canada Revenue Agency prior to the due date to initiate
discussions about payment arrangements. A repayment schedule includes
interest charges based on the prescribed rate of interest; however, by
making acceptable repayment arrangements in advance of the due date,
individuals avoid penalties associated with late payments. There are
circumstances when the Canada Revenue Agency may grant relief from
interest and penalties.
If a taxpayer refuses to pay, the Canada Revenue Agency has several

options to recover amounts owing. The Canada Revenue Agency could set-
off any amount the government owes the taxpayer (i.e., GST/HST refunds
or other refunds owing) or garnish wages or other amounts owing to the
taxpayer. The Canada Revenue Agency can register the debt with the
Federal Court of Canada or obtain a judgement in a provincial court, which
would allow the Canada Revenue Agency to seize and sell the taxpayer’s
assets.
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Tax refunds
It is the Canada Revenue Agency’s general practice to assess and issue a
refund within two weeks for tax returns filed online and within eight weeks
for paper filings. It is common, however, for the Canada Revenue Agency
to request additional information from a taxpayer after a Notice of
Assessment has been issued, particularly for returns filed online.
The Canada Revenue Agency pays interest to individuals who receive

refunds. The rate of interest paid is the prescribed interest rate plus 2%.
The interest calculation starts at the later of the following three dates:
 May 31 of the year the tax return is due
 31 days after the return is filed
 The day after taxes were overpaid
Third-party civil penalties

To more expeditiously deal with tax advisors who knowingly, or through
gross negligence, make false statements or omit material facts relating to
the income tax affairs (also GST/HST) of a taxpayer, the Income Tax Act
includes civil penalties for third parties. While initially the penalties
appeared to target promoters of tax shelters, valuators and those who
prepare tax returns, the legislation has broad ramifications and is
expansive in nature.
The third-party civil penalties can apply to planning-, preparing- and

valuating-type activities. The penalties associated with third-party
penalties can be as high as $100,000 in certain large-dollar transactions.
Generally, penalties occur when a third party furnishes a statement that
the third party knows, or should have known, is false. This includes
statements that are false because of an omission of fact and apply even
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when the planner or preparer did not intend to deceive. The rules are very
broad and complex, with possible implications for financial advisors.
Financial advisors, including financial planners, should be cognizant of the
existence of civil penalty rules and apply care in providing tax planning
advice.
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Personal Income Tax
Introduction
A financial planner must have a good understanding of the Canadian
personal income tax system. As such, this section provides a
comprehensive understanding of the general concepts of personal income
tax and a foundation for the basic elements and issues surrounding income
tax computations.
This section frequently references the Income Tax and Benefit Return,
which is available on the Canada Revenue Agency website. The discussion
does not review every line of the form, but rather focuses on select
aspects. While reading this section, be sure to refer to the areas/lines
referenced on the Income Tax and Benefit Return.
The titles and subtitles in this section reference the numbers (Roman
numerals) assigned to each of the 14 steps described in the Calculating an
Individual’s Income Tax Liability table and Income Tax Calculation list.
Income tax framework

While the Income Tax Act is the law that governs the amount of tax
individuals are required to pay each taxation year, the Canada Revenue
Agency incorporates those laws into a tax return form called the Income
Tax and Benefit Return. By following the instructions on the form,
Canadians can be confident they are abiding by the tax laws set out by
Parliament. It is important, however, to realize that the form is not the
law, and in rare cases where the Income Tax Act and Income Tax and
Benefit Return might differ, the Income Tax Act prevails.
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A process for determining an individual’s personal income tax liability is

built into the steps required to complete the Income Tax and Benefit
Return. It is important to understand the individual elements of the tax
return — particularly elements that have financial planning implications —
and how the pieces fit together overall.
Before discussing the individual components, this section reviews the

overall process for calculating an individual’s income tax liability. Table 6
lists the 14 steps that together create the framework for determining an
individual’s income tax liability.
Table 6: Calculating an Individual’s Income Tax Liability
Step Calculation
(I) Calculating Total Income
(II) Deductions from Total Income
(III) Net Income
(IV) Deductions from Net Income
(V) Taxable Income
(VI) Calculating Initial Federal Tax
(VII.I) Deduction of Non-Refundable Federal Tax Credits
(VII.II) Deduction of Refundable Federal Tax Credits
(VIII) Basic Federal Tax
(IX) Deductions/Additions to Basic Federal Tax
(X) Basic Provincial Income Tax
(XI) Refund or Balance Due
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Income tax calculation

There is detail within each of these steps that fills in the framework for
calculating an individual’s income tax liability. This section summarizes the
individual components that make up each step.
(I) Calculating Total Income includes:
 Employment income
 Other employment income
 Old Age Security income
 Canada Pension Plan/Quebec Pension Plan (CPP/QPP) income
 Pension income (including elected split-pension income)
 Employment Insurance income
 Taxable amount of dividends from Canadian corporations
 Interest and other investment income
 Net partnership income
 Registered Disability Savings Plan (RDSP) income
 Net rental income
 Taxable capital gains
 Taxable support payments received
 Registered Retirement Savings Plan (RRSP) income
 Other income
 Net income from self-employment
 Workers’ Compensation payments
 Social assistance payments
 Net federal supplements
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(II) Deductions from Total Income includes:
 Registered Pension Plan (RPP) contributions
 Registered Retirement Savings Plan (RRSP) contributions
 Deduction for elected split-pension amount
 Professional, association and union dues
 Child care expenses
 Disability support expenses
 Allowable business investment losses
 Moving expenses
 Deductible support payments made
 Carrying charges and interest expenses
 Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions on

self-employed earnings
 Exploration and development expenses
 Other employment expenses
 Social benefits repayment
(III) Net Income
= (I) – (II)
(IV) Deductions from Net Income includes:
 Stock option and share deductions
 Other payment deductions
 Limited partnership losses of other years
 Non-capital losses of other years
 Net capital losses of other years

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 Capital gains deductions
 Northern residents deduction
(V) Taxable Income
= (III) – (IV)
(VI) Calculating Initial Federal Tax
= ((V) x (Applicable Federal Tax Rate))
(VII.I) Deduction of Non-Refundable Federal Tax Credits includes:
 Basic personal amount
 Age amount
 Spouse or common-law partner amount
 Amount for an eligible dependant (formerly equivalent-to-spouse)
 Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions
 Canada employment amount
 Home buyer’s amount
 Adoption expenses
 Pension income amount
 Canada caregiver amount for spouse and eligible dependants
 Disability amount
 Disability amount transferred from a dependant
 Interest paid on student loans
 Tuition and education amounts
 Tuition and education amounts transferred from a child

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 Amounts transferred from spouse or common-law partner
 Medical expenses
 Donations and gifts
 Dividend tax credit
 Minimum tax carryover (ties into alternative minimum tax)
(VII.II) Deduction of Refundable Federal Tax Credits includes:
 Working income tax credit
 GST/HST tax credit
(VIII) Basic Federal Tax
= (VI) – (VII)
(IX) Deductions/Additions to Basic Federal Tax includes:
Subtract:
 Federal foreign tax credit
 Federal political contributions tax credit
 Investment tax credit
 Labour-sponsored funds tax credit
Add:
 Additional tax on Registered Education Savings Plan (RESP)

accumulated income payments
Net Federal Tax
= (VIII) – (IX)
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(X) Calculating Basic Provincial Income Tax
(calculated on a separate schedule)
Provincial income taxes are calculated in a manner similar to the federal

tax calculation, using a separate schedule. Pick up taxable income from (V)
and follow through each of steps (VI), (VII), (VIII) and (IX), replacing the
term “federal” with the applicable province/territory. When the calculation
is complete, the provincial/territorial income tax payable is brought back
from the separate schedule into the calculation.
Calculating Total Payable includes:
Add:
 Net federal tax (VIII - IX)
 CPP contribution payable on self-employment earnings
 Repayment of social benefits (Employment Insurance and Old Age Security)
 Provincial/territorial tax (except for Quebec residents) (X)
Calculating Total Credits
 Total income tax deducted
 CPP overpayment
 Employment Insurance overpayment
 Refundable medical expense supplement
 Working Income Tax Benefit (WITB)
 Refund of investment tax credit
 Tax paid by instalments
(XI) Refund or Balance Due= Total tax payable less total credits
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(I) Calculating total income

Figure 4 shows page 2 of the 2018 Manitoba personal tax return. This part
of the personal tax return collects all income items individuals must report.
Throughout the subsequent material, any reference to line numbers in the
income tax return is for reference purposes only. You do not need to
memorize or utilize tax return line numbers for your ongoing studies.
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Figure 4: Total Income
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Employment income
Line 101
Salary, wages or gratuities

An individual may receive employment income that could consist of salary,
wages or gratuities. Typically, an employer issues a T4 slip to an employee
to report remuneration it pays to that individual employee as a result of his
or her employment. Employment income may include regular salary or
bonuses, commissions paid to an employee, vacation pay, an honorarium,
director’s fees and even the fees individuals receive in their role as
executor of an estate (except if the individual acts in this capacity in the
regular course of business).
Commissions
While commission income earned by employees is reported with all
employment income, it is also reported on line 102. This is important
because an employee earning commission income is entitled to certain
expense deductions.
Tips and gratuities

Tips and gratuities fall within employment income and, in some cases, are
reported by the employer. When an employee receives tips and gratuities
that the employer does not report, it is the employee’s responsibility to
report the amount received as employment income on line 104.
Taxpayers report employment income for income tax purposes in the year
they receive it, not the year in which it is earned. For example, payment
on January 8 that relates to work done in December of the prior year is
taxed as employment income in the year the taxpayer receives the
payment. Retroactive pay increases are taxed when received, so there is
no need to amend a tax return.
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Taxable benefits and allowances

All taxable benefits and allowances an employee receives count as
employment income. This ensures that an employee’s total remuneration
package is fully taxed to create fairness and equity regardless of how an
employer and employee structure the employee’s total remuneration
package. For example, an employee earning $100,000 of employment
income is taxed in a manner similar to an employee earning $80,000 of
employment income plus taxable benefits valued at $10,000 and taxable
allowances valued at $10,000.
Employers are obligated to send T4 slips covering employment income

amounts they paid to all employees during the applicable taxation year.
Employment income appears in box 14 on the T4 slip and is entered on
line 101 of the return. Taxpayers must separately enter on line 104, as
other employment income, any employment income they earned that is
not included on a T4 slip and captured on line 101.
Salary deferral arrangement

A salary deferral plan or salary deferral arrangement is a defined term in
the Income Tax Act that describes a special agreement between an
employee and an employer with respect to the payment of salary or
wages. In simple terms, it refers to a situation in which an employee is
permitted to postpone the receipt of salary or wages to a later year. The
postponed amount is referred to as the deferred amount.
Under the salary deferral rules, the deferred amount is taxable in the year
the right arises, rather than in the year the employee receives the amount.
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There is an exception for sabbatical arrangements, under which an

individual is permitted to defer the receipt of current year income to fund a
future absence from work.
Taxable benefits and allowances

The taxation of employment benefits an employer provides to an employee
can cause confusion as there is often a misconception that benefits are not
taxable. This is simply not true. Most employment-related benefits are
treated as employment income unless there is a specific exclusion. The
value of all taxable benefits and allowances is reported on the employee’s
pay, and income tax applies to the fair market value of the benefit.
Taxable benefits are included in the return on line 101 (if included in box
14 of the T4 slip) or on line 104 (if the taxpayer is reporting the income
without a corresponding T4 slip).
An employee receives a benefit when an employer gives or pays for

something that is personal in nature for the employee (not business-
related) and an economic benefit arises. A benefit can be provided directly
to the employee or to a person who is non-arm’s length to the employee
(e.g., to a spouse, child or parent of the employee). A benefit can be
merchandise or services, and can include use of a company-owned
recreational vehicle or use of company-paid seats at a sports event for the
employee’s personal enjoyment or the enjoyment of a person who is non-
arm’s length to the employee. A benefit also includes an allowance or
reimbursement of personal expenses.
Allowances are periodic or lump-sum amounts employers pay to employees

in addition to the employee’s regular wage or salary. While allowances are
often intended to assist the employee with anticipated expenses, they are
typically an arbitrary amount with no specific relationship to the actual costs
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incurred. As such, there is an economic benefit to the employee so, in most

instances, allowances are treated as taxable income.
When employers reimburse employees for specific expenses employees

incur while carrying out their duties of employment, these reimbursements
relate to specific business expenses and do not typically create a taxable
benefit to employees.
The following pages examine examples of taxable benefits acquired by

virtue of an office or employment, including benefits that are taxable in
some situations but not in others.
Automobile benefit
If an employer makes a vehicle available to an employee, it creates a
taxable benefit to the employee and the employee must include the value
of the benefit in income. The Income Tax Act sets out specific formulas to
establish the value, which includes both a standby charge and an operating
cost benefit the employee must include in taxable income.
Standby charge
A standby charge applies when business-use of the vehicle is less than

90% of total use or when personal-use of the vehicle is more than 1,000
kilometres per month. The standby charge is calculated as follows:
Standby Charge
Employer owns automobile
Standby charge = 2% x (number of months the vehicle is available for use) x (total
original cost of the vehicle including all PST, GST, HST) – (employee reimbursements
attributable to the standby charge made no later than 45 days after the end of the
year)
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Employer leases automobile
Standby charge = 2/3 x ((monthly lease cost excluding insurance or other itemized
charges) x (number of months the vehicle is available for use)) – (employee
reimbursements attributable to the standby charge made no later than 45 days after
the end of the year)
This is a very expensive charge that equates to the employee having an

income inclusion of 2% of the cost of the vehicle or two-thirds of the cost
of the lease for every month an employer-owned vehicle is available for
use. To determine the number of months the vehicle was available, divide
the total number of days the automobile was available (including
weekends and holidays) by 30, and round the result to the nearest whole
number.
EXAMPLE
Keith’s employer provides him with an automobile valued at $30,000 (including HST).
The vehicle was available to Keith for the entire past year. Keith did not reimburse his
employer for expenses associated with the use of the automobile. This creates a
standby charge of:
2% x 12 months x $30,000
= $600 per month x 12 months
= $7,200
This $7,200 is treated as a taxable benefit that is included in Keith’s income.
EXAMPLE
Hetta’s employer leases an automobile for her exclusive use throughout the year. The
employer’s monthly lease cost is $600. Hetta did not reimburse her employer for the
use of the automobile. This creates a standby charge of:
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2/3 x $600 x 12 months

= $400 per month x 12 months
= $4,800
This $4,800 is treated as a taxable benefit that is included in Hetta’s income.
As a planning tip, individuals whose employer makes a vehicle available for

their use should leave the vehicle at the employer’s office/location
whenever the vehicle is not needed. For example, when an employee is on
vacation, it can be financially advantageous to leave the vehicle at the
employer’s location, thereby making it unavailable for the employee’s use
and reducing the “available for use” number in the standby charge
calculation.
The same strategy applies if the vehicle is not used on weekends. Simply
leaving a vehicle in the employee’s home garage is generally not sufficient
to reduce the “available for use” number, even if the employee does not
use it or is away from home. The best approach is to leave the vehicle, and
keys to the vehicle, at the employer’s office/location whenever the vehicle
is not needed.
Reduced standby charge
A reduced standby charge may be available when all of the following

criteria are met:
 The employer must specify that the vehicle is required for business
 Personal-use of the automobile must be less than 50%
 Personal-use of the automobile must average less than 1,667

kilometres per month (i.e., 20,004 kilometres per year)
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In this special circumstance:
Reduced standby charge = (basic standby charge) x

((average personal-use kilometres per month) ÷ 1,667)
Based on this formula, an employee realizes a reduced standby charge in

the ratio of personal kilometres per year divided by 20,004.
As an example, if the personal-use of a company-owned automobile for

the entire year was only 750 kilometres per month on average, and the
business-use was at least 50% of the total kilometres travelled, the
employee is eligible for a reduced standby charge. This assumes the
employer specifies that the vehicle is required for business-use.
EXAMPLE
If Keith from the previous example used the vehicle for business purposes at least
50% of the time, and if his personal portion of the total kilometres travelled averaged
750 kilometres per month, Keith is eligible for a reduced standby charge. Keith’s
reduced standby charge is calculated as follows:
$7,200 x (750 ÷ 1,667)

= $3,239
The concept of personal-use is very broadly defined and generally includes

travel between the employee’s home and place of employment, regardless
of whether the employee had the vehicle at home because he or she was
“on call.”
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Operating cost benefit
When an employer makes an automobile available to an employee, the

employee has an income inclusion related to the operating cost benefit as
well as the standby charge. Any reimbursement an employee makes
during the year or within 45 days after the year-end reduces the amount
of the operating cost benefit. If the employee reimburses all personal
operating expenses to the employer during the year or within 45 days after
December 31, then no operating cost benefit applies.
There are two ways to calculate the operating benefit:
Alternative 1
The general alternative is to apply a prescribed kilometre charge for every kilometre of
personal-use driving. The prescribed rate is set annually; for 2019, it was $0.28 per
kilometre of personal-use driving.
Alternative 2
If an employee can demonstrate that he or she used the vehicle primarily for business
purposes (i.e., 50% or more), a second alternative is available. Under this alternative,
the employee may choose an operating cost benefit income inclusion equal to 50% of
the applicable standby charge. The employee must also request in writing, before the
end of the year, that the employer use Alternative 2.
EXAMPLE
Assume that Keith in the previous examples drove the company-owned automobile a
total of 20,000 kilometres in the year. During that time, 75% of the kilometres were for
business purposes, while the other 25% constituted personal driving. Although Keith
did not keep a detailed driving record, he had sufficient general records to
approximate the 75%/25% split. The operating cost of the vehicle (gas, oil,
maintenance, insurance) totalled $5,000 during the 12 months of the year that Keith
drove the automobile. The company paid for all operating costs.
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What is Keith’s income inclusion?
The basic standby charge is (2% x (cost of vehicle) x (number of months driven)). In
this case:
Standby charge
= 2% x $30,000 x 12 months
= $7,200 for the year
Reduced standby charge

= $7,200 x ((20,000 x 25%) ÷ 1,667)
12
= $1,800
Keith must also include an operating cost benefit in his income. Because he does not
have detailed driving logs, but can substantiate more than 50% business use, he can
use the formula that designates the operating cost benefit to be 50% of the standby
charge amount. Under this formula:
Operating cost benefit

= 50% x standby charge
= 50% x $1,800
= $900
Note that Keith’s operating cost benefit does not relate to the actual expenses his
employer incurred with respect to the automobile. Instead, Keith must apply the
government-prescribed formula.
The total income inclusion for Keith for the company-owned automobile is:
Standby charge $1,800

Operating benefit $900
Total $2,700
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Had Keith kept detailed driving records to support driving 5,000 kilometres of
personal-use, he could have used the alternative method to calculate an operating
cost benefit of $1,400 (20,000 kilometres x 25% x $0.28/kilometre). There is no
benefit to using Alternative 1 for Keith in this case.
Parking
Employer-provided parking is usually a taxable benefit, whether or not the
employer owns the parking lot.
There are some exceptions, such as:
 When the employee has a disability, the parking benefit is generally not
taxable
 When the parking is for business purposes and the employee regularly
uses his or her own car for business travel
 When the parking is on a scramble basis (i.e., no reserved spots) and

there fewer parking spaces than employees who regularly want to park
(10 parking spaces with 30 employees who regularly want to park).
Scramble parking does not generate a taxable benefit when accurately

assigning a value to the benefit is not possible because of the random
or uncertain nature of the parking.
Transit passes
Employer-provided or subsidized transit passes are a taxable benefit to the
employee.
There is an exception for airline employees, who can travel personally

without being charged a taxable benefit as long as the ticket is on standby
and not a confirmed seat.
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Employer-paid education
Employer-paid training and educational costs are a taxable benefit to the
employee, unless the training is primarily for the benefit of the employer.
In situations where the employer payment of education or training costs

generates a taxable benefit to the employee, the employee is deemed to
have paid the tuition costs. As such, the employee is eligible to claim any
applicable non-refundable tax credits with respect to tuition “paid.”
EXAMPLE 1
Moham is the director of marketing at NetPro Software, where he has worked for the
past five years. To increase his knowledge of accounting and finance, Moham
enrolled in an executive MBA program at a local university. NetPro Software paid
Moham’s tuition — $20,000 per year for two years —because they felt the Moham
would be of greater value to the organization after completing the degree. He would
have a more solid grasp of accounting and finance concepts. In this case, the
$20,000 for each of the two years is a non-taxable benefit for Moham.
EXAMPLE 2
Effie is the vice-president of finance for UR First Health Centres, where her role
involves managing all aspects of the company’s financial affairs. Having been in her
role for 12 years, and having taken many courses to enhance her skills, Effie recently
enrolled in a nutrition program at the local college. The program focused on a
completely new and unrelated field Effie wished to explore. Keeping with standard
company policy, UR First Health Centres paid the $2,500 tuition cost for Effie’s
enrolment in the nutrition program. This $2,500 cost is a taxable benefit to Effie
because, while it is company policy to cover fees for programs of this nature, her
participation does not have a direct benefit for the employer.
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Private non-group wage-loss replacement plan

If the employer contributes to a private wage-loss replacement plan that
specifically relates to a personally owned non-group plan, the premium the
employer pays is a taxable benefit to the employee. This is no different
from an employer paying a personal expense on behalf of an employee.
Private wage-loss replacement plans include:
 A sickness or accident insurance plan
 A disability insurance plan
 An income maintenance insurance plan
However, be cautious when assessing the type of program (non-group

versus group), because if the plan forms part of a group program, the tax
treatment can differ. Find more information about this under “Premiums
for group wage-loss replacement plan."
When an employer pays the premium for a private non-group wage-loss

replacement plan, the employer’s premium payment generates a taxable
benefit to the employee and, therefore, the premium for the plan is
considered paid for in after-tax dollars. If the employee becomes ill and
qualifies for benefits from the plan, the benefit payment is non-taxable
because the premium was considered paid for in after-tax dollars.
EXAMPLE
Alicia’s employer pays the monthly premium of $85.49 ($1,025.88 annually) for her
individual disability insurance policy. The $1,025.88 is a taxable benefit to Alicia.
If Alicia becomes disabled and qualifies for benefits under the individual disability
insurance policy, the benefit payments she receives are non-taxable.
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Group life insurance plan

When an employer pays premiums for group life insurance on behalf of an
employee, it creates a taxable benefit to the employee, unless the
employee reimburses the employer for the premium payment either
directly or through a payroll deduction.
EXAMPLE 1
As part of Bongo’s benefits program at work, his employer pays the premium for his
group life insurance. The monthly premium is $18.75. The employer’s payment of this
premium generates a taxable benefit to Bongo of $225 per year ($18.75 per month for
12 months).
EXAMPLE 2
Leah’s employer provides group life insurance as part of its benefits package. While
the employer pays the monthly premium to the insurance carrier (cost of Leah’s
insurance is $22.95 per month), her employer withholds $22.95 from Leah’s monthly
paycheque. In this case, because Leah is repaying her employer for the cost of the
insurance premium, she will not incur a taxable benefit.
Financial planning, tax planning, re-employment counselling

and retirement planning
If an employer provides financial and/or tax planning to an employee, the
value of the service is a taxable benefit to the employee. However, the
cost of planning with respect to re-employment or retirement is not a
taxable benefit to the employee. It is important to understand and define
the specific type of service to ensure the correct tax treatment is applied.
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EXAMPLE 1
As part of a comprehensive benefits package available to all employees, Michelle’s
employer makes the services of a financial planner available to all staff and their
families. The employer covers the cost of this financial planning service. Michelle and
her spouse have decided to use this service, so its value becomes a taxable benefit to
Michelle and her employer will add it to her T4 slip.
EXAMPLE 2
Nick has been provided with four months’ notice that his position with URL will
become redundant. As part of his severance package, Nick has opted to participate in
re-employment counselling services. The value of the re-employment counselling
services URL pays for Nick’s participation in these services is not a taxable benefit to
Nick.
Professional fees
If an employer reimburses or provides access to professional services,
such as estate lawyers or tax preparation, the employer’s cost for the
services is a taxable benefit to employees who access these services.
Interest-free, low-interest and forgiven loans

Almost all interest-free, low-interest and forgiven loans granted by virtue
of an office or employment constitute a taxable benefit and trigger an
income inclusion for the employee. The following discussion refers to
employee situations and not situations involving shareholders or their
relatives.
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Prescribed interest rate
An interest rate referred to as the prescribed interest rate is an integral

part of many tax calculations. For example, the formula for calculating the
taxable benefit associated with loans to employees incorporates the
prescribed interest rate.
The federal government establishes the prescribed interest rate each

calendar quarter as the average rate (rounded to the next highest whole
percentage if the average is not a whole percentage) charged on 90-day
Government of Canada treasury bills issued during the first month of the
preceding quarter. This calculation results in establishment of the
prescribed interest rate between two and five months before the relevant
date when it might be used in tax calculations.
Table 7 summarizes the prescribed interest rates in 2017, 2018 and 2019
that are applicable for taxable benefits for employees.
Table 7: Prescribed Interest Rates
Year Quarter
1st 2nd 3rd 4th
2019 2% 2% 2% 2%
2018 1% 2% 2% 2%
2017 1% 1% 1% 1%
The following examples calculate an imputed interest benefit, which

becomes a taxable benefit amount the taxpayer must include in income.
Interest-free loans: When an employer provides an interest-free loan to an

employee, an imputed interest benefit applies and is calculated by
multiplying the prescribed interest rate by the outstanding loan amount for
the relevant tax period.
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Low-interest loans: When an employer provides a low-interest loan to an

employee, an imputed interest benefit applies. The benefit is calculated by
multiplying the prescribed interest rate by the outstanding loan amount
and subtracting the amount of any interest paid during the year or paid no
later than 30 days after the end of the year.
Forgiven loans: When an employer forgives a loan made to an employee,

an imputed benefit applies. The benefit is the face value of the forgiven
loan amount.
Home loans: When an employer makes a loan to an employee to purchase

a home, the method for calculating the imputed benefit changes slightly.
The deemed benefit on this type of loan uses the lesser of the prescribed
interest rate in effect at the time the loan was granted and the prescribed
interest rate for each quarter. When the term of the loan exceeds five
years, the deemed benefit calculation resets, so the prescribed interest
rate in effect at that five-year point becomes the new maximum in the
formula (the lesser of the prescribed interest rate at the five-year point
and the prescribed interest rate for each quarter). This reset occurs every
five years over the life of the home purchase loan.
EXAMPLE
In an effort to recruit Spencer as its new sales director, Big Sales Company offered him
an interest-free loan of $20,000 to use towards the purchase of a cottage.
Assume that Big Sales Company granted the loan to Spencer on January 1, 2019, when
he joined the firm. What is the income inclusion associated with Spencer’s loan for the
2019 tax year?
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The tax rules require the calculation of an imputed interest benefit that is added to
Spencer’s 2019 income as a taxable benefit. The interest income benefit is the
difference between the prescribed interest rate and the amount of interest actually
paid (which in this case is nil because it was an interest-free loan).
The prescribed interest rate for 2019 was 2% for each quarter. This results in an
income inclusion of $400 in 2019 for the imputed interest benefit:
Calculation Taxable Benefit
2% x $20,000 x 90
1st Quarter $98.63
365
2% x $20,000 x 91
2nd Quarter $99.73
365
2% x $20,000 x 92
3rd Quarter $100.82
365
2% x $20,000 x 92
4th Quarter $100.82
365
Total for 2019 $400.00
Spencer will have a $400 imputed interest taxable benefit as a result of his interest-
free loan from Big Sales Co.
RRSP contributions
Any amount that an employer contributes to an employee’s RRSP, or pays
to cover the cost of RRSP administration, is a taxable benefit to the
employee. This does not include amounts withheld from an employee’s
remuneration for contribution to an RRSP.
Although the employer’s contribution to the employee’s RRSP (or spousal

RRSP where the employee is the contributor) is a taxable benefit, the
deduction for the RRSP contribution offsets the income tax effect.
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EXAMPLE
Wilson participates in a group RRSP sponsored by his employer. As part of the
employee benefits package, Wilson’s employer matches employee contributions to
the plan. During the year, Wilson’s employer withheld $6,750 from his earnings as his
contribution to the group RRSP. In addition, the employer contributed $6,750 directly
to the group RRSP on Wilson’s behalf, to match Wilson’s contribution.
The employer’s direct contribution of $6,750 is a taxable benefit to Wilson, although

Wilson qualifies for a $13,500 RRSP deduction (based on contributions of $6,750
from the employer and $6,750 from Wilson).
Note, however, that the $6,750 specifically withheld from Wilson’s pay and submitted
on his behalf to the group RRSP does not constitute a taxable benefit because the
contribution was from Wilson’s own money (deducted from his paycheque).
Employee stock option plans

Calculating the benefit
The rules surrounding the taxable benefits associated with stock options
have expanded in recent years and in their entirety are quite complex.
Basic rule: Merely the granting of options does not generate a taxable
benefit. For a taxable employment benefit to arise, the employee must
exercise the option and purchase or acquire shares. The taxable benefit is
the amount by which the fair market value of the shares (what they were
worth at the time of purchase) exceeds the exercise price (the price at
which the shares were purchased).
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Taxable benefit = (value of shares acquired) – (cost to acquire the shares)
The employee’s adjusted cost base is the sum of:
 What he or she actually paid (i.e., the cost to acquire the shares)
plus
 The amount of the taxable benefit
plus
 The amount, if any, paid for the options
Offsetting deduction: The rules also provide an offsetting deduction in

certain circumstances. A deduction equal to 50% (i.e., an amount equal to
the capital gains inclusion rate) of the benefit is available from net income
in determining taxable income (at line 249) if the fair market value of the
shares when the employer granted the options was equal to or less than:
 The exercise price of the shares
plus
 Any costs associated with acquiring the options
To qualify for this deduction both of the following conditions must apply:
 The employee must deal at arm’s length with the corporation
 The shares acquired must be common shares
This deduction does not affect the employee’s adjusted cost base of the
shares.
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EXAMPLE
In 2015, Bill is granted 1,000 options to buy common shares of his employer, a
publicly traded company. Bill deals at arm’s length with the company. The options
have an exercise price of $10 each at a time when the shares are trading on the open
market at $9 each. In January 2019, Bill exercises his right to buy 1,000 shares by
paying $10,000. At the time Bill exercises his options, the fair market value of the
shares has risen to $25 each. In October 2019, Bill leaves his employer and sells his
shares on the open market for $35 each. What are the income tax implications of
these transactions?
2015
No income tax implications.
January 2019
Bill realizes a taxable benefit of $15,000, calculated as $25 (fair market value at time
of exercise) less $10 (exercise price) multiplied by 1,000 shares.
Taxable benefit
= ($25 – $10) x 1,000
= $15,000
Bill’s adjusted cost base is $25,000, calculated as $10,000 (what he paid his
employer) plus $15,000 (his taxable benefit).
Adjusted cost base

= $10,000 + $15,000
= $25,000
Bill is entitled to a deduction from net income of $7,500, calculated as 50% (current
capital gains inclusion rate) times $15,000 (taxable benefit).
Deduction
= 50% x $15,000
= $7,500
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October 2019
Bill realizes a capital gain of $10,000, calculated as $35 (selling price) less $25 (his
adjusted cost base) times 1,000 shares.
Capital gain
= ($35 – $25) x 1,000
= $10,000
Employee Stock Option Plans – Cash Out
It is possible to structure employee stock option agreements so that the

employees dispose of (“cash out”) their stock option rights for a cash
payment from the employer (or other in-kind benefit).
The employer is entitled to a deduction equal to the payment, and the

employee realizes a taxable benefit; both amounts would be equal to the
difference between the fair market value of the stock and the exercise
price.
Alternatively, the employer can elect not to take the deduction, in which
case the employee would be entitled to a deduction equal to 50% of the
taxable benefit realized.
Employee Stock Option Plans - CCPC
The rules change slightly when stock options are granted by a Canadian-
controlled private corporation (CCPC) to an employee who deals at arm’s
length with the corporation. The employment income inclusion is the same
amount, but the timing of the income inclusion is deferred until the shares
are sold (this is different from the basic rules where the income inclusion
occurs when the shares are purchased).
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In addition, in the case of a Canadian-controlled private corporation it is

possible to qualify for the offsetting deduction in two ways, rather than
just one. The deduction is available if either of the following circumstances
apply:
 The shares acquired when the option is exercised are held for a
minimum of two years
 The exercise price (the price the underlying share can be purchased
for) is equal to or greater than the fair market value of the shares
when the options were granted
The offsetting deduction reduces the tax cost of the employee benefit by
an amount equal to 50% of the difference between the exercise price and
fair market value.
The criteria outlined above allows an employer to grant options to

employees at an exercise price less than the fair market value of the
shares at the time the option is granted. Assuming the employee holds the
shares for at least two years, this is a significant advantage as it eliminates
the need for valuation of the employer’s shares.
EXAMPLE
In 2010, Leo is granted 1,000 options to buy shares of his employer, a CCPC. The
options have an exercise price of $1 each at a time when shares are worth
approximately $8 each. In 2015, Leo exercises his right to buy 1,000 shares by paying
$1,000 to his employer, when the shares are valued at $10 each. In 2019, Leo leaves
his employer and sells his shares for $35 each. What are the income tax implications
of these transactions?
2010
No income tax implications.
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2015
No income tax implications. Since the employer is a CCPC, Leo does not have a
taxable benefit income inclusion at the time he exercises his options.
2019
Leo realizes a taxable benefit of $9,000, calculated as $10 (fair market value at time
of exercise) less $1 (exercise price) times 1,000 shares.
Taxable benefit
= ($10 – $1) x 1,000
= $9,000
Leo also realizes a capital gain of $25,000, calculated as $35 (selling price) less $10
($1 cost of shares exercise price plus $9 taxable benefit) times 1,000 shares.
Capital gain
= ($35 – ($1 + $9)) x 1,000

= $25,000
Leo is entitled to a deduction from net income of $4,500, calculated as 50% (current
capital gains inclusion rate) times $9,000 (taxable benefit), since he held the CCPC
shares for more than two years.
Deduction
= 50% x $9,000
= $4,500
Stock purchase plans

When an employer gives an employee the option to purchase stocks of the
employer through an employer-sponsored stock purchase plan, any
amount the employer provides to the employee is reported as taxable
income to the employee. Consider, for instance, a situation in which
employees use 3% of their income to purchase shares in a stock purchase
plan and the employer matches the 3% for a total amount of 6%. In this
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scenario, the employees’ portion has no tax consequences, but the amount
the employer pays is taxable income to the employees.
Premiums for provincial hospitalization and medical insurance

Premiums an employer pays on behalf of an employee for provincial
healthcare services plans are a taxable benefit to the employee. This refers
to provincial plans where the employee is normally liable for the premium
(e.g., Alberta).
When the province levies a provincial health tax to the employer, there is
no taxable benefit to the employee since liability for the tax lies with the
employer and not the employee (e.g., Ontario’s Employer Health Tax).
Loyalty and points programs

Employees may collect loyalty points on their personal credit cards when
travelling on business trips for which the employer reimburses the travel
expenses. Generally, employees do not have to include in their income the
value of the rewards they received from the points collected on the
business trips unless any of the following apply:
 They convert the points to cash
 The arrangement between the employer and employee appears to be

structured as a form of remuneration
 The arrangement is designed for tax avoidance
When an employee uses a company credit card, the points are considered
to belong to the employer. As such, when an employee uses the points
associated with a company-owned credit card, the fair market value of the
benefit derived is a taxable benefit to the employee. Employers are
required to report the value of points redeemed on the employee’s T4 slip.
If not reported by the employer, it remains the employee’s responsibility to
self-report.
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Other taxable benefits

Examples of other benefits considered taxable benefits to employees
include:
 Employer’s payment of travel expenses for employee’s spouse or

common-law partner, unless the spouse or common-law partner is
engaged in supporting the employer’s business
 Employer-paid travel benefits for an employee if the employee is not

engaged in business activities
 Employer-paid travel benefits for the employee’s family
 Employer-paid transportation costs to or from work (other than for

safety reasons)
Non-taxable benefits
Automobile allowance (for use of own vehicle)
The Income Tax Act stipulates that allowances an employer pays to an
employee to cover the cost of using the employee’s automobile for
employment purposes are not a taxable benefit, provided that the
allowance is reasonable. The only allowance that the Canada Revenue
Agency considers reasonable is one based strictly on a rate per kilometre
where the reimbursement is for actual kilometres driven during
employment activities. The reimbursement for other expenses such as
parking, toll bridges or toll highways do not impair the reasonableness of
an allowance provided that the employer reimburses these other expenses
solely on the basis of actual expenses incurred.
While the Income Tax Act does not define the term reasonable, the Canada
Revenue agency sets annual maximum amounts that it uses as yardsticks
for measuring reasonableness.
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For 2019, the amounts are:
 $0.58 per kilometre for the first 5,000 kilometres and $0.52 per
kilometre thereafter
 An additional $0.04 per kilometre for travel in the Northwest

Territories, Yukon and Nunavut
While an employer can reimburse an employee in excess of these

amounts, the excess amount is not tax-deductible by the employer unless
it is included in the employee’s income.
When a per kilometre allowance paid by an employer is below the Canada

Revenue Agency’s yardstick for reasonableness, an employee may include
the total amount received in his or her employment income and claim an
offsetting deduction for allowable expenses incurred in the performance of
employment duties. Maintaining detailed logs of business and personal
kilometres is important for validating the amount of deductible expenses
claimed. A strategy of this nature is valuable when actual expenses exceed
the total of the per kilometre allowance paid to the employee.
When an employer pays a flat allowance to the employee for the use of his
or her automobile, the full allowance is considered taxable income. As well,
if the employer pays a flat allowance and a reasonable per-kilometre
allowance, the total of the two amounts is taxable and must be included as
income.
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RPP and DPSP contributions

An employer’s contribution on behalf of an employee to either a Registered
Pension Plan (RPP) or a Deferred Profit Sharing Plan (DPSP) is not a
taxable benefit to the employee when the contribution is made. It will,
however, be taxable in the hands of the employee when the money is
withdrawn from the plan in a future period.
Counselling services
Counselling services paid by an employer for employees are not a taxable
benefit provided the services relate to any of the following:
 The mental or physical health of the employee or a person related to

the employee (e.g., tobacco, drug and alcohol abuse or stress
management)
 The employee’s re-employment
 The employee’s retirement
Counselling services and planning services beyond this list are considered
a taxable benefit.
Relocation expenses
When an employer requests that an employee move from one location to
another, the following items are non-taxable benefits when the employer
pays for them:
 House-hunting trips, including child and pet care expenses when the
employee is away
 Travelling costs (including reasonable costs for meals and lodging)

incurred when moving from the old residence to the new one
 Cost of transporting or storing household effects
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 Charges and fees to disconnect telephones, water, gas barbecues,

automatic garage openers, etc.
 Fees to cancel any existing leases
 Any penalties incurred to discharge a mortgage
 Charges to connect or install new utilities, appliances and fixtures that

existed at the old residence
 Costs for automobile licences or driver’s permit if the employee had

them at the old residence
 Legal fees and land transfer tax on the new residence
 Reasonable temporary living expenses while waiting to occupy new

residence
 Reasonable amounts spent on the old residence in the pre-sale period
Items beyond this list are generally considered taxable benefits to the
employee.
Private health services plans

If an employer makes contributions on behalf of an employee to a private
health services plan (commonly referred to as an extended health or
dental plan), the contribution is not a taxable benefit to the employee.
When an employee and employer both contribute to the private health

services plan, the employer portion of the premium is not a taxable benefit
to the employee. The premiums the employee pays are qualifying medical
expenses and may be valuable to the employee when evaluating the
benefit of the medical tax credit on the individual’s income tax return.
The Income Tax Act defines a private health services plan as:
 A contract of insurance in respect of hospital expenses, medical

expenses or any combination of such expenses
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 A medical care insurance plan, hospital care insurance plan or any

combination of such plans
Except any such contract or plan established by or pursuant to:
 A law of a province that establishes a healthcare insurance plan as

defined in section 2 of the Canada Health Act
 An Act of Parliament or a regulation made thereunder that authorizes

the provision of a medical care insurance plan or hospital care
insurance plan for employees of Canada and their dependants and for
dependants of members of the Royal Canadian Mounted Police and the
regular force where such employees or members were appointed in
Canada and are serving outside Canada
Gifts and awards

A gift or award given by an employer to an employee is a taxable benefit
from employment regardless if it is cash, near-cash, or non-cash.
However, the Canada Revenue Agency has a published policy that exempts
some non-cash gifts and awards.
To begin with, any cash or near-cash gift is always a taxable benefit to the
employee. The Canada Revenue Agency considers near-cash gifts to
include gift certificates, gift cards and any item that can be easily
converted into cash, such as gold, securities or stocks. For example, a
$200 gift card to a restaurant is considered additional remuneration and is
taxable income to the employee.
Generally, vouchers or tickets to a specific pre-defined event fall under

non-cash gifts and awards. For example, a voucher that entitles an
employee to a specific item, such as a turkey, from a particular grocery
store is considered non-cash because the employee cannot turn the item
into cash.
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Items of an immaterial or nominal value, such as coffee, tea, t-shirts with

employer logos, mugs, plaques and trophies, are not taxable benefits to
employees. While there is no defined monetary threshold that determines
an “immaterial” amount, factors that may be taken into account include
the value, frequency and administrative practicality of accounting for
nominal benefits.
Within pre-defined limits, the Canada Revenue Agency permits an

employer to give an employee a non-cash gift for a special occasion
without creating a taxable benefit. Examples provided by the Canada
Revenue Agency include a religious holiday, a birthday, a wedding or the
birth of a child.
Also, within pre-defined limits, employers can provide an award to an

employee without creating a taxable benefit if the award recognizes
employment-related accomplishments that contribute to the overall
workplace but not for recognition of job performance. The Canada Revenue
Agency’s examples include outstanding service or employees’ suggestions.
The Canada Revenue Agency suggests that for these types of awards to be
non-taxable, there should generally be defined criteria, a nomination and
evaluation process, and a limited number of recipients.
Pre-defined limit: Non-cash gifts and non-cash awards to an arm’s-length

employee, regardless of number, are not taxable to the extent that the
total aggregate value of all non-cash gifts and awards to that employee is
less than $500 annually. The total value in excess of $500 annually is
taxable.
In addition to the above pre-defined limit, a separate non-cash long

service/anniversary award, once every five years, may also qualify for
non-taxable status to the extent that its total value is $500 or less. The
value in excess of $500 is taxable. To qualify, the award must be for a
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minimum of five years of service and there must be at least five years
between awards. For the purposes of applying the $500 thresholds, the
annual gifts and awards threshold and the long service/anniversary awards
threshold are separate. In other words, a shortfall in value under one
category cannot offset an excess value under the other category.
The Canada Revenue Agency’s administrative leniency for gifts and awards
does not apply to non-arm’s-length employees (e.g., relatives of the
proprietor and shareholders of closely held corporations) or related
persons of non-arm’s-length employees.
The Canada Revenue Agency’s administrative policy for gifts and awards is
very narrow in its application, allowing only the circumstances noted
above. Performance-related rewards (e.g., for meeting sales targets) or
cash and near-cash awards (e.g., gift certificates) fall outside the
administrative policy and are taxable income to the employee.
EXAMPLE
Zach’s employer has given him the following gifts and awards:
 T-shirt with employer logo: $15
 Birthday gift (monetary gift certificate): $75
 Reward for meeting sales performance target (weekend holiday): $400
 10-year anniversary award (art print): $275 (the last anniversary award Zach
received was for his five-year anniversary with the employer)
 Wedding gift (crystal vase): $300
 Innovation award (tickets to a specific sporting event on a specific day): $250
 Holiday season gift (watch): $150
Tax consequences
 T-shirt with employer logo ($15): this is non-taxable benefit as it is of
immaterial/nominal value
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 Birthday gift (monetary gift certificate, $75): this is taxable because, as a near-
cash gift, it is not eligible for the gift and award policy
 Reward for meeting sales performance target (weekend holiday valued at $400):
this is taxable because, as a performance-related reward, it not eligible for the gift
and award policy
 10-year anniversary award (art print, $275): this is eligible under the criteria for a
long service/anniversary award
 Wedding gift (crystal vase, $300): this is eligible under the gift and award policy
 Innovation award (tickets to a specific sporting event on a specific date, $250):
eligible under the gift and award policy
 Holiday season gift (watch, $150): this is eligible under the gift and award policy.
The total value of items eligible for the gifts and awards policy (wedding gift,
innovation award and holiday season gift) is $700. This exceeds the $500 threshold
by $200. Zach will therefore receive a taxable benefit of $200 related to these items.
In addition, the birthday gift (gift certificate valued at $75) and reward for meeting
sales performance target (weekend holiday, $400) fall outside the gifts and awards
policy, resulting in another $475 of taxable benefits for Zach.
In total, Zach will have $675 to taxable benefits related to the gifts and awards he
received from his employer.
The 10-year anniversary award (art print, $275) falls within a separate category for
non-cash long service/anniversary awards. Although the $275 award is less than the
$500 limit for this category, none of the shortfall can be used to offset the taxable
benefit amount described in the separate gift and award category.
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Use of employer’s recreational facilities

When an employer makes available a recreational facility (e.g., exercise
rooms, swimming pools, gymnasiums) to all employees, it is a non-taxable
benefit.
If, however, the employer provides the recreational facilities only to a

select group or subset of all employees, it is a taxable benefit for the
individuals in that select group. In addition, if the employer charges fees to
one group of employees and no fees or reduced fees to another group of
employees, a taxable benefit applies to the employees who enjoy no fees
or reduced fees.
Club dues
If an employer pays an employee’s membership fee to a social or athletic
club where membership is primarily for the employer’s advantage, the fee
is not a taxable benefit to the employee. However, if it cannot be
established that the club is primarily for the benefit of the employer, the
club dues the employer pays are a taxable benefit to the employee.
Premiums for group wage-loss replacement plan

A group wage-loss replacement program is a plan set up for all employees
or a specific group of employees (e.g., executives, management, senior
management). Employers could provide this benefit using group insurance
or individual insurance contracts where the individual contracts are owned
by the employer as part of a group program.
When an employer pays the premium for a group wage-loss replacement

plan or an income maintenance plan for an employee, the premium is not
a taxable benefit if it relates to a group plan that is any of the following:
 A sickness or accident plan
 A disability insurance plan

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 An income maintenance plan
The taxation of wage-loss programs is unique in that the structuring of the

premium payment can affect whether the payments are treated as a
taxable benefit and when benefits claimed under the plan are taxable to
the employee.
The payment of the premium by an employer is not a taxable benefit to

the employee at the time of the premium payment; however, should the
employee become ill and qualify for benefit payments under the plan, the
benefit payments are taxable to the employee.
Another option is for the employer to pay the premium and add the
amount of the premium as a taxable benefit to the employee, at the time
of the premium payment. In this case, should the employee become ill and
qualify for benefit payments under the plan, the benefit payments are not
taxable to the employee.
When an employee pays the full premium for a wage-loss replacement

plan, there is no taxable benefit associated with the premium payment and
the receipt of benefit payments under the plan is treated as non-taxable
income.
When an employee and employer share premium payments and the

employer’s portion of the premium payments is not treated as a taxable
benefit, it affects the tax consequences of benefit payments to the
employee. In this case, any benefit payments from the plan are taxable
income to the employee, but the taxable income amount can be reduced
by the amount of the employee’s premium contributions not previously
deducted against a benefit amount. As such, if the employee receives a
benefit from the plan, the portion equal to his or her premiums paid is
received tax-free and the remainder is taxable income.
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Table 8 summarizes the taxation of premium payments and benefits

related to a group wage-loss replacement plan.
Table 8: Group wage-loss replacement program tax treatment
If premium payments … Then . . .
are fully paid by the employer, and the benefit payments to the employee
employer does not designate the are taxable
payment as a taxable benefit to the
employee
are fully paid by the employer, and the benefit payments to the employee
employer designates the payment as a are not taxable
taxable benefit to the employee
are fully paid by the employee benefit payments to the employee

are not taxable
are shared between the employer and benefit payments to the employee
employee, and the employer does not are taxable, but any amount the
designate any portion of its premium employee contributed to premiums
payments as a taxable benefit to the reduces the amount of taxable
employee income
EXAMPLE 1
Kelly’s employer pays the monthly premium of $45.97 ($551.64 annually) for her
group long-term disability insurance policy. The annual premium payment of $551.64
is not a taxable benefit to Kelly.
If Kelly becomes disabled and qualifies to receive $3,000 per month of benefits under
the group long-term disability insurance policy, the benefit payments are taxable
income.
If Kelly had paid 50% of the premiums, the $3,000 per month of benefits would still be
taxable, but she would qualify for a deduction equal to the premiums she paid. Kelly
cannot deduct more than the income inclusion of the benefits.
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EXAMPLE 2
Roxanne is the manager of sales at RoToDo. All management staff participate in the
company’s group wage-loss replacement plan, and the employer pays the premiums.
Roxanne was injured at a baseball game last month and is now receiving benefits
from the plan. The benefit payments Roxanne receives are taxable income because
the employer paid the full premium for the plan.
EXAMPLE 3
At Greenborough Manufacturing, one of the benefits available to all non-management
office staff is shared premium payments for a group wage-loss replacement plan.
Russel found the benefit quite attractive, as he could acquire wage protection by
paying $1,000 per year, with Greenborough covering the remaining premium. Russel
enrolled in the plan when he first joined the company. On January 1, 2020, Russel
developed a serious illness that caused him to miss work, and he qualified to receive
benefits under the plan for the first time. His monthly benefit is $1,500.
Up to the end of 2019, Robert had contributed a total of $5,000 towards premiums for
the group wage-loss replacement plan. The first $5,000 of benefits received by Robert
are not taxable. After that, any further benefits will be taxable income.
Other non-taxable benefits

The following are a few other benefits that are considered non-taxable to
the employee.
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Discounts
The sale of merchandise to an employee at a discount is generally not

considered a taxable benefit. There are, however, circumstances under
which the Canada Revenue Agency considers a taxable benefit to arise.
The following are examples when discounts can create a taxable benefit:
 The employer makes special arrangements for discounts with a single

employee or a group of employees
 The employer allows employees to buy merchandise at less than cost

(except if the merchandise is old or soiled)
 Two employers put reciprocal arrangements in place to sell

merchandise at a discount to the employees of the other employer
When employers sell merchandise below cost, the taxable benefit arising
is calculated as the difference between fair market value and the amount
the employee paid.
Commissions on merchandise
The Canada Revenue Agency’s policy is that commissions received by sales

employees on merchandise they purchase are not a taxable benefit. As
well, the commission a life insurance salesperson receives on the sale of a
life insurance policy to herself or himself is not taxable as long as the
policy is owned by the salesperson, the policy is on his or her own life and
the salesperson is required to make the premium payments. In addition,
the commission income received cannot be significant, the insurance policy
cannot have an investment component and the policy cannot be for
business use.
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The Canada Revenue Agency’s position that the non-taxable status only
applies when the commission income received is not significant creates
uncertainty, as the Canada Revenue Agency is silent on what amount of
commission, in its view, is considered significant. The Canada Revenue
Agency has challenged cases and won because it is their administrative
policy and not the law; it can withhold leniency depending on the facts of
the situation. The courts are bound by the legislation, as set out in the
Income Tax Act. As such, the courts cannot force the Canada Revenue
Agency to apply its administrative policy when the policy is more lenient
than the specific tax legislation.
Uniforms
A taxable benefit does not arise when an employer supplies its employees
with a distinctive uniform or protective clothing such as safety footwear
and safety glasses.
Table 9: Summary of Taxable and Non-Taxable Benefits
Is it
Allowance or benefit
Taxable?
Automobile allowance – fixed amount Yes
Automobile allowance – reasonable per-kilometre

No
reimbursement
Automobile standby charge and operating cost benefit Yes
Club membership – employer-paid – membership benefits

No
employer
Commission on merchandise – general employee population Usually yes
Counselling services – health, re-employment or retirement

No
planning
Counselling services – tax and financial planning Yes
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Discount on merchandise (not below cost) – general employee

No
population
Education expense – employer-paid – benefits employer No
Education expense – employer-paid – primary benefit to

Yes
employee
Gifts and awards – in cash Yes
Gifts and awards – non-monetary, beyond threshold or

Yes
prescribed circumstances
Gifts and awards – non-monetary, within threshold and

No
prescribed circumstances
Group life insurance policies – employer-paid premiums Yes
Depends on
Group wage-loss replacement program or income structure of
maintenance plan – employer-paid premiums premium
payment
Loans to employees – interest-free and low-interest Yes
Loyalty and points programs Depends
Moving expenses – specified employer-paid expenses No
Parking – employer-paid (other than for company-specific

Yes
business)
Private health services plan No
Professional fees Yes
Provincial hospitalization and medical insurance plan –

Yes
employer-paid premiums
Recreational facilities – provided on-site at employer’s

No
premises and available to all employees at same cost
RPP contributions – paid by employer No
RRSP administration fees – paid by employer Yes
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RRSP contributions – paid by employer Yes
Spouse or common-law partner’s travelling expenses –

employer-paid where spouse not engaged in supporting Yes
employer’s business
Stock option plan Yes
Transportation costs (e.g., public transit) (other than for

Yes
safety reasons)
Uniforms No
The financial planner

Sourcing information about employment income
When working with clients who have employment income, a financial
planner should gain a good grasp of the client’s total income from
employment. The financial planner can glean this information from
different sources.
The employer issues a T4 slip, “Statement of Remuneration Paid,” to the

employee annually following the end of the calendar year. Figure 5 shows
a blank T4 slip that employers complete and provide to employees.
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Figure 5: T4 Slip, “Statement of Remuneration Paid”
Some of the more important information on the T4 slip includes:
 The employee’s total income (box 14)
 CPP/QPP withheld (boxes 16 and 17)
 Employment Insurance premiums withheld (box 18)
 The employee’s RPP contributions (box 20)
 The employee’s pension adjustment (box 52)
 Income taxes deducted (box 22)
 Union dues deducted (box 44)
 Charitable donations deducted (box 46)
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Across the bottom of the T4 slip is room for customized additional

information the employer needs to communicate to the employee.
The pay stub an employer issues to an employee can be helpful, but the
financial planner may need to accumulate the full series of pay stubs to
complete the picture. A final pay stub for a calendar year may be valuable
if it displays year-to-date information.
If the employer uses direct deposit for payroll, information from the
employee’s bank account will show the direct deposit amounts. These can
be helpful for tracking cashflow; however, the direct deposit amount is the
net amount, after tax and deductions, so financial planners should use the
information with caution. While deposits can be helpful for cashflow, the
picture is incomplete because it does not show withholdings or other
relevant information such as amounts directed to pension accounts,
RRSPs, Tax-Free Savings Accounts (TFSAs) or an employer stock purchase
plan. Employer matching for savings vehicles is not reflected in the net
deposit.
An employee’s record of employment can provide information on

employment history. It is a single snapshot of employment information
issued to the employee when there is an interruption of employment
earnings. Employees use their record of employment to apply for
employment insurance benefits. Pieces of information may be valuable to a
financial planner, but it is a single snapshot and does not necessarily
reflect all aspects of the employee’s employment income. The record of
employment reflects information related to insurable earnings for
employment insurance purposes only, an important limitation to keep in
mind.
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Remuneration planning
Not all employees have the benefit of working with their employer to
structure their compensation package, but there may be times when
employees have the opportunity to choose elements of their total
remuneration. This is more common with senior executives, although
flexible benefits that give regular employees a say in the choice of plan
design are increasingly more common.
Income taxes are a definite consideration in the structuring of benefits

packages; however, it is important that employees choose their flexible
plan design based on their personal needs and those of their family.
Income taxes should not be the only consideration.
Group health and dental benefits are important for most employees,
especially if they have a family. The premium the employer pays for group
health and dental benefits is not taxable to the employee. As such, if an
employee has the option to direct employer money towards a group health
and dental plan, this can be a wise choice as there is no additional cost to
the employee when the employer pays.
It is often suggested that employees pay for their wage-loss replacement

plan, so any benefit they receive under the plan is not taxable to the
employee. However, income tax should not be the only consideration. For
example, if one spouse has a strong employer-paid group health and
dental plan, does the family need the second spouse to also select an
employer-paid health and dental plan? There can be an advantage with
coordination of benefits under two plans, but does the family benefit
sufficiently from having family coverage under two plans? Could the
second spouse instead direct employer-paid premiums towards a wage-
loss replacement plan? Recall that employer-paid premiums to a wage-loss
replacement plan are not a taxable benefit.
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Since the wage-loss replacement coverage is important for wage earners,

the question becomes how best to fund the premium? While an employer-
paid premium for wage-loss replacement plans means any benefit claimed
is taxable, what is the probability of a claim being made? If money is tight,
could the employer-paid premiums be better used on the wage-loss
replacement plan (if permitted)? Asking these types of questions helps
clients structure benefits to meet their needs, while minimizing the income
tax consequences.
If an employee can choose between a monthly car allowance or a salary

increase of a similar amount, the economic impact is the same. The
employer reports the monthly car allowance as a taxable benefit, and
income tax applies to the amount, similar to any salary amount.
When an employee has the opportunity to participate in a stock purchase

plan, the employer’s contribution is typically only available for that one
purpose: purchasing stock. If it is a matching plan, the employer portion
will generate a taxable income amount to the employee each time a
matching contribution occurs. However, an employee who opts not to
participate loses the benefit of the employer’s contribution. By not
participating, the employee forgoes income from the employer. Aside from
the income tax consideration, the employee will want to consider the
investment risk associated with a stock purchase plan as the value of the
stock can go up and down.
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The fair market value of taxable benefits is treated like regular

employment income and is fully taxable at the employee’s marginal tax
rate. Each dollar of employment income or taxable benefits increases the
employee’s total income tax liability based on his or her marginal tax rate.
Registered Retirement Savings Plan

Line 129
Any individual under age 72 may have income from an RRSP.
A withdrawal of RRSP assets causes an income inclusion in the year of

withdrawal. For example, if an individual withdraws $10,000 from RRSP
assets, that $10,000 is added to the individual’s overall income in the year
of withdrawal and increases the individual’s overall income tax liability for
that year.
RRSP assets must be matured and converted to payout mode — e.g.,

through a registered annuity or Registered Retirement Income Fund (RRIF)
— by the end of the year in which the individual turns age 71. If the plan
assets are not transferred by this time, a full income inclusion equal to the
fair market value of the RRSP assets will be treated as an income inclusion
for that year.
Individuals who borrow assets from their RRSP under the Lifelong Learning
Plan or Home Buyers’ Plan are subject to a repayment plan, as outlined in
the Module 4, Registered Retirement Plans. In general terms, when an
individual misses a repayment, the missed amount is included in the
individual’s income for the year the repayment was due.
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Pension and retirement income

Line 115
Individuals age 60 or older may have income that includes Old Age
Security income on line 113 from box 18 of the T4A(OAS) slip (not the
Guaranteed Income Supplement portion) or CPP/QPP benefits on line 114
from box 20 of the T4A(P) slip. Depending on the provincial rules related
to pension income, individuals, from age 50 onward, may have private
pension income (line 115) to consider when looking at overall income.
The Guaranteed Income Supplement program provides a monthly non-

taxable benefit to individuals who are receiving an Old Age Security
pension and whose annual income, or combined family income, is below a
maximum threshold. The maximum income thresholds are adjusted
quarterly and range from $18,600 for an individual to a combined family
income of $24,676 when both spouses or common-law partners are
receiving Old Age Security. If only one spouse or common-law partner is
receiving the Old Age Security benefit, the combined family threshold is
$44,592 (summer 2020 amounts). The income threshold does not include
any Old Age Security pension or Guaranteed Income Supplement.
Registered Retirement Income Fund

Line 115
Individuals who have converted their RRSP assets into a RRIF, will have an
annual income inclusion arising from the RRIF. While Module 4, Registered
Retirement Plans, discusses the detailed rules related to RRIF income, this
is a general overview of what to consider when looking for income-related
items for income tax purposes.
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In general terms, the income inclusion begins in the year following

conversion of the plan assets from an RRSP to a RRIF. This “year
following” concept arises because the Income Tax Act sets out a schedule
of the minimum amount individuals must withdraw from their RRIF
beginning in the year following conversion from an RRSP. There could be
an income inclusion in the year of conversion if the plan holder chooses to
withdraw income from the RRIF that year, but there is no obligation to do
so based on the requirements of the Income Tax Act.
Registered annuities
Line 115
Individuals who convert RRSP assets into a registered annuity generally

have an income inclusion beginning either in the year of conversion or in
the year following conversion.
Pension income splitting

Line 116
Any Canadian resident who receives income that qualifies for the pension
income tax credit can allocate up to half of this income to his or her
resident spouse or common-law partner. The rules governing the type of
pension income that qualifies for income splitting mirror the rules
governing eligibility for the $2,000 pension income credit.
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Because the split pension income being transferred increases the

recipient’s tax payable, both spouses/common-law partners must
specifically agree to the allocation in their tax returns for the year. Both
the agreement and the amount can be changed from year to year.
The transferred pension income retains its character in the hands of the
receiving spouse or common-law partner for all purposes, which means the
receiving spouse or common-law partner may be able to claim the $2,000
pension income credit.
For individuals age 65 and older at the end of the year, the main types of
qualifying pension income that can be transferred to a spouse or common-
law partner’s return include:
1) A life annuity payment from an RPP
2) An annuity payment under an RRSP
3) A payment under a RRIF
4) A payment from a Pooled Registered Pension Plan (PRPP)
5) An annuity or instalment payment from a DPSP
6) The taxable portion of a non-registered annuity payment
7) Income reported from a non-exempt life insurance policy
For individuals under age 65, the list is far more restrictive and includes:
1) A life annuity payment from an RPP
2) Any of points two to seven in the section above received as a

consequence of the death of a spouse or common-law partner
The age of the receiving spouse or common-law partner does not matter
with respect to pension income splitting; as long as one spouse has
qualifying pension income that can be split, the age of the other spouse is
not a consideration.
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Types of income that specifically do not qualify for pension income splitting
include:
 Old Age Security
 Guaranteed Income Supplement
 CPP/QPP
 RRSP withdrawals (non-annuity)
One of the primary benefits of pension income splitting is to lower the

couple’s overall income tax liability. By shifting income from the higher-
income spouse to the lower-income spouse or common-law partner, one or
more of the following benefits might be achieved:
 The receiving spouse or common-law partner may be able to claim the

pension income credit
 The transferring spouse or common-law partner may be able to lower

his or her net income enough to reduce the impact of the Old Age
Security clawback
 The transferring spouse or common-law partner may be able to lower

his or her net income enough to reduce the impact of the age credit
reduction
 The couple’s combined taxes payable may be lower, allowing for

retention of more income, if the recipient spouse or common-law
partner is in a lower tax bracket than the transferring spouse or
common-law partner
If one spouse or common-law partner dies during the year, pension

income can be split according to a formula that takes into account the
length of time during the year that the couple was still married or in a
common-law relationship (i.e., before the spouse’s or common-law
partner’s death).
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The purpose of the age 65 requirement in respect of an RRSP annuity and

RRIF income is to target the pension income credit to retired individuals.
Individuals have much greater personal control over the timing of
withdrawals under RRSPs and RRIFs compared to RPPs. Without the age
65 eligibility rule, many individuals who are not retired could gain
significant tax advantages well before they attain age 65 by arranging to
withdraw money each year as an RRSP annuity or RRIF income, while still
saving for retirement. Individuals receiving RPP income, on the other hand,
generally have little control over the timing of their pension payments —
they usually only receive these payments after they retire.
While CPP income does not qualify as eligible pension income for the
pension income credit, existing rules permit CPP pensioners to split their
CPP retirement benefits. Spouses and common-law partners, who are both
at least age 60, can share up to 50% of CPP retirement benefits. The split
between the couple is determined by the number of years they lived
together during the period they were required to contribute to the plan. To
make this election, applicants should complete Form T1032, “Joint Election
to Split Pension Income.”
Investment income
Investments can represent a major source of income for individuals and,
depending on the situation and nature of the investment, special tax
treatment may be available.
In general terms, income from property is considered passive income (as

opposed to active income), since generating the income requires little or
no time or physical effort. Typically, income from property includes rent,
royalties, interest and dividends and is treated as investment income.
Capital gains are also investment income, but they are not considered
income from property.
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This section examines dividends, interest and net rental income, in

addition to taxable capital gains.
Dividend income
Lines 120 and 121
Dividend income is considered property income. A dividend is generally a

distribution of corporate profit divided among the corporation’s
shareholders. Dividends are reported as income in the year they are paid.
Taxable dividends from taxable Canadian corporations

Lines 120 and 180
Taxable dividends received from a taxable Canadian corporation qualify for

special tax treatment that involves a dividend gross-up and a dividend tax
credit. The dividend tax credit is claimed on Schedule 1, Line 425 (Figure
9). There are two types of taxable dividends: eligible dividends and non-
eligible dividends. Each type has a different gross-up amount and dividend
tax credit.
Dividends received from Canadian public corporations are eligible

dividends, while most taxable dividends received from Canadian-controlled
private corporations are non-eligible dividends. There are, however,
circumstances when a Canadian-controlled private corporation will pay
eligible dividends. It is up to the corporation to label the dividend payment
as either an eligible dividend or a non-eligible dividend.
Taxable Canadian corporations are obligated to report the amount of

dividend paid, type of dividend paid, taxable amount of dividend paid (i.e.
grossed-up dividend amount) and dividend tax credit on T5 slips they issue
to their shareholders.
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Eligible dividends
Individual taxpayers who received eligible dividends in 2019 from a public

Canadian corporation are subject to a 38% gross-up on the dividend. The
grossed-up amount of the dividend is included when determining the
individual taxpayer’s taxable income. The taxpayer is then eligible for a
federal dividend tax credit of 15.02% of the grossed-up dividend amount,
which reduces his or her federal income tax payable. Each province has its
own dividend tax credit amount.
Non-eligible dividends
Individual taxpayers who received non-eligible dividends in 2019 are

subject to a 15% gross-up on the dividend and a federal non-eligible
dividend tax credit of 9.03% of the grossed-up amount. Each province has
its own dividend tax credit amount.
EXAMPLE
In 2019, Grant received a non-eligible dividend of $300 from Acorn Inc, a taxable
CCPC. The taxable amount of the dividend is $345, which can be calculated as
follows:
Dividend received $300

Gross-up of 15% $45
Taxable dividend $345
While the impact of the gross-up may at first appear unfair, the dividend
tax credit provides a deduction from income taxes payable.
The dividend gross-up and dividend tax credit system is in place because
the dividend is paid from after-tax corporate earnings. This means the
corporation has already paid tax on its income and uses its after-tax funds
to pay the dividend. To simply include the dividend as income, without any
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adjustment, would result in double taxation (tax is paid by the corporation

and tax is paid again by the individual shareholder on the same dollar).
The gross-up and credit system creates a level of integration between the
personal and corporate tax systems.
The grossed-up dividend amount is entered on line 120 of the income tax
return in anticipation of the dividend tax credit applied on line 425 of
Schedule 1 of the income tax return.
EXAMPLE (continued)
Grant’s $300 non-eligible dividend from Acorn generates a $345 grossed-up amount
on line 120 of the income tax return and a $31.15 ($345 x 9.03% = $31.15) federal
dividend tax credit on line 425 of his return.
Taxable amount of dividend $345.00
Estimated federal income taxes $100.05 (assuming a 29% marginal tax rate)
Federal dividend tax credit $31.15
Net federal taxes $68.90
The concern for individuals who receive taxable dividend income is that the
grossed-up amount of the dividend is included in the taxpayer’s net
income for tax purposes, which is the amount the government uses to
establish qualifying income for many social benefits. While the dividend tax
credit later reduces the impact of the gross-up, the dividend tax credit only
adjusts taxes payable.
For example, when an individual receives $1,000 of taxable dividends from

a large public corporation, he or she receives $1,000 of cash. However, the
38% gross-up means the individual adds $1,380 (rather than $1,000) to
his or her net income. Reported income is higher than actual income, and
this can create an issue for income-tested benefits or tax credits. If the
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individual is receiving Old Age Security benefits or claiming the Age Credit
(both of which are subject to an income test), the taxpayer will have to
include $1,380 of income, which is $380 more than actually received.
While the taxpayer is eligible for a credit that is applied against taxes
payable, this credit does not help when the taxpayer applies for income-
tested benefits and credits.
Dividends from non-resident corporations

Line 121
Dividends received from non-resident corporations must be included in

income and are not eligible for the gross-up calculation or dividend tax
credit. The taxpayer reports the full amount of the dividend in Canadian
dollars as regular, fully taxable income. If the country the dividend came
from withholds tax on the dividend payment, the individual or trust may be
eligible for a foreign tax credit.
Dividends received from foreign corporations are included in income in

Canadian dollars.
EXAMPLE
Grant receives $750 (in Canadian dollars) as the net amount from a $1,000 (in
Canadian dollars) dividend from XYZ Corporation, a non-resident corporation. The
country in which XYZ Corporation is located withheld $250 (in Canadian dollars) as
taxes on the $1,000 dividend payment. Grant will report the $1,000 of foreign dividend
income and then claim a foreign tax credit for the $250 withheld by the other country.
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Dividend income: $1,000
Estimated federal taxes: $500 (assuming 50% marginal tax rate, federal and
provincial combined)
Less foreign tax credit: $250 (lesser of $250 (amount withheld) and $500 (tax
otherwise payable)
Net taxes $250
Stock dividends
The value of a stock dividend paid to a shareholder is established as the
amount of paid-up capital assigned to the shares. The gross-up and
dividend tax credit rules apply to stock dividends, provided that the
corporation qualifies as a taxable Canadian corporation.
It is the company paying the dividend that is obligated to report the stock
dividend on a T5 slip to its shareholders, in a manner similar to the cash
dividend.
Stock split
A stock split is not a taxable event and does not result in an income
inclusion for the taxpayer.
Following a two-for-one stock split, for example, shareholders own twice

as many shares. However, after a stock split, the market generally reduces
the market price of the stock in the same proportion as the stock split. So,
after a two-for-one stock split, a pre-split $10 market price per share
normally drops to an after-split $5 market price per share.
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Capital dividends
A capital dividend is a non-taxable dividend when paid to a Canadian
resident taxpayer.
Dividends received by a spouse or common-law partner

A taxpayer may elect to include in his or her income all dividends received
by his or her spouse or common-law partner from taxable Canadian
corporations. This election benefits the taxpayer when the taxpayer’s non-
refundable tax credit for the “spouse or common-law partner amount” is
reduced or eliminated because of the spouse’s taxable dividends from
corporations resident in Canada.
The election applies to all of the spouse or common-law partner’s

dividends from taxable Canadian corporations; a partial election is not
permitted. As well, the election applies only to dividends received by the
taxpayer’s spouse or common-law partner, not any other family member
or dependant. Expenses the spouse or common-law partner incurred to
earn the income cannot be transferred to the taxpayer.
The effect of this election is to remove the dividends from one spouse’s
income and include the dividends in the other spouse’s income. As already
suggested, this transfer can be advantageous when it enables the couple
to claim the credit for the “spouse or common-law partner amount.” If a
taxpayer is eligible for this election, it is wise to calculate the overall
impact for the couple by running a scenario with the transfer and a
scenario without the transfer.
In many cases, the transfer of dividends to the higher-income spouse is

not beneficial because the tax cost of dividends is about 47% for non-
eligible dividends and 40% for eligible dividends (i.e., the highest effective
marginal tax rate on taxable dividends) and the tax benefit to the spouse
or common-law partner non-refundable tax credit is about 8% to 25%
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(i.e., a low effective marginal tax rate on taxable dividends). The election
only benefits couples who have an effective marginal tax rate on dividends
that is less than the lowest tax bracket, because it is the lowest tax
bracket that applies to the non-refundable tax credits.
Dividends received by a trust

A trust may receive dividend income on investments it holds. Income
retained in the trust is taxed to the trust at the top marginal tax rate
applicable for the trust’s province of residence. A trust is taxed like an
individual, so is subject to the dividend gross-up and eligible for the
dividend tax credit.
EXAMPLE
The trustee decides to retain $10,000 of dividend income received from a public
Canadian corporation.
Actual amount of dividend $10,000
Dividend gross-up $3,800 (38% of 10,000)
Taxable amount $13,800
Federal taxes $4,554 (33% top rate x $13,800)
Federal dividend tax credit $2,073
Net federal taxes owing $2,481
In addition, the trust is liable for provincial taxes.
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Dividends allocated from a trust

A trust may receive dividend income on investments that it holds.
Depending on the provisions of the trust, the trustee may be permitted to
allocate this dividend income to the beneficiaries of the trust and have the
income taxed in the hands of the beneficiaries rather than the trust. The
trust can reduce its income earned by amounts allocated to its
beneficiaries.
Taxable dividends allocated from the trust to the beneficiaries of the trust
retain their character and are taxed in exactly the same way as when
dividends flow directly from the corporation to the beneficiary (i.e.,
dividends from taxable Canadian corporations fall into the gross-up and
dividend tax credit regime, whereas dividends from foreign companies are
treated as regular income with no preferential tax treatment).
EXAMPLE
Alice, who is 23 years old, is an income beneficiary of a trust from which she receives
a regular flow of income. In 2019, she received $7,500 of income from the trust. Of
the $7,500 received, $5,000 was allocated as a taxable dividend income from a
Canadian corporation and the remaining $2,500 was a taxable dividend income from
a foreign corporation. The trust has not yet paid tax on the funds.
How is Alice taxed on these funds?
The $2,500 of dividends from a foreign corporation is included as $2,500 of income,

whereas Alice will use the dividend tax regime that includes the gross-up and dividend
tax credit to calculate the taxes associated with the $5,000 of dividends from a
Canadian corporation.
Dividends from foreign corporation $2,500
Dividends from Canadian corporation $5,000
Dividend gross-up on Canadian dividend $1,900 (38% of $5,000)
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Taxable income $9,400
Estimated federal taxes $1,410 (assume 15% tax bracket)
Federal dividend tax credit $1,037 (20.74% of actual dividend)
Foreign tax credit Nil (no withholding in example)
Net federal taxes $373
Interest and other investment income

Line 121
Interest income refers to compensation an individual receives for making

funds available to other parties. When an individual borrows money for a
home or an automobile, he or she pays interest to the lender of the funds.
Interest is paid as compensation for the use of someone else’s money. For
example, an investment in a term deposit or guaranteed investment
certificate is a loan from the investor to the institution. In return, the
institution pays the investor compensation in the form of interest.
Reporting interest income

There are three terms - cash method, receivable method, and annual
accrual basis - used for the reporting of interest income for individuals.
The cash method reports income when the payment is received.
The receivable method reports income when the payment is legally due
and enforceable, even if the payment is delayed; it is considered a
receivable on the day it becomes due.
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Consider the situation in which a bond payment is due and payable on

November 30, but the payment is delayed until January 5. Under the
receivable method, the bond payment becomes income on November 30.
Under the cash method, the bond payment becomes income on January 5.
Under some circumstances, a taxpayer may choose between the cash

method and the receivable method, although the Income Tax Act requires
the taxpayer to follow the chosen method consistently.
The term accrual refers to income the taxpayer has earned but has not yet
received. For individual taxpayers, the annual accrual basis reports interest
income accrued to each annual anniversary date of an investment
contract. Investment contracts are debt obligations, except for certain
deferred compensation arrangements, employee benefit plans and some
specific instruments.
For individuals, the reporting of interest income incorporates a combination

of all three methodologies: cash method, receivable method and annual
accrual basis. Normally, the taxpayer receives a T5 slip after the end of the
year that indicates the amount of interest he or she must include as
income for the year. The cash method, receivable method and annual
accrual basis for the reporting of interest income for individual taxpayers
apply as follows:
 Interest income earned as of every annual anniversary date of an

investment contract must be reported as accrued interest income in the
taxation year during which the anniversary falls, except if the income
was accrued for income tax purposes in a prior taxation year
 Interest income received or receivable during a calendar year must be

reported as interest income for the calendar year, to the extent that it
was not accrued for income tax purposes in a prior taxation year
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Interest is fully taxable and increases an individual’s total income that is

subject to taxation. This means that the associated income tax liability is
measured at the taxpayer’s marginal tax rate.
Taxpayers other than individuals (e.g., trusts, partnerships and

corporations) must use an accrual method of reporting interest income and
do not have the option of the cash method or receivable method. The
accrual method requires the entity to accrue income to the last day of its
taxation year. For partnerships, inter vivos trusts and most testamentary
trusts, this means December 31. For a corporation, the year-end can be a
date other than December 31.
A Canadian-controlled private corporation is liable for corporate income

taxes on interest income it earns. It must add this interest income to its
aggregate investment income earned for the year. The tax rate that
applies to a corporation’s aggregate investment income is 50.67%which is
determined as follows:
Federal rate 38.00%
Less provincial tax abatement 10.00%
Plus additional refundable tax 10.67%
Plus provincial tax rate 12.00%*
Total 50.67%
* The 12% rate is an estimate of the provincial tax rate for this example. The taxpayer’s actual
provincial rate would apply in place of the 12%.
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The corporation must add the refundable portion (30.67%) of the 50.67%
to its refundable dividend tax on hand (RDTOH) account where it remains
until the corporation later pays taxable dividends to its shareholders. The
refundable portion of 30.67% is derived as 20% of the federal rate plus
the 10.67% additional refundable tax. The corporation is eligible for a
refund of its refundable taxes when it pays taxable dividends. The refund
to the corporation is the lesser of:
 The balance in the corporation’s refundable tax account, and
 38.33% of the taxable dividends paid by the corporation
EXAMPLE
On October 1, 2019, an investor purchases a $100,000 five-year investment contract
earning 3% interest annually. The interest income on this investment compounds
annually. On October 1, 2024, the investor receives a cheque for $115,927.41,
representing the return of capital plus interest income.
The interest the investor reports throughout the five-year period depends on the type
of taxpayer. In the table below, column A shows the tax reporting of interest income
for a trust, partnership or corporation, assuming a December 31 year-end. Column B
shows the tax reporting for an individual.
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Taxation Year A B
2019 $750.00 $0
2020 $3,022.50 $3,000.00
2021 $3,113.18 $3,090.00
2022 $3,206.57 $3,182.70
2023 $3,302.77 $3,278.18
2024 $2,532.39 $3.376.53
TOTAL $15,927.41 $15,927.41
Column B reports interest income on the anniversary of the contract based on the
amount of interest receivable. There is no interest income reported in the 2019
taxation year because no amount was received, no amount is receivable, and no
anniversary has occurred. The first anniversary is October 1, 2020, at which point
$3,000.00 has been earned. On the second anniversary, $3,090.00 has been earned,
representing 3% on the original capital plus 3% on the amount of interest earned in
the prior year.
Column A reports interest income based on a December 31 fiscal year-end. Under the
accrual method, the investment contract can be viewed as earning 0.25% per month.
The investor held the investment contract for the last three months of 2019, during
which time it earned $750.00 ($100,000 x 0.25% x 3 months). In 2020, the investment
contract earns 0.25% per month on $100,000 for the first nine months, and 0.25% per
month on $103,000 for the last three months. The change in the capital base reflects
the fact that the interest on the contract becomes payable on October 1 every year. In
the last year of the investment contract, the investor holds the investment for nine
months, and at 0.25% per month it earns $2,532.39 ($113,376.44 x 0.25% x 9
months).
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Rental income
Lines 126 and 160
Income and expenses
If a taxpayer owns real estate rental properties, the net income earned on
the rental properties is included in the taxpayer’s total income. The
taxpayer must complete a detailed schedule, Form T776, to report the
gross rental income, as well as expenses related to the rental operation.
The gross rental income is reported on line 160 and the net rental income
or loss is reported on line 126 of the return. A rental loss is reported as a
negative number and reduces the taxpayer’s income from other sources in
the determination of total income.
When reporting gross rental income, the taxpayer must include any type of
payment received, such as cash or services. An example of a service
received in exchange for rent is a building superintendent who receives a
$500 monthly rent reduction in exchange for services. In this example, the
owner of the building includes $6,000 in gross rental income and $6,000
as expenses for the services provided by the superintendent.
In general terms, determining net rental income appears to be a simple

exercise of listing income and expenses; however, there are several issues
that require close attention. These include:
 A determination must be made as to whether the rental operation is

passive or active in nature. This distinction is important because
passive rental income is income from property, which is subject to the
income attribution rules. Income attribution is covered in detail later in
this Module. For most individuals, rental income will be treated as
passive income unless there are more than five full-time employees
working in relationship to the rental operations
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 Analyzing deductible expenses to separate current expenses from

capital expenditures
Current expenses and capital expenditures
Current expenses are generally short-term in nature, such as painting the

exterior of the rental property, fixing a leaky pipe or repairing a walkway.
Capital expenditures extend the life of the property and are typically
viewed as items that benefit the property for longer than a year.
Current expenses are fully deductible in the year incurred, whereas capital
expenditures are deductible over a number of years through the capital
cost allowance system. Replacing a roof or several windows is generally
viewed as a capital expenditure because of the longer-term, enduring
value these activities add to the property.
Examples of current expenses include:
 Property taxes
 Mortgage interest
 Utilities, such as water and electricity
 Superintendent
 Advertising for new tenants
 Garbage removal
 Property upkeep expenses such as lawn mowing or snow removal
 Office supplies
 Painting
 Replacing carpet
 Legal and accounting fees
 Maintenance and repairs
Examples of capital expenditures include:

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 Replacing a wooden porch with a concrete porch
 Adding a new garage
 Replacing a series of old windows
Disabled Individuals
The Income Tax Act includes specific provisions that allow for the
deduction of expenses related to the costs of modifying a building to
accommodate disabled persons, regardless of whether the expense is
capital in nature. This special provision allows for certain expenses that are
capital in nature to be fully deductible in the year incurred when they
relate to the modification of a property to improve accessibility for disabled
persons. This is known as a tax incentive and is put in place by the
government to encourage certain behaviour.
EXAMPLE
Jerry is the landlord of a triplex where he has a new tenant who requires wheelchair
access into and throughout the building. Jerry spent $35,000 to add new structures in
and around the property to make it wheelchair accessible. The expenses he incurred
would normally be considered capital in nature. However, because these
expenditures relate to improvements to accommodate persons with disabilities, Jerry
can deduct the full $35,000 in the year he incurred the expenses.
Capital cost allowance
Expenditures that are capital in nature are deducted over a period of time
by using the capital cost allowance (CCA) system. The Income Tax Act
prescribes how much of a capital asset’s cost a taxpayer can deduct each
tax year by assigning a capital cost allowance rate to different classes of
assets. For example, a building is class 1 and has a rate of 4%, while
general equipment is class 8 and has a rate of 20%.
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EXAMPLE
Marvin buys a building for $100,000 and can claim the following CCA amounts over
the next several years.
Year Capital Cost Undepreciated Capital Cost

Allowance Claim (UCC)
(CCA)
Time of $100,000
purchase
First year $2,000 $98,000
(year of (4% x $100,000) x 1/2 ($100,000 less $2,000)
acquisition)
Second year $3,920 $94,080
(4% of $98,000) ($98,000 less $3,920)
Third year $3,763 $90,317
(4% of $94,080) ($94,080 less $3,763)
Only ½ of the CCA otherwise determined can be claimed in the year of acquisition.
Capital cost allowance may be claimed on rental property that is

considered depreciable capital property. It is a discretionary deduction. A
capital cost allowance deduction is not available if the capital cost
allowance amount for the year creates a rental loss or increases a rental
loss. The deduction for capital cost allowance cannot reduce net rental
income below zero. To the extent that the maximum capital cost allowance
is not deductible by the taxpayer, the undepreciated capital cost (UCC)
pool is preserved because only the allowable capital cost allowance
deduction reduces the undepreciated capital cost pool.
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As noted above, capital cost allowance is a discretionary deduction. The

advantage of claiming a capital cost allowance deduction is that it lowers
the taxpayer’s net income arising from the rental income, resulting in less
income tax payable for the taxation year. If a taxpayer plans to own a
property for more than a short period of time, the year-over-year tax
savings can be substantial.
A disadvantage of claiming capital cost allowance can arise when the

taxpayer sells the rental property. A calculation occurs at the time the
property is sold and previously claimed capital cost allowance may have to
be brought back into income, which is referred to as a recapture. At the
time of disposition, the Income Tax Act requires a calculation to determine
if any recapture of previously claimed capital cost allowance must be
included in the taxpayer’s income.
A recapture arises when the lower of cost and proceeds is deducted from
the undepreciated capital cost balance, and the outcome is a negative
number.
EXAMPLE
Donna recently sold a rental property for proceeds of $1,000,000, of which $500,000
relates to the building. When Donna purchased the property, she paid $250,000 in
respect of the building. She has claimed CCA annually throughout the time she has
owned the building, and her UCC balance was $200,000 at the time she sold the
property.
The recapture calculation is:
= UCC balance ($200,000) less (the lower of cost ($250,000) and proceeds
($500,000))
= $200,000 less $250,000
= ($50,000) negative
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In this case, Donna had claimed $50,000 of CCA throughout the time she owned the
building. This means she was able to deduct $50,000 from the rental income she
earned on the property, lowering her taxes payable throughout the ownership period.
However, she has now disposed of the property, and the recapture calculation shows
that Donna must recapture $50,000 of the previously claimed CCA.
The $50,000 recaptured amount will be added to Donna’s income in the year the
property is sold and is fully taxable. This recaptured amount is separate from the
$250,000 capital gain on the building, which is calculated as the proceeds ($500,000)
less adjusted cost base ($250,000).
When recapture applies, it effectively means the property has been “over-
depreciated.”
Typically, rental income is calculated on an accrual basis, with revenue and

expenses recognized when incurred rather than when received or paid.
This means if a tenant is overdue on rent, the taxpayer includes the rent
receivable in the gross rental income amount, assuming the amount was
legally due and payable by the renter. The cash method of accounting is
acceptable, provided the result would be essentially the same as the result
using the accrual method.
Renting a portion of the principal residence
Taxpayers can rent out a portion of their home and earn rental income or
suffer a rental loss. If taxpayers rent out a portion of their home, they are
entitled to deduct reasonable expenses against the gross rental income.
Taxpayers calculate the total expenses incurred and pro-rate those
expenses between personal and rental. They can base the ratio on the
number of rooms in the home or the number of square feet in the home.
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Taxpayers should be aware of the income tax implications of renting a

portion of their personal residence. The Canada Revenue Agency’s current
administrative practice is not to apply the deemed disposition rule, but
rather to allow the property to retain its nature as a principal residence if
all of the following conditions apply:
 The rented portion of the taxpayer’s principal residence is ancillary to

the main use of the property as the taxpayer’s principal residence
 The taxpayer has made no structural change to the property
 The taxpayer has not claimed any CCA on the property
The purpose of these rules is to provide a level of reasonableness should

taxpayers use their home for an ancillary purpose. Examples include
renting out a bedroom or using a single room in relation to a business or
employment.
If the above conditions are not met, a change in use could apply to the
taxpayer’s principal residence, which means a deemed disposition of the
capital property (the residence) may occur along with the loss of a portion
or all of the principal residence exemption. A deemed disposition could
result in the situation where the property is deemed to have been sold for
fair market value, which may trigger any accrued capital gain or the
recapture of previously claimed capital cost allowance.
The Canada Revenue Agency’s position is that it will not apply the change
in use rules unless the taxpayer claims capital cost allowance on any
portion of income derived from a principal residence. The deemed
disposition rule applies immediately when there is a change in use to an
income producing property.
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Rental income as business income
The difference between property income and business income is primarily

a question of how many services the owner actively provides to the
tenants. The Canada Revenue Agency takes the position that if the owner
provides the tenants with basic services (e.g., space, heat, light, laundry
and parking) he or she is likely earning passive property income. If the
owner actively provides a greater range of services (e.g., meals, security
and cleaning) he or she may be carrying on a business. The determination
of whether the income is property income or business income depends on
the facts of the given situation, which are different for each taxpayer.
If income earned from rental properties is business income, in most cases

it will be entered on line 135 of the return
Non-deductible expenses
Certain expenses are not deductible under any circumstances, including

the principal portion of mortgage payments, land transfer taxes and
income tax penalties.
Taxable capital gains

Line 127
This section briefly reviews some of the more important issues with
respect to reporting taxable capital gains on a tax return. A section later in
this module offers more in-depth coverage.
Individual taxpayers usually report a capital gain or capital loss as the

result of an actual or deemed disposition of capital property, usually real
estate or shares. Capital gains are not reported on the accrual basis like
investment income. Instead, taxpayers report capital gains only when they
actually dispose of the property or when the Income Tax Act deems them
to have disposed of the property.
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The taxable capital gain (or allowable capital loss) is calculated on

Schedule 3 of the tax return and reported on line 127.
Capital gain versus taxable capital gain
It is important to note the difference between a capital gain and a taxable

capital gain. A capital gain occurs when the proceeds of disposition of a
property (less selling expenses) exceed the cost of acquiring the property
(the adjusted cost base). If an asset is acquired for $1,500 and sold for
$2,500, the capital gain is $1,000. However, under the Canadian tax
system, the $1,000 is not fully taxed.
The Income Tax Act prescribes an inclusion rate, which is a set percentage
of the capital gain that must be brought into income. The inclusion rate is
currently 50%. Continuing the above example, the $1,000 capital gain is
multiplied by the 50% inclusion rate to derive a $500 taxable capital gain.
The reason for the inclusion rate is to tax only part of the “profit” realized
on the sale of an asset. Capital gains are not fully taxed in order to
encourage investment in capital property and to reflect the fact that asset
values are subject to inflationary influences. These inflationary influences
inflate the value of the asset over time without increasing the wealth or
purchasing power of the asset’s owner.
For example, suppose a taxpayer buys real property for $100,000 and
several years later discovers the value of the property has increased in
exact tandem with the annual inflation rate. In 20 years, the property is
worth $180,000. If the taxpayer sells the property, he or she would realize
a capital gain of $80,000, even though the purchasing power of the
$180,000 today is exactly equivalent to the purchasing power of $100,000
20 years earlier. There is no change in the taxpayer’s wealth, but he or
she must potentially pay tax on the inflationary gain.
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The inclusion rate reflects government policy to avoid taxing inflation and,
as already suggested, to encourage capital investment.
Capital property
The Income Tax Act does not specifically define what constitutes a capital
gain. Rather, it merely lays out the provisions describe how a capital gain
is to be treated once it has occurred.
An apple tree is often used as a metaphor to illustrate the difference

between capital and income. If you are an apple producer, the apples the
tree produces are considered income. However, if you sell the tree itself,
that is considered a capital transaction.
Literally, hundreds of court cases have been argued on the question of

whether a given transaction was capital or income in nature. One of the
reasons this is such a hotly debated issue is that capital gains are taxed at
a preferential rate compared to regular income. If the sale of a property
results in a $100,000 capital gain, only 50% of the gain (under current
rules) is added to income as a taxable capital gain.
Registered Disability Savings Plan

Line 125
Income received by a taxpayer from a Registered Disability Savings Plan

(RDSP) is reported on an individual’s income tax return. While
contributions withdrawn are not included as income to the beneficiary
when paid out from the plan, the Canada disability savings grant, the
Canada disability savings bond, investment income earned on plan assets
and proceeds from rollovers are all included in the income of the
beneficiary of the RDSP when these amounts are paid out from the plan.
The operating details of an RDSP are discussed in Module 6: Registered
Education and Disability Plans.
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RDSP income is not included in the calculation of the beneficiary’s

GST/HST credit, Canada Child Benefit payments, social benefit
repayments, refundable medical expense supplement or Working Income
Tax Benefit.
Taxable support payments

Line 128
Support payments fall into two categories: spousal support and child
support. The distinction relates to their taxation, with the tax treatment of
spousal support differing from the tax treatment of child support. Spousal
support payments are tax-deductible by the payer and taxable to the
recipient. Child support payments are not tax-deductible by the payer, nor
are they taxable to the recipient.
Spousal support payments
When couples experience a breakdown in their relationship, financial

support often forms part of their separation agreement. While statements
within a written agreement or court order regarding the tax consequences
of support payments can be valuable to clarify the intent, the actual tax
treatment is not established by the contracting parties. Rather, the
taxation of payments under the agreement must ultimately follow the
treatment set out in the Income Tax Act.
When support payments are paid pursuant to a court order or written

agreement and are solely for the maintenance of a spouse or a former
spouse, the term spousal support typically applies, and payments are
deductible by the payer and taxable to the recipient. Without a court order
or written agreement, spousal support payments are not deductible by the
payer nor taxable to the recipient.
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Understanding the requirements for a payment to be treated as spousal

support is an important consideration because support payments that align
with the label of child support are treated differently for income tax
purposes.
A spousal support payment must be:
 Payable/receivable as an allowance on a periodic basis (e.g., weekly,

bi-weekly or monthly) and for a specific amount (e.g., specified sum of
money either as fixed amount or a formula), where the timing of the
payment is referenced in the court order or written agreement
 Made for the support and maintenance of the recipient, with the
recipient having full discretion as to the use of the proceeds
 Made directly to the recipient or to an agent enforcing the collection of

the amount
While the recipient must have the right to determine the use of the funds,
there are limited circumstances where payments can be made to a third-
party in a way that limits the recipient’s discretionary use of the funds. In
such a case, the payment to the third-party must be pursuant to a written
agreement or court order. Examples of these types of payments could
include rent, property taxes, insurance premiums, education or medical
expenses, and maintenance costs for the former spouse’s home.
Definitions
The term spouse means a person to whom the taxpayer is legally married,
so the term former spouse means a person to whom the taxpayer had
previously legally married. The term common-law partner includes a
person who has cohabited in a conjugal relationship with the taxpayer
throughout a continuous period of at least 12 months, or who is a person
who is cohabiting in a conjugal relationship with the taxpayer and is the
parent of a child of the taxpayer. Once individuals fall within the definition
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of common-law partners, they are deemed to continue this relationship

until they live separate and apart for a period of 90 consecutive days due
to a breakdown of their conjugal relationship.
Common-law partners are considered to be separated when they have

been living separate and apart because of a breakdown of their
relationship for a period of at least 90 days.
Child support payments
Child support payments are not deductible by the payer nor taxable to the
recipient under any circumstances. These income tax rules apply
automatically to child support payments made in accordance with an
agreement or court order (federal or provincial) made on or after May 1,
1997. As such, child support payments are not taxable income for the
receiving parent and cannot be claimed as a tax deduction by the paying
parent.
Definition
The definition of a child of a taxpayer includes:

 A child of whom the taxpayer is the legal parent
 A child who is wholly dependent on the taxpayer for support and of

whom the taxpayer has, or immediately before the person attained the
age of 19 years had, in law or in fact, the custody and control
 A child of the taxpayer’s spouse or common-law partner
 A spouse or common-law partner of a child of the taxpayer
Unless a court order or written agreement specifically declares that a

defined portion of a single periodic support payment is for spousal support,
the entire payment is assumed to be for child support. For income tax
purposes, payments will be deemed to be child support in each of the
following circumstances:
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 The court order or agreement does not specifically identify an amount

as spousal support
 The payment is made directly to a third-party within an agreement that

does not specifically identify that the amount is for the benefit of the
spouse
In addition, the Canada Revenue Agency considers all payments to be child

support until the child support obligations are fully met. This means the
child support payments are deemed to have been paid first in situations
where the payer has not met his or her full obligation. Deductible
payments for spousal support can only occur after all child support
obligations have been met. If the payer of child and spousal support
payments falls short of the amount specified within the terms of the
agreement, child support is deemed to have been paid first.
EXAMPLE
Under the terms of his agreement, Chin must make monthly child support payments
of $2,000 ($24,000 annually) and monthly spousal support payments of $1,200
($14,400 annually). Unfortunately, Chin experienced a shortfall in his income during
the year and was only able to pay $28,000 towards his support obligations. For
income tax purposes, Chin is deemed to have paid:
Child support $24,000

Spousal support $4,000
Total payments $28,000
Other income
Line 130
The tax return does not have a separate line for every possible type of
income. The following is a list of the more common types of other income
taxpayers must include.
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Scholarships
Elementary and secondary school scholarships and bursaries are not

taxable. Post-secondary school scholarships, fellowships and bursaries are
not taxable when received for the current year and the student is a full-
time qualifying student for the current, prior or subsequent year. The
scholarship exemption is limited to the extent that the award is intended to
support the student’s enrolment in the program. There are rules that
provide for a scholarship exemption for part-time students; these rules
follow similar criteria but are adjusted to reflect part-time attendance.
Students attending a post-secondary program that consists mainly of

research may be eligible for the scholarship exemption if the program
leads to a college or CEGEP diploma, or a bachelor, masters or doctoral
degree (or the equivalent). Any post-doctoral fellowship is taxable income.
If a student is not eligible to claim the education credit amount, then

scholarships, fellowships, bursaries, or study grants that are in excess of
$500 must be included in income. (amounts at or below $500 are non-
taxable).
Artists’ project grants
Students may also receive an artists’ project grant, either separately or in

addition to other scholarship income. This type of grant is used for
producing literary, dramatic, musical or artistic work. The student may
claim the scholarship exemption to reduce the amount that must be
included in income. In simple terms, the exemption amount is the total of
reasonable expenses the student incurs to fulfil the conditions for receiving
the grant, but the total cannot exceed the amount of the grant.
Apprenticeship grants
There are several types of grants available from the federal government to
apprentices for items such as tuition, travel, tools or other expenses.
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These items are not paid by the individual’s employer as part of a

compensation package; instead, they are reported as other income
because they do not meet the definition of employment income.
Self-employment
Lines 135 to 143
As well as employment and investment income, taxpayers must include

self-employment income on their tax return. The tax return breaks self-
employment income into five categories:
 Business income (lines 162 and 135)
 Professional income (lines 164 and 137)
 Commission income (lines 166 and 139)
 Farming income (lines 168 and 141)
 Fishing income (lines 170 and 143)
In all cases, both the gross amount (before expenses) and the net amount
(after expenses) must be entered on the appropriate lines of the return.
Business income
Lines 162 and 135
When individuals carry on business as an unincorporated business (i.e.,

sole proprietorship, partnership or simply self-employed), the net income
of the business is taxable in the hands of the individual and must be
reported on the individual’s tax return. If the business activities incur a
loss, which is common in the start-up phase, the loss can generally be
written off against other sources of income. There are some exceptions
with regards to the handling of home office expenses, which are discussed
later.
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In terms of self-employed income, the business income category (lines 162

and 135) is the catchall category. Unless the business fits one of the other
four categories (professional, commission, farming or fishing), the activity
is reported as business income.
Defining a business
A business can be practically any activity, trade, calling, or profession

whereby an individual carries out activities that make a profit or have a
reasonable expectation of making a profit. The Canada Revenue Agency
considers a business to have started (and the expenses deductible) when
the business begins to conduct significant activities that form a regular
part of the business.
Many business activities must be accounted for on an accrual basis, not a

cash basis. The accrual method of accounting recognizes revenue and
expenses when they occur and not when the money is received or paid.
Self-employed individuals must use the calendar year as their fiscal year.
Deductible expenses must be reasonable in the circumstances.
Expenditures for capital items can be written off over time, pursuant to the
capital cost allowance rules. Financial statements and Form T2125,
“Statement of Business or Professional Activities,” must be prepared and
submitted with the tax return.
Maintaining records
It is important for a business to keep accurate records of revenue and

expenses, and to retain the records for six years before discarding them.
Supporting information, such as receipts, need not be submitted with a
return but must be made available should the Canada Revenue Agency
request it. Other types of supporting documents may include cancelled
cheques and bank statements.
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Cautions
Many Canadians over the years have attempted to create a business

focused on a major hobby, lifestyle or sports activity. It is important to
realize that losses incurred in these businesses are not deductible unless
the business has a reasonable expectation of profit. There are grey areas
that must be considered when trying to use self-employed business losses.
For example, the courts have admonished the Canada Revenue Agency for
second-guessing the business judgement of taxpayers and denying losses
arising from ill-advised but legitimate business activities.
In a technical newsletter, the Canada Revenue Agency indicates that it will

disallow losses due to a lack of reasonable expectation of profit when
losses appear to be from personal or non-business activities, or when a
business takes a loss to realize tax benefits. They will allow start-up losses
for a reasonable time where there is “no personal element or inappropriate
activity.” The Canada Revenue Agency has identified seven criteria, based
on common law principles, it uses for determining whether a business has
a reasonable expectation of profit:
 Profit and loss in past years
 Significance and growth of gross revenue
 Development of the operation to date
 Planned or intended course of action
 Education, experience and background
 Time spent on activity in question
 Extent of activity in relation to a business of a comparable size
The tax return requires gross self-employed business income to be entered

on line 162 and net income (with expenses deducted) on line 135.
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EXAMPLE
For the last six months of 2019, Mohsin Kahn operated an unincorporated boat
charter business. Mohsin’s statement of income was as follows:
Kahn Accounting Services

Statement of Income
For the period of July 1, 2019
to December 31, 2019
Revenue $31,000
Expenses
Rent $12,300
Administration $9,800
Heat $8,800
Maintenance $9,600
Insurance $1,200
Total Expenses $41,700
Business Income ($10,700)
Because Kahn Accounting Services is an unincorporated business, it qualifies as

business income for Mohsin. For the six-month period ending December 31,2019
Kahn Accounting Services incurred a loss of $10,700 that Mohsin can normally offset
against other sources of income (with the exception of rules related to home office
expenses).
Reasonable expenses
A business owner is entitled to deduct any reasonable expense incurred to

earn an income from that business. The key for the taxpayer is to link the
expense to income.
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Examples of expenses that business owners should review for deductibility

include:
 Advertising  Bad debts
 Business taxes  Capital cost allowance
 Delivery, freight  Fuel costs
 Insurance  Bank charges
 Interest expense  Maintenance and repairs
 Meals and  Motor vehicle expenses

entertainment
 Supplies  Travel
 Telephone  Internet
 Rent  Legal and accounting fees
The tax impact of claiming a deduction is a reduction to the taxpayer’s

overall income tax liability. The tax savings is derived by multiplying the
expense claimed by the taxpayer’s marginal tax rate. This is because
claiming an expense reduces the business owner’s taxable income and
therefore lowers his or her overall income tax liability.
Cash versus accrual reporting
The self-employed taxpayer can choose whether to report the income

using the cash method or the accrual basis. The cash method tracks
revenue when received and expenses when paid. The accrual basis tracks
revenue based on the date of invoice, when there is a legal obligation the
amount is owed to the individual. The annual accrual basis records
expenses when incurred, regardless of when the invoice arrives for
payment.
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Employee versus independent contractor
Another important consideration for self-employed individuals is to ensure

a correct assessment of their working relationship with the payer; is the
individual truly self-employed or does the relationship align with that of an
employee? This relationship determination is not a choice or election. A
valid analysis must assess the nature of the worker’s and payer’s
relationship by examining the specific facts of each situation, based on a
framework established through common law principles.
Relationship Impact
The determination of this issue – employee versus independent contractor

– matters because an incorrect determination can cause a reassessment
by the Canada Revenue Agency, resulting in adjustments related to the
following issues:
 An employer is responsible for withholding income tax, CPP/QPP

premiums and Employment Insurance premiums from an employee’s
remuneration. As well, the employer is responsible for matching the
employee’s CPP/QPP and Employment Insurance contributions.
 Individuals who are truly self-employed are responsible for the

employee and employer contributions for both CPP/QPP, and generally
are not eligible for Employment Insurance.
There is an exception for self-employed individuals who can access

special Employment Insurance benefits by entering into an agreement
or registering with the Canada Employment Insurance Commission.
These special benefits include six types of benefits – maternity,
paternal, sickness, compassionate care, family caregiver benefit for
children, and family caregiver benefit for adults. Quebec self-employed
benefits are limited to maternity, paternity and parental benefits.
Employment benefits are not included in this group of special benefits.
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Access to these special benefits requires the self-employed

individual to contribute only the employee portion of the premium,
not the employer portion. Contributions must continue throughout
the duration of self-employment, regardless of any changes in the
nature of the self-employment. There are two exceptions:
o A self-employed individual can cancel participation within

60 days of having registered
o Self-employed participation can be cancelled at any time

provided the self-employed individual has never claimed
any benefits under this plan
 A self-employed taxpayer is entitled to a wider range of expenses that

can be claimed against his or her gross income. If a reassessment
results in the loss of self-employed status, the deduction for expenses
will be denied creating a higher income subject to tax.
While not a Canada Revenue Agency audit issue, employees are typically
eligible for minimum amounts of paid vacation time, along with notice
and/or severance in respect of termination of employment. Self-employed
individuals are not eligible for these types of benefits and/or payments
under provincial labour laws. This can create issues for employers who
may owe vacation or severance pay to a worker, if a working relationship
is re-defined to be that of an employee-employer instead of a self-
employed contractor.
Evaluating the relationship
A valid determination of whether an individual is truly self-employed or in

an employee-employer relationship requires a careful analysis of the
unique facts using a framework established through common law
principles. The framework considers the following criteria:
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 Ownership of tools and equipment: Who owns the tools and equipment
the worker uses when performing the services?
 Control: What level of control does the payer exercise over the worker?
What degree of independence does the worker have in determining
when and how the work is completed?
 Hiring of assistance: What degree of accountability does the worker

have over the work performed? Can the worker subcontract the work to
others or can the worker hire others to assist?
 Financial risk: What degree of true financial risk does the worker
assume within the relationship? Who pays for the expenses the worker
incurs?
 Opportunity for profit: What profit potential arises for the worker
through the relationship the worker has with the payer?
 Responsibility for investment and management: Is the worker required

to make an investment in order to provide the service? Is the worker
free to make independent decisions?
 Ongoing relationship: Does the worker have any other clients? What
percentage of the worker’s gross income arises from the relationship
with the payer?
 Intention and documentation: What was the intention of the two

parties (worker and payer) when they entered the relationship, and
what documentation supports the assertion?
 Other relevant facts can also contribute to the analysis
No single element demonstrates whether a worker is an employee of the

payer or a self-employed individual carrying on a business relationship
with the payer. Analysis of the relationship between the worker and payer
is based on the specific facts of the relationship, using the framework
described above.
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The issue of employee versus independent contractor is a common area of

reassessment by the Canada Revenue Agency, and many situations end up
in the courts for settlement. Workers may like the idea of being self-
employed because of the potential to deduct business expenses. This
feeling can change quickly when the work comes to an end and the worker
realizes he or she is not eligible for Employment Insurance benefits. It is at
this point that workers commonly complain that self-employment was not
what they understood the relationship to be. As such, it is important to
undertake careful analysis from the start to correctly assess the worker
and payer relationship. As well, it is possible to get a pre-determination
from the Canada Revenue Agency.
Professional income
Lines 164 and 137
The income earned by doctors, dentists, lawyers, architects, engineers,

accountants and other types of professionals can be termed as professional
income. Professionals can deduct expenses incurred in earning their gross
income. Financial statements and Form T2125, “Statement of Business or
Professional Activities,” must be prepared and submitted with the tax
return.
Commission income
Lines 166 and 139
Individuals who earn income as self-employed commission sales agents

use these lines. While most business and professional income must be
reported on an accrual basis, commission sales agents can use the cash
method if it accurately reflects their income.
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EXAMPLE
During the 2019 tax year, Mahood earned commission sales income of $62,000. On
December 31, he had not yet received $7,000 of the $62,000, although he was very
confident he would receive it eventually. Mahood knows that commission sales agents
are allowed to use the cash method of accounting, so he reports $55,000 of gross
revenue ($62,000 less $7,000 not yet received).
Since he has chosen to report income using the cash method, he must also report
expenses using the cash method. Therefore, Mahood can only deduct expenses he
actually paid.
During 2019, Mahood operated from rented premises for the entire 12 months. His
cash flow was tight, so the landlord allowed him to defer rent payments for two
months (November and December), until his cash flow picks up. Although Mahood
has an obligation to eventually pay the rent for November and December, he can only
deduct the 10 months of rent (January to October) he actually paid as expenses for
2019.
Farming income
Lines 168 and 141
Farming includes income from the following types of activities:
 Soil tilling  Beekeeping
 Livestock raising or showing  Hydroponic crop growing
 Poultry raising  Christmas tree growing
 Dairy farming  Operating a wild game preserve
 Fur farming  Chicken hatcher
 Tree farming
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Typical farming expenses include:
 Fertilizer and lime
 Seeds and plants
 Livestock purchases
 Legal and accounting
 Clearing, levelling and draining
 Crop insurance
 Property taxes and rent
 Capital cost allowance
 Pesticides
 Feed, supplements, straw and

bedding
 Veterinary bills and medicine
 Repairs and maintenance
 Electricity
 Interest and bank charges
 Small tools
 Salary and wages
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Self-employment income from farming is reported on a calendar year

basis. Either the cash or accrual accounting method can be used in keeping
financial statements for the business. The Canada Revenue Agency
requires that Form T2042, “Statement of Farming Income,” and financial
statements be filed with the tax return.
Restricted farm losses
A restricted farm loss can occur when the taxpayer’s chief source of
income is neither farming nor a combination of farming and some other
source of income. The term “chief source” generally means 50%.
In such a situation, the farm loss is restricted and only a portion is

deductible against other income of the taxpayer. The restricted farm loss is
the first $2,500 of the farm loss plus 50% of the next $30,000 of farm
losses. This creates a maximum restricted farm loss of $17,500 on total
farm losses of $32,500 or more.
Taxpayers can carry any unused restricted farm loss back three years or
forward 20 years and claim it against farming income in those years.
Taxpayers may claim any restricted farm loss carryforwards against a

capital gain realized on the sale of the farm property, but only to the
extent of property taxes and interest expense on money borrowed to buy
the land. A restricted farm loss can be used to reduce the gain to zero but
cannot create a capital loss.
Fishing income
Lines 170 and 143
Fishing income includes income earned from fishing for or catching any of
the following:
 Shellfish
 Crustaceans
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 Marine animals
Individuals employed by a fishing operation do not report self-employed

fishing income. To be considered a self-employed fisher, an individual must
participate in making a catch, be fishing for reasons other than sport, and
one of the following must apply:
 Own or lease the boat used to make the catch
 Own or lease specialized fishing gear
 Hold a species licence issued by Fisheries and Oceans Canada

 Have a right of ownership to some or all of the proceeds of the catch
Typical fishing expenses include:
 Salt, bait and ice
 Fuel costs
 Insurance
 Legal and accounting
 Office expenses
 Property taxes and rent
 Salary and wages
 Fishing gear
 Business taxes and licences
 Repairs and maintenance
 Nets and traps
 Interest and bank charges
Self-employment income from fishing is reported on a calendar year basis.

Either the cash or accrual accounting method can be used in keeping
financial statements for the business. The Canada Revenue Agency
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requires that Form T2121, “Statement of Fishing Activities,” and financial

statements be filed with the tax return.
Deduction for workspace in the home

A common expense associated with all types of self-employment income is
the deduction of expenses related to an office space maintained within the
taxpayer’s home.
The workspace in home criteria and calculations for self-employed

individuals and employees are similar, although there are subtle
differences. For simplicity, this section provides a comprehensive
discussion of the deduction for workspace in the home as it relates to both
self-employed individuals and employees.
Self-employed individuals can deduct expenses for workspace in the home

in the calculation of their net income. Employees apply the deduction on
line 229 (Other employment expenses) of the tax return.
Global criteria
Individuals can deduct expenses for the business/employment use of a

workspace in the home, as long as one of the following conditions are met:
 The workspace is where the individual primarily (more than 50% of the
time) does his or her work
 The workspace is used only to earn business/employment income. It is

also used on a regular and continuous basis for meeting clients,
customers, or other people in the course of business/employment
duties. The criteria for meeting clients is reasonably broad and can
include face-to-face, teleconference or skype. This means the space
cannot have any personal element at any time during the reporting
period.
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Self-employed
If a self-employed individual uses a home office to earn business income,

many of the expenses that are reasonable in operating the home office are
deductible expenses. This includes expenses such as heat, electricity,
insurance, maintenance, property taxes, water and mortgage interest. The
repayment of mortgage principal is not a deductible expense; only the
interest portion is deductible. If the self-employed individual rents the
property, and does not own it, a portion of the rent is deductible.
In addition, a self-employed individual can claim capital cost allowance on

the home. This is rarely advisable because it can trigger a change in use
for a portion of the home used for business and possibly eliminate it from
principal residence status, making any gain on the home at least partially
taxable when it is sold. In most situations, individuals should avoid the
deduction of capital cost allowance as a home office expense.
Employee (non-commission)
If an employee is someone other than a commission salesperson,

deductions may be made for a reasonable portion of expenses associated
with home maintenance, such as heat, electricity, water and minor repairs,
as well as a portion of the rent if the employee does not own the property
personally.
These are considered deductible expenses because they are classified as

supplies to earn employment income. To qualify for this deduction, the
employee must be required under the terms of his or her employment
agreement to provide a home office for which he or she is not reimbursed.
The employer completes Form T2200, “Declarations of Conditions of
Employment,” to indicate this.
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An employee (excluding an employee who is a commission salesperson)

cannot claim a deduction for property taxes, insurance, mortgage interest
or capital cost allowance.
Commission employee
Like other employees, an employee who is a commission salesperson can

deduct a reasonable portion of the expenses associated with home
maintenance, such as heat, electricity, water and minor repairs, as well as
a portion of the rent if the employee does not own the property personally.
In addition, an employee who is a commission salesperson may also
deduct a reasonable portion of home insurance and property taxes. He or
she cannot claim a deduction for mortgage interest or capital cost
allowance, as the rules explicitly prohibit the deductibility of expenses that
are payments on account of capital (meaning capital cost allowance is not
deductible for commission salespeople).
Determining reasonable proportion
A reasonable proportion of eligible expenses is usually best calculated on a

pro rata basis using one of the following two options:
 Floor space in the home
 Number of rooms in the home
For the floor space option, compare the portion of the home used for office
space with the total floor space of the home to arrive at a ratio. For
example, if an individual uses a 400-square-foot home office in a 4,000-
square-foot home, and the space qualifies as a deductible workspace, then
10% (400 ÷ 4,000) of reasonable eligible expenses are deductible.
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Alternatively, compare the number of rooms that qualify as a deductible

workspace to the total number of rooms in the home. For example, if an
individual uses one room (as qualifying workspace) in a home that has
seven rooms in total, then 14.3% (1 ÷ 7) of eligible expenses are
deductible.
EXAMPLE
Hannah, a self-employed electrician, operates her business from the 150-square-foot
den in her 2,000-square-foot home. Her home has a total of eight rooms, of which the
den is one. Based on floor space, Hannah could use a ratio of 7.5% (150 ÷ 2,000).
Alternatively, she could use the number of rooms, resulting in a ratio of 12.5% (1 ÷ 8).
Assume Hannah has eligible home office expenses that total $18,000, before
applying the ratio. If Hannah bases the ratio on the number of rooms, she can claim a
$2,250 (12.5% x $18,000) deduction for expenses associated with her home office
workspace. If she bases the ratio on floor space, she can only claim $1,350 (7.5% x
$18,000).
It is obviously more advantageous for Hannah to base the ratio on the number of
rooms. Once she has made that choice, however, she must apply it consistently.
Other considerations
While a self-employed individual may be eligible to claim a deduction for

the business use of the home, the actual amount deductible is limited to
the amount of net income earned, before the deduction for home office
expenses, from the business for the applicable taxation year. In essence,
this means an individual cannot create a loss through the use of home
office expenses nor can the deduction be used to make a business loss
larger. Any workspace expenses that cannot be deducted because of this
rule may be carried forward indefinitely.
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EXAMPLE
Hannah, the self-employed electrician, has a net income of $1,500, before applying
the deduction for workspace in the home. From the previous example, we know
Hannah is eligible to claim a $2,250 (12.5% of $18,000) deduction of expenses
associated with her home office. Given that her net income is only $1,500, the
maximum deduction Hannah can claim for workspace in the home this year is $1,500.
She can carry forward the remaining $750 ($2,250 – $1,500) indefinitely.
Employees who qualify to claim a deduction for workspace in the home

cannot use the deduction to create a loss from employment. When eligible
workspace in the home expenses exceed the employee’s income, the
excess amount can be deducted from income earned through the same
source in the following year.
EXAMPLE
Marty is a records librarian who is an employee of Community Hospital, located 100
kilometres from his home. Due to the distance, Marty works from home and goes to
the hospital only for the occasional meeting. Assume that Marty meets the criteria to
claim a deduction for workspace in the home and can claim 14% of eligible expenses
based on floor space.
If Marty’s eligible home office expenses are $24,000, then he can claim a deduction of
$3,360 (14% x $24,000). He cannot use this $3,360 to create a loss from
employment.
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Table 10: Workspace in the Home Deductible Expenses

Circumstances
Proportionate
share of: Employee Employee
Self-employed
(no commission) (commission)
Home maintenance
(i.e., heat, water,
Yes Yes Yes
electricity, minor
repairs, etc.)
Home insurance Yes No Yes
Property taxes Yes No Yes
Mortgage interest Yes No No
Mortgage principal No No No
CCA Yes No No
Rent (if property not

Yes Yes Yes
owned personally)
This table assumes the individual meets the global and other criteria to be eligible to
deduct qualifying expenses.
Non-taxable income
Some income sources are not taxable. Examples include:
 Awards for personal injuries
 Structured settlements
 Lottery winnings
 Life insurance proceeds arising from the death of the life insured
 GST/HST credit
 Canada Child Benefit payments
 Allowances for newborn children from Quebec family allowance
 Disability or death payments resulting from war service
 Amounts received from inheritances
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 Workers’ compensation payments (generally not taxable, but may need

to be included in net income with an offsetting deduction)
While these types of income are not taxable, subsequent income earned on
these amounts is taxable. Investment earnings arising from the
investment of receipts that were originally non-taxable amounts will
increase a taxpayer’s overall income for a taxation year and subsequently
increase the taxpayer’s income tax liability.
Tax-Free Savings Accounts

The Income Tax Act allows taxpayers to withdraw any amount from their
TFSA at any point in the year without an income tax consequence.
Detailed discussion of the design and operation of TFSAs is Module 4,

Registered Retirement Plans.
Types of income by segment and life cycle stage

Figure 6 is a general checklist based on the principles discussed in this
section as they relate to income. Do not rely solely on the figure; use it in
conjunction with the commentary for each income item.
As well, labels can be misleading because of perception. The term student,

for example, may cause someone to think of a younger individual
attending post-secondary education immediately following high school.
While this may describe many students, it is increasingly common for
individuals to return to school later in life.
Similarly, the term disabled is commonly used to refer to someone with a

physical or mental condition that limits movements, senses or activities.
Meeting the definition of disabled under the Income Tax Act may allow the
individual to qualify for special tax treatment. That does not mean the
person does not work; an individual with a disability may or may not be
employed.
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Planning for students and planning for individuals with disabilities will be
different depending on their age and point in their life cycle. In the figure,
the income tax consequences under Students and Disabled refer to items
unique to these categories of individuals, but these individuals may also
fall under other categories within the life cycle for financial planning.
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Figure 6: Income Impact
Income Impact
Increase
POTENTIAL Increase Income
Unique Circumstances Stage of Life Cycle Income Tax Other Notes
Type of Income Inclusion for Recipient of the Income for Tax Purposes
Liability
Mature,
Mature,
Module 9: Taxation
Individuals Pre- Couples Raising Mid-Life No

Students Disabled Still
in General Family Only Family Cylce Longer
Working
Working
1 1 1 1 Pension plan income Yes Yes
1 1 1 1 Pension income splitting (recipient spouse) Yes Yes Reduce income inclusion for payor spouse
1 1 1 1 1 1 Self-employed (unincorporated) business income Yes Yes
1 1 1 1 1 1 Self-employed professional income Yes Yes
1 1 1 1 1 1 Self-employed farming income Yes Yes
1 1 1 1 1 1 Self-emploiyed fishing income Yes Yes
1 1 1 1 1 1 Child support No No
1 1 1 1 1 1 1 Spousal support Yes Yes May be a deduction for payor
1 1 1 1 1 1 1 Rental income Yes Yes Typically passive income with opportunity to offset eligible expenses
1 1 1 1 1 1 1 Interest income Yes Yes
1 1 1 1 1 1 1 Salary and wages Yes Yes
1 1 1 1 1 1 Commission income (employee) Yes Yes
1 1 1 1 1 1 1 Honorarium Yes Yes
1 1 1 1 1 1 1 Taxable benefits Yes Yes
1 1 1 1 1 1 1 Non-taxable benefits No No
1 1 1 1 1 1 Wage-loss replacement plan Yes Yes
1 1 1 1 1 1 1 RRSP Withdrawal Yes Yes Caution in respect of attribution period for withdrawals from spousal RRSP
1 1 1 1 1 1 RRSP Home Buyer's Plan, missed re-payment) Yes Yes
178
1 1 1 1 1 1 RRSP Life Long Learning Plan, missed re-payment) Yes Yes
1 1 1 1 RRIF Income Yes Yes
1 1 RDSP payment of grant, bond, investment earnings, proceeds from rollover No No
1 1 1 1 1 1 1 1 1 Tax-Free Savings Account (TFSA) withdrawals No No
1 1 Scholarships, bursaries, grants (qualifying students) No No
1 1 1 1 1 1 1 1 Dividends, Taxable from Taxable Canadian Corporation Yes Yes The dividend gross-up and dividend tax credit scheme applies
1 1 1 1 1 1 1 1 Dividends, Non-taxable (Capital Dividends) No No Typically a shareholder of a private company
1 1 1 1 1 1 1 Dividends, from non-resident corporation Yes Yes Investors
1 1 1 1 1 1 1 Dividends, Stock Dividends Yes Yes Typically a shareholder of a private company
1 1 1 1 1 1 1 1 Investment earnings on amounts originally received as non-taxable amounts Yes Yes
1 1 1 CPP retirment income Yes Yes
1 1 1 CPP disability income Yes Yes
1 1 1 1 1 1 1 CPP death benefit Yes Yes
1 1 1 Old Age Security Yes Yes Income tested
1 RCA payment Yes Yes
1 Awards for personal injury No No
1 Structured settlements No No
1 Lottery winnings No No Once proceeds invested, earnings on investment are taxable
1 1 1 1 1 1 1 Life insurance proceeds No No
1 1 1 1 1 1 1 1 1 GST/HST credit No No
1 1 Canada Child Benefits (CCB) No No
1 1 1 1 1 1 1 1 1 Amounts received from inheritances No No
1 Workers compensation Generally No Generally NO

Module 9: Taxation
The term seniors, too, can be misleading and is often misused. There is
nothing in the Income Tax Act that defines senior, and referring to an
individual age 50, 55, 60 or 65 as a senior could be viewed as biased.
Financial planning should focus on the individual or family’s stage in the
life cycle and take into consideration additional unique circumstances.
The term mid-life is used for those who have reached the point of mid-life
in terms of age. Typically, this group has passed the point of raising
children and may have reached the empty-nest stage or may never have
had children.
The term mature, still working describes those in the pre-retirement phase
of life but are still employed or active in business with some regularity. The
term mature, no longer working describes those who are older and no
longer employed or active in business. Retirement is not a point in time,
but rather a phase. Furthermore, individuals are working longer, well past
what has been viewed as traditional retirement ages of 60 to 65.
Just because a category is not ticked off in the figure, it does not suggest
the category could never apply. For example, a mature individual could be
an older parent, or a mature individual who is a grandparent could be
raising his or her grandchildren. Either situation could affect the
individual’s income. The figure works on the premise that these situations
tend to be the exception rather than the norm.
An individual’s role, whether employee, student or mature individual, does

not limit the types of income the individual may receive during the year. In
addition to the common types of income described above, these individuals
may also have investment income, such as interest income, dividend
income or capital gains. Individuals who withdraw money from an RRSP
have a resulting income inclusion that increases their overall income and
ultimately their total income tax payable. A mature individual may still be
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working, so could have employment income along with pension income

and Old Age Security.
Students
For students, common types of income related to their role include
employment income, tips and gratuities, income from a Registered
Education Savings Plan (RESP), scholarships, fellowships, bursaries and
study grants such as an artists’ project grant or apprenticeship grant.
Persons with disabilities

Qualifying individuals who are the beneficiaries of a RDSP may have
income arising from the plan. A withdrawal of contributions does not
increase the taxpayer’s income for income tax purposes when paid out
from the plan. Other types of payments from the plan, including the
Canada Disability Savings Grant, Canada Disability Saving Bond,
investment income earned on plan assets and proceeds from rollovers, are
included in the income of the beneficiary in the year of payment. This
increases the beneficiary’s income subject to taxation and ultimately
increases his or her income tax liability.
Employees
For employees, common types of income related to their role include
employment income, tips and gratuities, and taxable benefits and allowances.
Mature, still working

Individuals in the mature, still working phase may have income from a
wide variety of sources, including employment, self-employment, non-
registered investments and possibly a pension.
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Mature, no longer working

Individuals in the mature, no longer working phase generally do not have
employment or self-employment income, but could still have taxable
benefits arising from retirement benefits provided through a prior employer
(e.g., life insurance that a prior employer pays for). These individuals
commonly have Old Age Security and CPP/QPP retirement income.
(II) Deductions from total income

Once taxpayers have included all income, they have the opportunity to
deduct certain amounts from their total income to determine their net
income. A deduction reduces total income by amounts incurred to earn
income (e.g., child care expenses), amounts that will be taxed in the
future (e.g., RRSP and RPP contributions), amounts that will be taxed to
another individual (e.g., deduction for support payments), and amounts
that benefit certain taxpayers (e.g., clergy residence).
The term deduction refers to an amount taxpayers can use to lower either
their net income for tax purposes or their taxable income, depending on
where in the formula the deduction applies. Since a deduction reduces the
amount of income that is subject to taxation, it reduces the taxpayer’s
income tax liability at the marginal tax rate. As such, the higher the
taxpayer’s marginal tax rate, the greater the tax savings to the taxpayer.
A tax deduction differs from a tax credit, because a tax credit directly
reduces the total amount of taxes owing. Tax credits do not affect the
calculation of a taxpayer’s income, but rather affect the calculation of
taxes owing after calculating income. This module discusses tax credits
later in this section.
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EXAMPLE
Rachel, who is in the 50% marginal tax bracket, is eligible to claim a $1,000 tax
deduction. The deduction reduces Rachel’s income by $1,000 and, based on her
marginal rate of tax, the effect is tax savings of $500 ($1,000 x 50%). Therefore,
claiming the deduction reduces Rachel’s income tax liability by $500.
Figure 7 shows an excerpt from the 2018 tax return that depicts the
calculation of net income for tax purposes (for a person living in Nova
Scotia). This section of the return begins with the taxpayer’s total income
and applies a series of deductions to derive the taxpayer’s net income.
Figure 7: Calculating Net Income
The line items in this section of the return represent some of the available
deductions. Any deduction not specifically listed goes on line 232, Other
deductions.
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RRSP, PRPP and RPP contributions

Lines 207 and 208
Taxpayers can deduct their contributions to an RRSP, PRPP or RPP, subject

to certain limitations in the calculation of an individual’s net income in the
prior year.
A taxpayer may not contribute to an RRSP after the end of the year in
which the annuitant turns age 71, and the plan must mature by the end of
the year in which the annuitant turns age 71. Similarly, RPPs and DPSPs
must generally start paying benefits to members by the end of the year in
which members turn age 71.
The dollar limit for contributions is:
 For RRSPs, $26,230 for 2018 and $26,500 for 2019
 For RPPs, $26,500 for 2018 and $27,230 for 2019
Deduction for elected split pension amount

Line 210
Eligible taxpayers who receive eligible pension income can allocate up to

half of their pension income to their spouse or common-law partner, as
discussed under “Pension income splitting” (line 116) in the Total Income
section. Taxpayers who split their eligible pension income with their spouse
deduct the shared portion on line 210. As such, the total amount of eligible
pension income is still reported on two tax returns; the first spouse claims
100% and deducts the shared portion, and the second spouse claims the
shared portion.
The pension income split does not have to be 50/50, although both
spouses or common-law partners must agree to the allocation in their tax
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returns for the year. As discussed earlier, different rules apply to

individuals under age 65 and individuals age 65 and over.
This income splitting opportunity can be helpful as the income retains its
character. This means a spouse who might otherwise not have pension
income can receive transferred income and use it to claim the $2,000
pension income credit.
Note, however, that the minimum age for splitting RRSP annuity, RRIF and
LIF income is age 65 and older. As discussed earlier, the reason for this
age restriction is that individuals have much greater personal control over
the timing of withdrawals from RRSPs, RRIFs and LIFs when compared
with RPPs. Without the age 65 eligibility rule, many individuals who are not
yet retired could gain significant tax advantages well before they reach age
65 by arranging to withdraw money each year as RRSP annuity or RRIF
income while still saving for retirement.
While there is no requirement that individuals must retire at age 65, the
federal government and most provinces use age 65 as the minimum
eligible age for many benefits associated with retirement. However, an
increasing number of individuals are delaying retirement beyond age 65.
This presents planners with an opportunity to evaluate whether strategies
to create eligible pension income might be beneficial. For example, by
triggering some RRIF income during the year, an individual may be able to
claim the pension income credit and/or transfer qualifying pension income
for income splitting purposes. It is important to assess the individual’s
specific circumstances to determine if this type of strategy is beneficial.
Individuals receiving RPP income, on the other hand, generally have little
control over the timing of their pension payments. RPP income is more
commonly received only after retirement. Individuals cannot access RPP
money on an as-needed basis nor on a partial pension basis; in contrast,
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individuals can more easily access RRSP money on an as-needed or partial

basis.
Annual union, professional, or like dues

Line 212
Trade union dues are tax-deductible provided that the employer withholds
and remits the dues pursuant to a collective bargaining agreement.
Typically, dues paid appear in box 44 of a T4 slip.
Professional dues are tax-deductible if the taxpayer must pay them to

maintain his or her professional status as recognized by statute.
In both cases, dues must pay for the ordinary operating expenses of the
union or professional association to be deductible.
Child care expense

Line 214
Eligibility
Taxpayers may be eligible to deduct child care expenses in the year they
incur the expense, provided that they incur the expense to allow one of the
parents (or supporting individuals) to do any one of the following:
 Earn income from employment
 Carry on a business
 Attend a qualifying educational program, including high school
 Carry on research for which a grant was received
To be eligible for a deduction, the expenses must be associated with a

child who was under age 16 at some point during the year or had a
qualifying impairment in physical or mental function.
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Deduction amount
The maximum amount of the deduction for eligible childcare expenses is
the least of (a), (b) and (c):
a) The actual amount the taxpayer paid in the year
b) The sum of the following amounts:
 $8,000 (2019 amount) for each child under age seven at the end of
the taxation year, provided the child did not qualify for the disability
tax credit
 $5,000 (2019 amount) for each child over age six at the end of the
taxation year and under age 16 at any time during the taxation year,
provided the child did not qualify for the disability tax credit
 $5,000 (2019 amount) for each child over age 15 throughout the
year who has a physical or mental infirmity and is dependent on the
taxpayer or taxpayer’s spouse or common-law partner, provided the
child did not qualify for the disability tax credit
 $11,000 (2019 amount) for each eligible child for whom anyone is
entitled to claim a disability tax credit
c) Two-thirds of the taxpayer’s earned income
A claim for childcare expenses may reduce entitlement to the disability tax
credit supplement, which is available to some individuals under age 18 at
the end of the year when they have a severe and prolonged impairment in
a mental or physical function.
Part (a) above reflects the actual expenses incurred.
Part (b) above is based on the formula outlined above regardless of the
actual expenses incurred. If, for example, a parent has three children ages
4, 8 and 14, the formula used to calculate the part B above includes all
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three children, even if the parent only incurs childcare expenses in respect
of the 4 and 8-year-old.
Part (c) above is based on the taxpayer’s earned income, where the term
earned income is defined within the Income Tax Act for purposes of this
specific deduction. As the term suggests, earned income for purposes of
part (c) must be income earned (not passive income from investments)
and includes items such as:
 Salary, wages, gratuities and other remuneration from an office or

employment
 CPP and QPP disability pension income
 Amounts included in computing employment income such as taxable

employment benefits and employee stock option benefits
 Scholarships, fellowships, bursaries, prizes and research grants to the

extent the amount must be included in income
 Apprenticeship grants that fall within the government of Canada’s

program and to the extent the amount must be included in income
 Income from businesses whether alone or as a partner (but excluding

losses)
Types of expenses
Childcare expenses include payments to the following:
 Eligible childcare provider, as discussed below
 Day nursery school or daycare centre
 Day camp or day sports school
 Boarding school or camp, where lodging is involved
 Educational institution for the purpose of providing daycare
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Eligible childcare provider

The term eligible childcare provider is used to describe an individual or
organization who provides child care services. Where the service is
provided by an individual, the payment is deductible provided the payment
is made to someone other than:
 Parent (mother or father) of the eligible child
 Supporting person of the eligible child
 Person for whom the taxpayer claiming the childcare expense, or a

supporting person of the eligible child, has deducted a personal tax
credit
 Person under age 18 who is related to the taxpayer, where the term
related falls within the Income Tax Act’s definition of related.
Amounts associated with overnight camps or boarding schools are limited

to:
 $275 (2019 amount) per week for each child for whom the disability
tax credit can be claimed
 $200 (2019 amount) per week for each child who is under age seven at
the end of the year
 $125 (2019 amount) per week for all other children
Making the claim and exceptions to the standard

The child care deduction may be claimed only by the parent or supporting
individual with the lower income, subject to the following exception. The
higher-income parent may claim the child care deduction only during
periods when the lower-income parent is:
 Attending a designated educational institution or high school in Canada,

on a full-time or part-time basis
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 By reason of mental or physical infirmity and confinement throughout a

period of not less than two weeks in the year to a bed or to a
wheelchair or as a patient in a hospital, an asylum or other similar
institution, was incapable of caring for children
 By reason of mental or physical infirmity, was in the year, and is likely

to be for a long-continued period of indefinite duration, incapable of
caring for children
 Confined to prison or similar institution for at least two weeks in the

year
 Living apart from the higher-income parent at the end of the year and
for at least 90 days that began in the year due to a relationship
breakdown
If any of these four circumstances applies (except attending school on a

part-time basis), the higher-income individual can claim child care
expenses, but on a reduced basis. The calculation is:
Lessor of:
a) The maximum otherwise determined (i.e., $8,000 per child under age
7, $5,000 per child over age six and under age 16, $5,000 per
dependent child over age 15 with a physical or mental infirmity, and
$11,000 per child for whom anyone is entitled to claim a disability tax
credit) times 2.5% times the number of:
 Months the lower-income spouse was enrolled in a part-time
educational program, plus
 Weeks the lower-income spouse was enrolled in a full-time
educational program, plus
 Weeks the lower-income spouse was not capable of caring for
the children because of an impairment in physical or mental
function, plus
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 Weeks the lower-income spouse was confined to a prison or

similar institution for a period of at least 2 weeks, plus
 Weeks the couple was living apart due to a relationship
breakdown at the end of the year for a period of at least 90 days
beginning in the year and reconciled before 90 days after the
year
b) The maximum otherwise determined for the lower-income spouse
EXAMPLE
The Chen family has one child, Daniel, age nine. Daniel attended overnight camp for
four weeks this past summer, at a cost of $700 per week, while his parents both
worked. Daniel’s mother earns $85,000, while his father earns $91,000. Daniel’s
mother can claim a childcare expense of $500 ($125 per week maximum for overnight
camp).
EXAMPLE
Shelby’s earned income was $9,000, while her spouse, Sandy, earned $53,000. To
allow Shelby to work, they incurred childcare expenses of $12,000 for the daycare
that three-year-old Christy attended and $3,000 for after-school care for six-year-old
Connor. The maximum amount that Shelby can claim for childcare expenses is
$6,000, the least of $15,000 (actual expenses incurred), $16,000 (2 children under
age 7, maximum $8,000 each) and $6,000 (2/3 x earned income of $9,000).
Disability supports deduction

Line 215
Individuals with a physical or mental function impairment may be eligible

to claim a deduction for some types of medical expenses that allow them
to work (as an employee or carrying on a business), go to school or do
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research for which they received a grant. This deduction is only available
to the person with the disability.
For example, a deduction may be claimed for expenses paid to an

unrelated attendant who is at least 18 years of age and not the spouse or
common-law partner of the taxpayer, or for eligible expenses that helped
or enabled the taxpayer to work as an employee, carry on a business,
conduct research or enroll in an educational program.
Types of expenses
Examples of eligible expenses include bliss symbol boards, braille note-taker
devices, braille printers, synthetic speech systems, devices or software,
electronic speech synthesizers, optical scanners, page turner devices and
teletypewriters.
Other types of devices include reading and tutoring services, talking
textbooks or voice recognition software.
Deduction amount
The deduction amount is limited to the lesser of:
 The amount actually paid for the attendant or disability support

expenses (net of reimbursements)
 The taxpayer’s earned income plus, if the taxpayer attended a

designated educational institution, the least of:
a) Net income in excess of earned income
b) $375 times the number of weeks in school
c) $15,000 (2019 amount)
A taxpayer does not need to qualify for the disability amount to be eligible
for this deduction, unless he or she is claiming part-time attendant care
expenses.
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Allowable business investment losses

Line 217
The general rule is that taxpayers who incur a capital gain must include
50% of that gain, referred to as a taxable capital gain, in their reported
income. When there is a capital loss, a similar rule applies: 50% of the
capital loss, referred to as an allowable capital loss, can be claimed against
taxable capital gains. When there is no taxable capital gain in the current
taxation year against which an allowable capital loss may be claimed, the
allowable capital loss may be carried back three years to offset any taxable
capital gains incurred in the three previous years. Or, alternatively, the
allowable capital loss becomes a net capital loss that can be carried
forward indefinitely.
A taxpayer may, however, be eligible for more generous tax treatment

when the capital loss meets the conditions set out for a business
investment loss.
A business investment loss is a capital loss arising from the disposition of a

share in, or a debt owing to a taxpayer by, a small business corporation
when either of the following apply:
 The disposition is to an arm’s-length person
 There is a deemed disposition of the debt or share at the end of a tax

year for nil proceeds and the taxpayer is deemed to have immediately
reacquired the debt or share at nil cost
In simple terms, a business investment loss is a capital loss that meets the
conditions outlined in the paragraph above. While 50% of a capital loss is
referred to as an allowable capital loss, 50% of a business investment loss
is referred to as an allowable business investment loss (ABIL). An ABIL
may be deducted against all sources of income in the year it is incurred.
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Carry back and carry forward

An ABIL that is not deductible in the year it is incurred, is treated as a non-
capital loss and is subject to a special carry back and carry forward period.
An ABIL may be carried back three years or forward for up to 10 years,
and can be used as a deduction against any type of income in any of the
carry back and forward years. If, at the end of the 10-year carry forward
period, the loss has not yet been utilized, the tax treatment changes. From
that point on, it is treated as a net capital loss, which can be carried
forward indefinitely and deducted against taxable capital gains only.
Reduce risk from losses

The business investment loss rules are designed to encourage investment
in small business corporations. There is often a greater risk of business
failure for new businesses, so the government designed these rules to
provide more generous tax treatment than would otherwise be available
for ordinary capital losses. The opportunity to deduct a loss against any
type of income, not just against taxable capital gains, makes it a more
attractive investment than if it were simply subject to the ordinary taxable
capital gain and allowable capital loss rules.
Moving expenses
Line 219
Qualifying moves
A taxpayer who moves from one location in Canada to another may qualify
to deduct eligible moving expenses. Moves that qualify include:
 A move associated with the establishment of a new home to be

employed, or run a business, at a new location
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 A move to take courses as a full-time student enrolled in a post-

secondary program at a college, university or other educational
institution
In addition, the taxpayer must move at least 40 kilometres closer to the

new work location or post-secondary institution, where the distance is
measured using the shortest normal route available to the travelling
public.
For taxpayers other than students, the move can be within Canada, from
Canada, to Canada or between two locations outside of Canada. When the
move involves a location outside of Canada, the taxpayer must be a
deemed or factual resident of Canada to be eligible for the deduction. In
addition, the move must be from a place where the taxpayer ordinarily
resided to another place where the taxpayer will ordinarily reside.
For students, the move can be within Canada or outside of Canada. When
the move is to attend a post-secondary institution outside of Canada, the
student must be a deemed or factual resident of Canada to be eligible for
the deduction.
Timing of deduction
Moving expenses can be deducted in the year of the move against income
earned from employment at the new work location.
For students, the deduction can be claimed against part-time employment

income in the new location, prizes, research grants, scholarships,
fellowships and bursaries included in computing income. Recall that
scholarships, fellowships and bursaries are only included in computing
income if the student cannot claim the non-refundable education tax
credit.
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To the extent that eligible expenses exceed the income requirements, a

taxpayer may carry forward unused amounts to claim as a deduction in the
following year against qualifying income earned from employment in the
new work or school location.
Qualifying expenses
A taxpayer may not deduct any expense for which he or she receives
reimbursement (i.e., when the employer covers the expense). There is a
specific list of the types of expenses that qualify for the moving deduction.
Examples include:
 Travel expenses for the taxpayer and individuals in the taxpayer’s

household, including vehicle expenses, meals and accommodation
 Cost of transporting and storing household goods, including packing,

moving, in-transit storage and insurance
 Temporary living expenses, including the cost of food and temporary

lodging near the old and new locations for up to a maximum of 15 days
 Cost of cancelling the lease at the old home
 Cost associated with selling the old home
 Legal fees involved in the purchase of the new home
 Ancillary costs associated with maintaining the vacant prior home, up

to a maximum of $5,000, after the taxpayer has moved and during the
period when reasonable efforts are being made to sell the home. This
includes expenses such as insurance premiums, heating and other
utilities, property taxes and interest
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Supporting documentation
Taxpayers may claim actual expenses for meals and vehicle costs incurred
by submitting supporting receipts. Alternatively, the Canada Revenue
Agency offers a simplified method under which taxpayers may claim a per-
person flat amount using prescribed formulas to calculate costs without the
need to retain and submit supporting receipts.
Note, however, that if a taxpayer uses the simplified method, the Canada
Revenue Agency may still request that the taxpayer provide reasonable
documentation to support the claim.
A request for reasonable documentation typically occurs when it appears

that the amounts claimed do not align with the actual move. For example,
a claim for 15 days of flat expenses for a move between two cities that are
600 kilometres apart, is likely to generate a Canada Revenue Agency
query.
2019 rates
Mileage rates depend on the province or territory in which the move
originates, and range from $0.48 to $0.645 per kilometre. Meals are set at
$17 per meal to a maximum of $51 per day for each individual in the
family.
EXAMPLE
Sivy has accepted a new position as a controller at a company located in another city.
From her current home, Sivy faces a 100-kilometre commute to her new job. If Sivy
decides to move closer to her new employer to reduce her commute, she will have
more time for her family and friends.
For eligible expenses associated with the move to be tax-deductible, Sivy must meet
the distance criteria. As long as the commute between Sivy’s new residence and new
work location is 60 kilometres or less (measured using the shortest normal route
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available to the travelling public), her eligible moving expenses will qualify as tax-
deductible.
Support payments
Line 220
Certain support payments are tax deductible. See the “Taxable support
payments” section for a discussion of the associated rules.
EXAMPLE
Wilson and Gail were married for nine years before they separated in July of last year.
Based on a verbal agreement that Wilson and Gail negotiated, Wilson pays Gail a
support payment of $1,200 per month, although they did not specifically allocate this
amount between child support and spousal support. Wilson paid Gail $6,000 for the
period August to December of last year.
In the absence of a written agreement stipulating child support and spousal support
amounts, the Canada Revenue Agency assumes the entire payment to be child
support, which is not taxable to Ellen nor tax-deductible for Sam.
Carrying charges and interest expense

Line 221
Carrying charges and interest expense a taxpayer incurs to earn income

from investments may be deductible under the following circumstances:
 Costs associated with managing investments, excluding fees associated

with a PRPP, RRIF, RRSP, Specified Pension Plan (SPP), segregated
fund and TFSA
 Fees for some types of investment advice or for recording investment

income
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 Interest expense on borrowed money used to earn income, although

not for assets held in registered plans
Potential to earn income

Interest on money a taxpayer borrows for investment purposes is
generally tax deductible provided the investment is made in a property
with the potential to earn income, such as interest or dividend income.
While shares of a corporation may not always pay dividends, provided

there is the potential that a dividend could be paid at some point in the
future, interest on money borrowed to purchase the shares is deductible.
When a corporation has a specific policy that states dividends will not be
paid on its shares, the potential for dividend income is eliminated and any
interest on money borrowed to purchase those shares is not deductible.
Borrowed to invest directly

Interest expense associated with money borrowed to invest directly in a
business is generally deductible by the taxpayer who borrowed the money.
For example, an individual shareholder who borrows money personally and
lends the borrowed funds to the corporation could deduct the interest
expense. Similarly, a sole proprietor may borrow money personally to
invest in the business operations.
Traceable
The primary consideration when assessing the deductibility of interest or
carrying charges is that the borrowed funds must be clearly traceable to an
income-producing business or property.
When the connection between the interest paid on the money borrowed
and the income-producing property is eroded, the deductibility of the
interest can and often is challenged by the Canada Revenue Agency.
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Cumulative net investment loss

An individual taxpayer may have a balance referred to as a cumulative net
investment loss (CNIL). A taxpayer’s CNIL balance is the cumulative
excess (if any) of deductible investment expenses (i.e., interest paid,
carrying charges and losses from passive investments in partnerships and
limited partnerships, plus losses from rental real estate) over the
cumulative total of investment income (i.e., interest, dividends and passive
income from partnerships, limited partnerships or rental property) since
1987.
To the extent that a taxpayer’s cumulative investment income exceeds his

or her cumulative investment expenses, his or her CNIL balance is zero. If
the taxpayer’s cumulative investment expenses exceed cumulative
investment income, the taxpayer’s CNIL account will carry a balance.
A taxpayer’s access to the capital gains exemption may be reduced

(deferred) to the extent that the taxpayer has a positive balance in his or
her CNIL account in the year in which a gain on qualifying assets occurs.
When a CNIL balance exists, the taxable amount of the gain must exceed
the CNIL balance before the capital gains deduction can be claimed.
CPP/QPP contributions on self-employment

Line 222
Self-employed taxpayers must pay both the employee and employer

portions of the CPP/QPP contribution. One-half of the CPP/QPP payment
made by a self-employed individual is used to calculate a non-refundable
tax credit (line 308). The other half of the payment is deductible from total
income in the determination of net income (line 222).
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The maximum CPP/QPP contribution for a self-employed taxpayer is

$5,497.80, while the maximum for line 222 is $2,748.90 (2019 amounts).
Other employment expenses

Line 229
The “Other employment expenses” line captures employment and other

expenses that are not captured elsewhere.
Workspace in the home

There are circumstances under which employees may be eligible to deduct
expenses associated with workspace in the home. Individuals who are an
employee and eligible for a deduction for workspace in the home would
apply the deduction on this line (Other employment expenses).
Self-employed individuals with eligible amounts to deduct for workspace in

the home take the deduction in the calculation of their net business
income, not on this line.
The criteria and calculations for employees and for self-employed

individuals are similar, but there are subtle differences. Find a
comprehensive discussion of this topic in the “Deduction for workspace in
the home” section.
Commission employees
If employees who earn commissions are contractually obligated under the
terms of their employment agreement to pay for their own expenses, and
are ordinarily required to carry on employment duties away from the
employer’s place of business, they may have expenses that can be
deducted on line 229.
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In addition to travel related expenses, deductible expenses for commission

employees may also include such items as salaries for an assistant and
office supplies, if the employee is required to provide these items under
the terms of his or her employment agreement and such expenses are not
reimbursed by the employer. Examples of other expenses commission
employees may expend on earning income and may therefore claim as
eligible expenses include promotional items for gifts, entertainment
expenses and business equipment.
The total of eligible deductions (excluding capital cost allowance on an

automobile and interest on a car loan) cannot exceed the individual’s
commission income (base salary is not included in the calculation). In
addition, a commission salesperson may claim capital cost allowance and
interest payments on an automobile he or she uses for employment
purposes and may deduct these expenses against all types of income, not
simply commission income.
As an alternative, commission employees who have expenses in excess of

commissions earned and therefore deductible expenses are capped to
commissions earned, may want to consider the regular employee option.
The planning process should compare the outcome of claiming eligible
expenses as a commission employee versus a regular employee. The
comparison must consider only eligible expenses available for each option.
This allows the taxpayer to determine the most advantageous approach.
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Regular employees
Regular employees may deduct automobile expenses incurred for travelling
in the course of employment if an automobile is ordinarily required to carry
on the duties of employment away from the employer’s place of business.
In addition, the employee must be under an employment contract that
requires him or her to pay motor vehicle expenses the employer does not
adequately reimburse or cover with an allowance.
Special situations
Transportation employees may claim the cost of meals and lodging against
their employment income if their job requires them to regularly travel
away from their municipality and regularly pay their own travel expenses.
Forestry employees may claim the cost of buying and using a power saw if
they use the saw to earn employment income and their job mandates that
they purchase a saw.
Employed artists may claim related expenses but are limited to the lesser
of $1,000 and 20% of their artist employment income.
Employed tradespersons may claim the cost of eligible tools that they are
required to purchase to perform their job.
Compliance requirement
An employee’s eligibility to deduct any of these expenses must be
supported with a T2200, “Declaration of Conditions of Employment,”
completed and signed by his or her employer.
Summary
Table 11 summarizes an employee’s opportunity to deduct expenses his or
her employer does not reimburse.
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Table 11: Opportunity to Deduct Additional Expenses — Employee

vs. Commission Employee
Employee Commission Employee
Workspace in the
Same as regular employee
home (discussed Rent, repairs,
plus insurance, property
earlier in module) — maintenance, supplies,
taxes and mortgage
portion of total home utilities
interest
expenses
Advertising and
X
promotion
Motor vehicle
X X
expenses
Interest paid to buy a

X
motor vehicle
Food, beverages and

entertainment X
expenses
Travel expenses other

X X
than motor vehicles
Lodging X
Parking X
Supplies X
Professional
membership dues or X X
union dues
Other expenses
directly related to
X
earning the
commission income
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Other deductions
Line 232
If an individual taxpayer incurs legal fees to collect wages or other

remuneration owed by a current or former employer, the legal fees are
tax-deductible from employment income and entered on line 232. The
taxpayer must establish that the employer owed an amount to him or her,
although the taxpayer does not need to be successful in the collection.
Legal expenses are deductible in the year they are incurred. Any
remuneration resulting from the action is taxable in the year it is received.
Social benefit repayment

Line 235
Certain social benefits, such as Old Age Security and Employment

Insurance, may be clawed back once a recipient reaches certain income
thresholds.
The repayment for Old Age Security benefits is 15% of the amount by
which an individual’s annual net income, including Old Age Security
benefits, exceeds a minimum level. Since 2000, the annual clawback
threshold has been indexed to changes in the Consumer Price Index. For
2019, the minimum threshold is $77,580. An individual with a net income
below the minimum threshold is not subject to any clawback on Old Age
Security benefits for that year.
When taxpayers receive regular Employment Insurance benefits and their

net income exceeds $66,375 (2019 amount), they may be required to
repay some or all of those benefits.
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The Employment Insurance repayment is made when the individual files

his or her tax return, and is based on the lesser of the following two
amounts:
 The taxpayer’s net income in excess of $66,375 (2019 amount)
 The total regular Employment Insurance benefits the taxpayer received

in the taxation year
There are some exemptions for the repayment. For example, amounts the
taxpayer received as special benefits from Employment Insurance such as
maternity, parental, sickness, compassionate care or parents of critically ill
children benefits are not repayable.
(III) Net income

Net income is calculated on the tax return by subtracting the total of all
deductions from the total of all income inclusions. Net income is entered
on line 236 of the tax return.
(IV) Deductions from net income

Once net income has been determined, the next step is to determine the
taxpayer’s taxable income by deducting certain items from net income.
Figure 8, excerpted from the 2018 Manitoba tax return, shows the
deductions permitted in this step of the calculation.
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Figure 8: Determining Taxable Income
Security options deductions

Line 249
Employees who receive stock options as part of their compensation

package must typically report the difference between the exercise price
and the fair market value of the shares as taxable income when they
exercise their option and buy the shares.
However, it is also possible to get a deduction from income, in certain

circumstances, in the year in which the option is included in income. This
deduction equals the inclusion rate (i.e., 50%) multiplied by the amount
included in income, if certain criteria are met. The primary criterion is that
the strike price at the time the options were granted was equal to or
greater than the fair market value of the shares.
Find more information in the “Employee stock option plans” section.
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Losses — carryforwards and carrybacks

Lines 252 and 253
Recall that taxpayers can carry net capital losses and non-capital losses
forward and backwards when they are unable to use them in the year they
are incurred. It is in this spot on the tax return that the carryforward and
carryback amounts can be utilized. These losses are a deduction from net
income in the determination of taxable income.
Capital gains deductions

Line 254
The Income Tax Act contains special rules that allow Canadians to avoid
tax on capital gains on shares of a qualified small business corporation
(QSBC) up to a maximum of $866,912 (2019 amount) and on qualified
farm and fishing property (QFFP) up to a maximum of $1,000,000 (2019
amount).
The exemption on capital gains of $866,912 translates into a deduction

equal to $433,456 (50% inclusion rate x $866,912 exemption). Therefore,
$433,456 is the maximum deduction a taxpayer can claim on line 254 for
2019 in respect of a disposition of QSBC shares. Alternatively, $500,000
(50% inclusion rate x $1,000,000 exemption) is the maximum deduction a
taxpayer can claim on line 254 for 2019 in respect of a QFFP.
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(V) Taxable income

As Figure 8 shows, taxable income is derived by subtracting a series of
deductions from net income. The series of deductions that occur after
calculating net income are totalled on line 257 and applied as a deduction
against net income (line 236) to arrive at taxable income.
(VI) Calculating initial federal tax

Once the individual’s taxable income has been calculated, the next step is
to ascertain the income tax liability arising on the taxable income. There is
both a federal income tax calculation and a provincial income tax
calculation.
Federal tax payable

The federal personal income tax rates are used to derive the amount of
federal income tax payable on the taxable income derived in the previous
step. Recall that Canada uses a progressive income tax system, which
means that as an individual’s taxable income increases, the rate of tax
increases in stages through the application of tax brackets. Table 12 shows
the federal tax rates for the 2019 taxation year.
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Table 12: 2019 Federal Personal Tax Brackets and Rates
Taxable Income Tax Calculation
Up to $47,630 15%
More than $47,630 up to $95,259 20.5%
More than $95,259 up to $147,667 26%
More than $147,667 up to $210,371 29%
Over $210,371 33%
Table 12 works very simply: each tax bracket has its own tax rate for
income falling within the band. Total federal tax payable is the sum of the
brackets.
EXAMPLE
Barbara has $150,000 of taxable income. Using Table 12, calculate her federal tax
payable.
The first $47,630 of Barbara’s income is taxed at 15%, creating a tax liability of
$7,144.50. Because her income exceeds $47,630, the calculation of her federal tax
liability continues into the subsequent bracket.
The amount of Barbara’s taxable income that falls between $47,630 and $95,259 is
taxed at 20.5%, resulting in federal taxes owing of $9,763.94.
This process continues into the third bracket, where Barbara’s income between
$95,259 and $147,667 is taxed at 26%, resulting in $13,626.08 of federal taxes.
There is still a small amount of Barbara’s $150,000 of taxable income not yet taxed,
so the calculation moves into the fourth bracket with the remaining $2,333 of taxable
income not yet captured ($150,000 less $147,667). This remaining amount of $2,333
is subject to federal tax at 29%, creating an additional liability of $676.57
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Once the tax liability is calculated at each bracket, the liability is summed to derive a
total federal tax liability of $31,211.09.
The table below summarizes these steps.

Federal Tax Amount of Taxable Amount of
Rate Income in the Tax Federal Tax
Band
15% $47,630 $7,144.50
20.5% $47,629 $9,763.94
26% $52,408 $13,626.08
29% $2,333 $676.57
Total Federal $150,000 $31,211.09
Taxes Owing
Barbara’s total federal tax payable is $31,211.09.
Barbara’s marginal federal tax rate is 29%. Why? Because the next dollar of income
Barbara earns will be taxed at 29%.
Barbara’s average federal tax rate is 20.8% (Total federal tax liability ÷ Total taxable
income = $31,211.09 ÷ $150,000).
Provincial tax payable

Every Canadian province except Quebec maintains a tax collection
agreement with the federal government, whereby the federal government
collects and administers taxes on behalf of the provinces. The advantages
of having the federal government collect taxes are significant
administrative savings at the provincial level and use of a single tax
return. Quebec opts to collect its own provincial income taxes. As such,
individuals subject to Quebec provincial tax must submit one tax return to
the federal government and a second return to the provincial government.
The provinces are free to create their own tax brackets and corresponding
tax rates; however, provincial tax is calculated on the taxable income
reported for federal tax purposes.
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(VII.I) Deductions of non-refundable federal tax

credits
Tax credits are designed to reduce income taxes owing. These credits are
based on “amounts” the federal government sets annually (many are
indexed). With one exception, the amounts an individual qualifies for are
added together and multiplied by 15% (the lowest federal tax bracket).
The total of the federal tax credits is used to reduce the taxpayer’s federal
taxes payable. The provinces and territories set their own amounts and
multiplication factors.
Tax credits are used by the federal and provincial governments as an

efficient means by which to offer all eligible taxpayers the same tax relief,
because a tax credit is calculated on the same basis for everyone. This
differs from a tax deduction, which provides a greater tax benefit to
qualifying individuals as their income rises and they are subject to tax at a
higher marginal tax rate. By using tax credits, the tax system can be
neutralized so eligible taxpayers receive an equal amount of tax relief
regardless of their income or tax bracket.
Tax credits are used to reduce taxes owing. Most tax credits are non-
refundable, which means that the tax credits can only be used to reduce
taxes owing; once the taxpayer’s taxes are at zero, the credit no longer
has any value to the taxpayer. With non-refundable tax credits, if the
taxpayer owes no tax, in many cases the benefit of the credit is lost.
There are a few refundable tax credits. Refundable tax credits have value
even after the taxpayer’s taxes are reduced to zero. The credits are first
applied against taxes owing and, if the taxes owing reach zero, the credit
is applied as a refund to the taxpayer.
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Charitable donations are the one exception where the tax credit rate differs
from the standard 15%. Instead, charitable donations use a unique three-
tier structure to derive the total value of the tax credit (discussed under
“Donations and gifts” later in this section).
Charitable donations and tuition/education tax credits have carryforward

provisions.
In some circumstances, taxpayers may transfer tuition credits to another

individual (discussed under “Tuition amount” later in this section).
Basic personal amount

Line 300
The basic personal amount represents the amount of income an individual

can earn without being subject to tax. Every taxpayer is entitled to claim
the basic personal amount. The basic personal amount is $12,069 federally
(2019 amount); the provincial amount varies by province.
Age amount
Line 301
Taxpayers who reach age 65 before the end of the taxation year may claim
an age amount tax credit, subject to an income threshold. The federal age
amount is $7,494 (2019 amount).
The age amount is reduced by 15% of the taxpayer’s net income in excess
of $37,790. This means that:
 If a taxpayer’s net income is $37,790 or less, the age amount is not

reduced
 If the individual’s income is over $87,750, the age amount tax credit is
nil
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EXAMPLE
Amber, who is 75 years old, has a net income of $50,000.
$12,210 Income in excess of threshold ($50,000 – $37,790)
1,831 Reduction ($12,210 x 15%)
5,662 Age amount claimed ($7,494 – $1,831)
The age tax credit for Amber’s age amount tax credit is $5,662 x 15% = $849. This
means Amber can reduce her federal taxes owing by $849.
If a taxpayer is entitled to an age amount but cannot fully use the tax
credit because the sum of non-refundable tax credits exceeds taxes
payable, then the taxpayer’s spouse or common-law partner may claim all
or a portion of the taxpayer’s age amount.
Spouse or common-law partner amount

Line 303
The spouse or common-law partner amount is $12,069 (2019 amount),

but it is reduced by the spouse or common-law partner’s net income. The
amount is increased by $2,230 if the taxpayer is entitled to the caregiver
amount for the spouse or common-law partner.
The credit is applicable in the year of marriage, throughout the time the
couple is together, and in the year of relationship breakdown, if any.
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If the income of a dependent spouse exceeds the threshold to qualify for a

spouse or common-law partner amount tax credit, it may be possible to
reduce such income if the spouse has qualifying income and can make an
RRSP contribution.
EXAMPLE
Clive’s spouse has net income of $4,500. Assume the caregiver amount does not
apply.
$12,069 Spouse or common law partner maximum amount
4,500 Spouse’s net income
7,569 Claim for the spouse or common-law partner amount
A taxpayer cannot claim a spouse or common-law partner amount tax

credit for more than one spouse in a taxation year. In addition, if a
taxpayer claims a spouse or common-law partner amount tax credit, the
taxpayer cannot claim an eligible dependant tax credit for that year.
Canada caregiver amount for spouse or common-law

partner or eligible dependant
Lines 304 and 307
The Canada caregiver amount tax credit may be available to a taxpayer

whose spouse or common-law partner has an impairment in mental or
physical function or when the taxpayer has an eligible dependant who has
an impairment in mental or physical function. The spouse or common-law
partner and dependant are subject to a maximum net income that is
incorporated in the calculation of the taxpayer’s available credit.
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The amount a taxpayer may claim depends on all of the following:
 The taxpayer’s relationship to the person for whom the taxpayer is

claiming the credit
 The taxpayer’s circumstances
 The other person’s net income
 Whether other credits are being claimed for the other person
Additional rules apply to a taxpayer claiming this credit when the taxpayer
is required to pay child support or has shared custody of the child for
whom the credit is being claimed.
Typically, the Canada Revenue Agency requires a signed statement from a

medical practitioner confirming when the impairment began and its
expected duration. Once the Canada Revenue Agency has the signed
document, updated documents are generally only required when dates or
circumstances indicate a change.
When a claim is for a child under age 18, the doctor’s statement would
typically include information to indicate that the child’s impairment makes
the child dependent on others currently, and for an indefinite duration, and
that the child requires more personal assistance than other children of the
same age.
Amount for an eligible dependant

Line 305
An individual taxpayer may claim the amount for an eligible dependant if

all of the following apply:
 The taxpayer is single, divorced, separated or widowed
 The taxpayer supported a dependant
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 The dependant lived with the taxpayer (except if attending school)
In addition, the dependant must be either:
 The taxpayer’s parent or grandparent by blood, marriage, common-law

partnership or adoption
 The taxpayer’s child, grandchild, brother or sister by blood, marriage,

common-law partnership or adoption and must be either under age 18
or mentally or physically infirm
Generally, a person is considered dependent on the taxpayer if the

taxpayer supplies necessary maintenance, or the necessities of life, to the
person on a regular and consistent basis. For example, if an elderly parent
is not self-supporting because of mental or physical infirmity and lives with
a married child, and the married child provides necessary food, lodging,
clothing and medical care, the parent may qualify as a dependant of that
child for the purpose of the dependant tax credit.
Although all of the preceding conditions may be present, a taxpayer is not

eligible to claim an amount for an eligible dependant if any of the following
apply:
 The taxpayer claimed a spouse or common-law partner amount
 The person for whom the taxpayer wants to make the claim is a
common-law partner (use line 303 instead)
 Another individual in the taxpayer’s household is making the claim
 The claim relates to a child for whom the taxpayer is required to make
support payments (alternatives may be available)
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For 2019, the amount for an eligible dependant is $12,069 ($14,299 if the
caregiver amount applies). The amount is reduced by the dependant’s net
income. A claim cannot be made when the dependant’s net income is more
than $12,069 ($14,299 if the caregiver amount applies).
Canada caregiver amount for infirm dependants

under age 18
Line 367
A taxpayer can claim an amount for infirm dependants who are under age
18 at the end of the taxation year, and who are dependent on the taxpayer
because of physical or mental function. It is not necessary for the
dependant and the taxpayer to live in the same residence for the purposes
of this tax credit. However, the taxpayer’s claim for the infirm dependant
tax credit is reduced by an amount related to the dependant’s income for
the year.
For 2019, the maximum amount for an infirm dependant is $2,230.
The full amount is available to qualifying individuals in the year of birth,

adoption or death.
CPP/QPP contributions through employment and self-

employment
Lines 308 and 310
Taxpayers may claim their portion of CPP/QPP contributions in the

determination of their non-refundable tax credit.
For 2019, the CPP/QPP contribution limit is the lesser of the amount
actually paid and $2,748.90.
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Employment Insurance premiums

Line 312
Taxpayers may claim their portion of Employment Insurance premiums in

the determination of their non-refundable tax credit.
For 2019, the Employment Insurance premium is the lesser of the amount
actually paid and $860.22.
Canada employment amount

Line 363
The Canada Employment amount is the lesser of $1,222 (2019 amount)

and the total amount of employment income (lines 101 and 104).
Volunteer firefighter and search and rescue

volunteer
Lines 362 and 395
Taxpayers who meet the required definitions for these roles can claim a
tax credit of $3,000 (2019 amount). To be eligible, the taxpayer must
meet both of the following criteria:
 Performs not less than 200 hours of eligible service as an eligible

volunteer firefighter or search and rescue volunteer
 Provides a certificate of service from the team president
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Home buyers’ amount

Line 369
The home buyers’ amount is a credit for individuals who have purchased a
qualifying home in the year and meet both of the following conditions:
 The taxpayer, or the taxpayer’s spouse or common-law partner, buys a

qualifying home
 Neither the taxpayer, nor the taxpayer’s spouse or common-law

partner, have owned and lived in another home either in the year of
purchase or in any of the four preceding years (first-time home buyer)
The first-time home buyer requirement does not apply when the taxpayer
is eligible for the disability tax credit or the taxpayer acquired the home for
the benefit of a related person who is eligible for the disability tax credit.
The purchase must, however, be made to allow the individual with a
disability to live in a home that is more accessible or better suited to his or
her needs.
The intention must be for the taxpayer or the related person with the
disability to occupy the home as a principal residence no later than one
year after it is acquired.
The home buyers’ amount is $5,000 (2019 amount) and is available to

only one individual when a couple purchases a home.
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Pension income amount

Line 314
The pension income amount provides a tax credit to taxpayers who have
claimed eligible pension income on line 115, line 116 and/or line 129 of
their return. The types of income that qualify as pension income for
purposes of this tax credit differ for taxpayers under age 65 and taxpayers
age 65 and over at the end of the taxation year.
Amounts such as Old Age Security, CPP, death benefits and retiring
allowances do not qualify for the pension income amount tax credit.
Age 65 and over

For individuals who are age 65 and over at the end of the taxation year,
the pension income amount is the lesser of:
 $2,000
 The individual’s eligible pension income received in the year
Eligible pension income includes:
 A payment in respect of a life annuity from a superannuation pension

plan or fund
 An annuity payment under an RRSP or a RRIF
 An annuity payment under a DPSP
 The income portion of non-registered annuity payments
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Under age 65
For individuals who are under age 65 at the end of the taxation year, the
pension income amount is the lesser of:
 $2,000
 The individual’s eligible pension income received in the year
Eligible pension income includes:
 A payment in respect of a life annuity from a superannuation pension

plan or fund
 Any of the following amounts if received as a consequence of the death

of a spouse or common-law partner:
o An annuity payment under an RRSP plan or a RRIF
o An annuity under a DPSP
o The income portion of non-registered annuity payments
Family effect
Pension income splitting may allow couples to reduce their combined taxes
by transferring all or a part of their eligible pension income, which does not
include income from the CPP or Old Age Security programs, to the lower-
income spouse or common-law partner for income tax purposes (see line
326).
Disability amount for self

Line 316
This credit may be available to taxpayers who have a prolonged (12

months or more), severe impairment of mental or physical function that
markedly restricts basic activities of daily living.
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The disability amount is $8,416 (2019 amount). An additional amount of

up to $4,909 (2019 amount) may be claimed if the taxpayer was under
age 18 at the end of the year.
This disability amount cannot be claimed if anyone has made an attendant

care expense claim (line 215) with respect to the same taxpayer. It is
sometimes better to make a claim for medical expenses (line 330) rather
than claiming the attendant care expense, in order to maintain the viability
of the credit for the disability amount.
To claim the disability amount, the taxpayer must submit Form T2201,
“Disability Tax Credit Certificate.” A qualified person (i.e., a medical
physician) must complete and provide an original signature on Part B of
the form. If the disabled taxpayer has limited or no taxable income, the
disability amount can be transferred in some situations.
Disability amount transferred from a dependant

Line 318
Under certain circumstances, the unused portion of the taxpayer’s

disability amount, which is a non-refundable tax credit, may be transferred
to another taxpayer who supports the individual with a disability. To
qualify for a transfer, the supporting individual must have claimed, or have
been able to claim, a dependant-type tax credit in respect of the person
with a disability (i.e. having made a claim on line 305, 306 or 315).
Generally, the amount of the disability tax credit that may be claimed by
the supporting individual is the amount not needed to reduce the income
tax liability of the person with a disability to zero after deducting only the
basic personal amount and the pension income amount.
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Interest paid on student loans

Line 319
Qualifying loans
A taxpayer is eligible to claim an amount for interest paid on a qualifying
student loan in the current taxation year or any of the preceding five years
(provided the amount has not been claimed previously). The loan interest
must be in respect of loans for post-secondary education received under
the Canada Student Loans Act, Canada Student Financial Assistance Act,
Apprentice Loans Act or a similar provincial or territorial government law.
Payer of interest
The interest may be paid by the taxpayer or by an individual related to the
taxpayer, although only the taxpayer may claim the respective tax credit.
Carryfoward
The five-year carryforward period is helpful as it allows taxpayers to
optimize the value of the credit. In years when taxpayers have interest
expense but no tax payable for the year, they should not claim this tax
credit. Instead, they should carry it forward to a future year when they
have income and taxes payable.
The carryfoward can, for example, be beneficial to new graduates who are
not yet employed or who find employment late in the year, taxpayers on
maternity or paternity leave or taxpayers who are unemployed with little
or no income during the year.
Interest amounts paid can be carried forward and applied on a return for
any of the next five years following the year of payment.
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Non-eligible loans
This credit is not available for loans other than those described under
“Qualifying loans.” As such, the following types of loans do not qualify:
 A personal loan or a line of credit
 A student loan that has been combined with another kind of loan
 A student loan received from another country
A taxpayer cannot claim interest paid because of a judgement obtained

after he or she failed to repay a student loan.
Planning considerations
The credit for interest paid on student loans can be beneficial to a taxpayer
and should be a consideration when evaluating options for financial
support related to post-secondary education costs. If the student can
qualify, applying for loans through the Canada Student Loans Act, Canada
Student Financial Assistance Act, Apprentice Loans Act or a similar
provincial or territorial government law, may be more beneficial than
private or commercial loans because of this credit.
Tuition amount
Line 323
A taxpayer may be entitled to claim a tax credit for tuition based on the
type of educational program in which he or she is enrolled. The educational
program must be at a post-secondary level or improve the taxpayer’s skills
in an occupation. In addition, the tuition fees must be more than $100 for
each educational institution.
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To the extent that the taxpayer’s employer pays the tuition and the
amount does not create a taxable benefit, the tuition tax credit is not
available to the taxpayer. In other words, if the taxpayer did not incur a
tuition expense, there is no credit available.
Transfer of tax credits to a spouse or common-law

partner
Line 326
To the extent that a taxpayer’s tax credits are greater than his or her
federal income tax liability, the taxpayer may be eligible to transfer some
unused amounts to his or her spouse or common-law partner. The
following tax credits are eligible for transfer:
 Age amount
 Pension income amount
 Disability amount for self
 Tuition amount
 Canada caregiver amount for infirm children under age 18
The transfer of the tuition amount to a spouse or common-law partner is

limited to a maximum of $5,000.
Transfer of tax credits from a child to a parent or

grandparent
Line 324
To the extent that a taxpayer’s tax credits for tuition and education are
greater than his or her federal income tax liability, the taxpayer may be
eligible to transfer up to $5,000 of the tuition amount to a parent, to a
grandparent, or to the parent or grandparent of the student’s spouse or
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common-law partner. The person who receives the transferred amount

does not need to be the same each year.
The maximum amount students are permitted to transfer is $5,000 less

the amount they use to reduce their own tax owing. The parent or
grandparent enters the amount on line 324.
Carryforward amounts from a previous year are not eligible for transfer.
Medical expenses
Lines 330 and 331
There is no limit to the amount of eligible medical expenses a taxpayer

may claim on line 330 of the tax return. However, an amount equivalent to
3% of the taxpayer’s net income, or $2,352 (2019 amount), whichever is
less, must be deducted from the total eligible medical expenses to arrive at
the amount eligible to be claimed. In other words, there is a prescribed
threshold before medical expenses can be claimed as a tax credit.
A taxpayer may claim a medical expense incurred by:
 The taxpayer
 The taxpayer’s spouse or common-law partner
 The taxpayer’s or taxpayer’s spouse or common-law partner’s child or

grandchild who depended on the taxpayer for support
 The taxpayer’s or taxpayer’s spouse or common-law partner’s parent,

grandparent, brother, sister, uncle, aunt, or niece or nephew who lived
in Canada at any time in the year and depended on the taxpayer for
support (line 331)
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Evaluating who makes the claim

The net income threshold makes it more advantageous for the lower-
income spouse to claim the credit for medical expenses if the income of
one or both spouses is less than $78,400 (2019 amount) (i.e., $78,400 x
3% = $2,352, which is the prescribed threshold). If both spouses exceed
the income threshold, it is often more advantageous for the higher-income
spouse to make the claim because of provincial surtaxes.
Evaluating the expense period

This credit is based on accumulated medical expenses incurred in any
consecutive 12-month period ending at any point in the current taxation
year. The “any 12 consecutive months” criteria offers taxpayers flexibility
for the purpose of calculating the highest possible amount of eligible
medical expenses that can be claimed.
EXAMPLE
Patrick paid the following medical expenses that he has not yet claimed:
 November last year, $1,200 for orthodontic work for his daughter
 Jan this year, $1,200 for additional orthodontic work for his daughter
 May this year, $500 for new eyeglasses for his son
 December this year, $750 for elective surgery for his partner
To maximize the value of Patrick’s medical expense claim, he should claim medical
expenses incurred during the 12-month period ending in November this year. This will
pick up the $1,200 paid in November last year, plus $1,200 and $500 paid this year
before the end of November, for total medical expenses of $2,900. While the
threshold reduces this amount, Patrick still ends up with a medical expense claim.
The remaining $750 of medical expenses incurred in December of this year can be
used when calculating Patrick’s (or his partner’s) next year’s medical expenses.
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Claiming for other dependants

For a taxpayer to claim medical expenses for other dependants (line 331),
the total medical expenses for each dependant must exceed the lesser of
$2,352 (2019 amount) or 3% of the dependant’s net income for the year.
Eligible medical expenses

The Canada Revenue Agency publishes detailed descriptions of eligible
medical expenditures, and the list is lengthy and well-developed. Medical
expenses are not restricted to those incurred in Canada; residents of
Canada who incur medical expenses while outside Canada can claim those
costs as medical expenses if they are for services or procedures deemed
eligible by the Canada Revenue Agency.
Examples of common eligible medical expenses include:
 Payments for a public or private hospital
 Payments to a medical doctor, dentist, nurse or certain other medical

practitioners
 Premiums paid for private health services plans (but not those paid by
an employer)
 Payments for prescription drugs, prescription eyewear and hearing aids
 Amounts paid for attendant care
 Expenses related to guide dogs and hearing ear dogs
The premium for provincial hospitalization and provincial medical plans is

not an eligible medical expense; however, as noted above, premiums for
employer health and dental plans that employees pay for are eligible.
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Donations and gifts

Line 349
As a general principle, taxpayers may claim charitable donations up to a

limit of 75% of their net income (line 236). Any charitable donation
amount a taxpayer cannot or does not claim in the taxation year may be
carried forward and used in any of the subsequent five years.
The federal donation tax credit is the sum of the following:
 15% of the first $200 of eligible donations
 33% of the lesser of:
o The amount by which total donations exceed $200
o The amount by which the individual’s taxable income exceeds the

top federal tax bracket ($210,371 for 2019)
 29% on any remainder
EXAMPLE
Carol, whose taxable income is $230,371, donated $40,000 in 2019. Her donation tax
credit can be calculated as:
 $300, derived as 15% x $200, (first $200 of donation amount)
 $6,600, derived as 33% x $20,000 (the amount of her taxable income of $230,371
in excess of the top bracket of $210,371)
 $5,742, derived as 29% x $19,800 (total donations of $40,000 in excess of $200

and $20,000)
The total amount is derived by adding together the result of each step: $300 + $6,600
+ $5,742 = $12,642.
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Year of death
In the year of death, the 75% limit increases to 100% of the taxpayer’s
net income.
When a taxpayer dies, charitable donations completed from the graduated

rate estate or completed by way of a beneficiary designation while the
estate meets the definition of a graduated rate estate, may be claimed in
any of the following tax years:
 On the terminal tax return, up to 100% of net income
 On the tax return for the year prior to death, up to 100% of net income
 On the estate’s tax return for the year the gift was completed, up to
75% of net income
 On a prior year of the estate’s tax returns, up to 75% of net income
 On any of the five subsequent tax returns for the estate, up to 75% of
reported net income
To the extent that a charitable gift cannot be completed during the

existence of the graduated rate estate, there is an exception that permits a
donation credit to be claimed in any of the five scenarios above provided
the gift is completed within 60 months of death and the graduated rate
estate expired at the end of 36 months.
Special exceptions
Cultural and ecological gifts are an exception to the rules described above.
In the case of a cultural or ecological gift, the 75% limit increases to 100%
of the taxpayer’s net income during the taxpayer’s lifetime.
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EXAMPLE 1
Bonnie inherited a substantial estate and decided to donate $50,000 to her church,
which is a registered charity. Bonnie’s 2019 net income was $45,000.
For 2019, the maximum amount Bonnie can claim for charitable donations is $33,750
(75% x $45,000).
The actual donation tax credit Bonnie will receive is $9,760 ($200 x 15% + ($33,750 –
$200) x 29%). The first $200 of donations is multiplied by 15%, and amounts above
$200 are multiplied by 29% to derive the donation credit. Bonnie can carry forward
any donation tax credit she does not use in 2019 and claim it on her tax return in any
of the subsequent five years.
EXAMPLE 2
In 2019, Nelly donated $25,000 to the local hospital, a registered charity. That same
year, Nelly’s net income was $24,000.
If Nelly dies in 2019 after making this donation, how much of the $25,000 donation
can her executor claim for charitable donations?
The executor can claim $24,000 (100% of her net income) for 2019, and can
potentially carry back the remaining $1,000 ($25,000 – $24,000) to Nelly’s 2018
return. The carryback is always dependant on sufficient net income and available
donation room.
Optimizing the claim

It is the Canada Revenue Agency’s administrative policy to allow either the
taxpayer or the taxpayer’s spouse or common-law partner to claim the
couple’s inter vivos donations. In other words, a couple (spouses or
common-law partners) can combine their donations and either can claim
them.
Given that the first $200 of donations uses a 15% tax credit, it is
advantageous for a couple to combine their donations so $200 attracts the
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15% rate only once, rather than $200 for each spouse. It is generally
advantageous for the higher-income spouse to claim the charitable tax
credit if that spouse’s taxable income is subject to the top tax bracket or if
the province of residence has surtaxes to which the higher-income spouse
is subject.
Legitimate claims only

Taxpayers should be cautious because charitable donations may only be
claimed if the charitable institution to which the donation is made is a
registered charity. It is the taxpayer’s responsibility to ensure that this is
the case. There is no relief for taxpayers who make charitable donations to
a non-registered charity. The Canada Revenue Agency maintains a list of
registered charities on its website.
Gifts in kind
Charitable gifts can be completed as non-cash charitable donations (e.g.,
donating a piece of art), which are referred to as gifts in kind. Gifts of
capital property or depreciable property result in a disposition of the
property at fair market value, and create a taxable event for the taxpayer,
with the exception of gifts of ecologically sensitive land or publicly listed
securities. The tax consequences arising from any accrued capital gain and
potential recapture for depreciable property at the time of disposition
should be considered when evaluating a gift in kind. The fair market value
of the property becomes the taxpayer’s proceeds of disposition and
corresponding donation amount.
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As noted above, ecologically sensitive land and publicly listed securities

donated to a charity are an exception to the general rules. When a taxpayer
donates these types of properties to a registered charity, there is no taxable
capital gain on the disposition, which results in no tax consequences for the
taxpayer when the property is disposed of to the charity.
Dividend tax credit

Line 425
On line 120 of the tax return, the taxpayer enters taxable dividend income,
which is in fact the actual dividend received grossed up by 15% (2019
amount) for non-eligible dividends and 38% (2019 amount) for eligible
dividends. The dividend tax credit is available to individual taxpayers who
receive dividends from taxable Canadian corporations. The dividend-paying
corporations report information related to this tax credit to taxpayers on a
T3 and/or T5 slip.
There is no carryforward provision for dividend tax credits; taxpayers must

use them in the current year or lose them forever. It is possible, in some
circumstances, to elect to have dividends transferred to a spouse if the
taxpayer cannot use them because his or her taxable income is already nil.
This concept was discussed earlier in the module, under “Dividend
income.”
A taxpayer must use personal tax credits before using the dividend tax
credit. This restricts the taxpayer’s ability to transfer allowable credits to a
spouse. If a taxpayer cannot use a dividend tax credit, and a spousal
transfer is not available, the taxpayer should review any options available
to prevent the dividend tax credit from expiring unused. For example,
charitable donations have a five-year carryforward available, which means
a current year donation credit could be delayed to a future year. Another
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option that can increase income in order to take full use of the dividend tax
credit is to avoid using discretionary deductions such as capital cost
allowance and/or reserves that can be used in future periods.
Foreign tax credit

Line 405
Since Canadian residents are subject to income taxation on worldwide

income, they may have paid foreign taxes on foreign income. To minimize
double taxation, taxpayers can claim a credit for foreign taxes paid.
The claim is the lesser of:
1. Foreign taxes paid
2. (Foreign income ÷ total income) x taxes for the year otherwise

payable
The second element of the formula is designed to cap the foreign tax credit
at an amount not higher than the rate of tax that would have been levied
in Canada.
(VII.II) Deduction of refundable federal tax credits

Most tax credits are not refundable, which means taxpayers derive no
benefit if their tax credits are greater than their income tax liability, unless
some of their available tax credits can be transferred to their
spouse/common-law partner or parent.
However, here are two tax credits that can generate a refund to the
taxpayer:
 The GST/HST credit
 The working income tax credit
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The federal government administers these two refundable tax credits and
usually pays them directly to the recipient on a quarterly basis; they do
not appear on the personal tax return.
Working income tax credit

To be eligible for the working income tax credit, the taxpayer must be a
resident of Canada throughout the year and over age 18. The credit is
subject to an income threshold beyond which the credit decreases.
Goods and services/harmonized sales tax credit

To be eligible for the GST/HST credit, the taxpayer must be a resident of
Canada throughout the year and either:
 Be over age 18
 Have/had a spouse or common-law partner
 Be a parent living with a child
The credit is subject to an income threshold beyond which the credit is

reduced and eventually eliminated.
(VIII) Basic federal tax

Figure 9 shows the calculation of federal tax using a portion of Schedule 1
of the 2018 personal tax return.
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Figure 9: Basic Federal Tax
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Basic federal tax on line 429 is calculated as described in the following

series of steps.
All income
All income from all sources is entered on the appropriate lines and the
total is entered on line 150.
Total deductions
All deductions are entered on the appropriate line and totalled on line 233.
Net income
Net income, before adjustments, is entered on line 234 and is calculated

by subtracting line 233 from line 150.
Net income, after adjustments, is entered on line 236.
Additional deductions
Additional deductions, such as carryforwards from prior years and capital

gains deductions, are entered on the appropriate line and totalled on line
257.
Taxable income
Taxable income is derived as net income (line 236) minus additional

deductions (line 257), resulting in taxable income (line 260).
Total tax payable
Taxable income is entered on Schedule 1, and the appropriate tax rate is

applied to the amount of taxable income falling within each bracket. Total
tax payable is summed and entered on line 36 of Schedule 1.
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Federal non-refundable tax credits
Federal non-refundable tax credit amounts are calculated (lines 300 to

332). The total of all non-refundable tax credits is entered (line 335) and
multiplied by 15% to arrive at the total credits to be subtracted from the
tax owing (line 338).
Donations are calculated separately (line 349) because they use

three rates instead of one.
The total non-refundable tax credits is entered on line 350.
The dividend tax credit is added to the tax credits from line 350 and
the total is entered on line 49 of Schedule 1.
Basic federal tax
Basic federal tax is calculated by subtracting line 48 from line 53 on

Schedule 1.
Surtaxes
A surtax is a tax calculated based on taxes already owing, so is typically an
additional layer of tax on top of the basic tax structure. A government
body, federal or provincial, may use surtaxes as a means to collect an
additional layer of tax from those already paying tax based on the basic
tax structure. Surtaxes are commonly directed at a particular segment of
the higher income-earning population.
As of 2019 the federal government does not apply any surtaxes.
Ontario and PEI currently levy a surtax on their residents.
Ontario levies a surtax of 20% on Ontario taxes greater than $4,740 and
an additional 36% on Ontario taxes greater than $6,067. Through the use
of a surtax, Ontario is targeting the higher income-earning population in
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their province, pushing up the marginal tax rate of higher income earners
through an additional tax that applies only to those who reach a certain
tax threshold.
2019 federal tax brackets

Recall that federal income taxes are calculated based on a marginal rate
system that uses a progressively higher rate of tax as an individual’s
taxable income crosses various thresholds. This progressive structure can
be seen through the five federal tax brackets in the following schedule:
 Bracket one: 15% on the first $47,630 of taxable income
 Bracket two: 20.5% on the next $47,629 of taxable income (over

$47,630 up to $95,259)
 Bracket three: 26% on the next $52,408 of taxable income (over

$95,259 up to $147,667)
 Brackets four: 29% on the next $62,704 of taxable income (over

1$47,667 up to $210,371)
 Bracket five: 33% on taxable income over $210,371
The federal government adjusts the brackets annually to reflect inflation

and/or other government policy objectives.
(IX) Deductions and additions

Once federal tax is calculated (line 50 of Schedule 1), there are still a
couple of additional credits that are available to some taxpayers, such as:
 Labour-sponsored funds tax credit (line 414)
 Special taxes – additional tax on RESP accumulated income payments

(line 418)
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Accumulated income payments (AIP) are generally distributions that have

been made from an RESP other than:
 Refund of contributions
 Educational assistance payments
 Payments to a designated educational institution in Canada
 Transfers to another RESP
 Repayments of a Canada Education Savings Grant (CESG)
An AIP is subject to regular tax and also attracts an extra 20% of tax
(12% in Quebec). The regular tax comes from the AIP as a normal income
inclusion amount; however, taxpayers who receive an AIP must fill out
Form T1172, “Additional Tax on Accumulated Income Payments,” to
calculate the additional tax amount (line 418).
(X) Basic provincial/territorial tax
Tax brackets
Each province sets its own tax rates using its own tax brackets.
Table 13, published by the Canada Revenue Agency, shows the provincial
and territorial tax rates.
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Table 13: Provincial and Territorial Tax Rates

Provinces and
Brackets
Territories
 8.7% on the first $37,591 of taxable income
 14.5% on the next $37,590
Newfoundland and
Labrador
 15.8% on the next $59,043
 17.3% on the next $53,689
 18.3% on the amount over $187,913
Prince Edward Island  13.8% on the next $31,985
 14.95% on the next $29,590
Nova Scotia  16.67% on the next $33,820
 17.5% on the next $57,000
 21% on the amount over $150,000
 14.82% on the next $42,592
New Brunswick  16.52% on the next $53,307
 17.84% on the next $19,287
 See Income Tax Rates (Revenu Québec website)
Quebec
for rate schedule
 9.15% on the next $43,907
Ontario  11.16% on the next $62,187
 12.16% on the next $70,000
 13.16 % on the amount over $220,000
Manitoba  12.75% on the next $37,940
Saskatchewan  12.5% on the next $83,989
 10% on the first $131,220 of taxable income
 12% on the next $26,244
Alberta  13% on the next $52,488
 14% on the next $104,976
 7.7% on the next $40,709
British Columbia
 10.5% on the next $12,060
 12.29% on the next $20,030
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 14.7% on the next $40,394

 9% on the next $47,629
Yukon  10.9% on the next $52,408
 12.8% on the next $352,333
 8.6% on the next $43,140
Northwest Territories
 12.2% on the next $53,990
 4% on the first $45,414 of taxable income
 7% on the next $45,415
Nunavut
 9% on the next $56,838
Source: Canada Revenue Agency. www.canada.ca/en/revenue-
agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-
tax-rates-individuals-current-previous-years.html#provincial
Provincial/territorial tax deductions and credits for

individuals
In addition to being a resident of Canada and subject to tax based on the
federal rules, every Canadian resident is also a resident in a province or
territory and subject to the income tax rules of that province or territory. A
taxpayer is a resident of the province or territory where he or she lives on
December 31 of the tax year.
Each province or territory is free to establish its own amounts for

deductions and tax credits, as well as its own unique deductions and tax
credits.
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Conclusion
This section reviewed the calculation of net income, taxable income and
taxes payable for an individual. Using the tax return as a guide, it looked
at various types of income and benefits individuals, employees and self-
employed persons receive. The section also explored tax deductions, tax
credits and tax-free benefits available to individuals and families.
Tax affects a tremendous number of decisions in financial planning and, as

such, tax is an integral element in the body of knowledge financial
planners require.
Although the tax statutes in Canada are complex, most Canadians operate
their financial affairs in a straightforward fashion, and a financial planner
with a basic understanding of income tax should be able to recognize
straightforward issues and identify relevant applications with ease and
confidence.
One of the most challenging aspects of understanding income taxes for

individuals is the vast array of changes that occur to the system over time.
While some changes may be minor and easy to absorb, others can affect
major legislative programs that require substantial knowledge to
understand and assimilate.
It is important to identify for clients the implications of basic tax changes

as part of their ongoing plan. However, financial planners must be careful
not to inadvertently present themselves as tax professionals without the
requisite training.
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The Capital Gains System

Since the capital gains system began in 1972, Canadian taxpayers must
include in their income a portion of any gain realized upon the disposition
of capital property. This requirement is known as the capital gains system.
Prior to 1972, capital gains were not taxed.
To accomplish the introduction of the capital gains system, a transition was

required. As a result, a taxpayer’s cost base is the lesser of the actual cost
of the property and the value of the property at the end of 1971 (which is
referred to as valuation day).
The Income Tax Act does not specifically define what constitutes a capital
gain. That said, recall that an apple tree is often used as a metaphor to
illustrate the difference between capital and income. If you are an apple
producer, the apples the tree produces are income. However, if you sell
the tree itself, that is a capital transaction.
It is important to understand the distinction between a transaction that is

considered capital in nature and one that is considered to be ordinary
income because the tax treatment differs. Capital gains are eligible for
more favourable tax treatment than income: only 50% of a capital gain is
taxable, whereas income is fully taxable. Similarly, only 50% of a capital
loss is deductible; however, it is only deductible against taxable capital
gains, except in the year of death when it is deductible against any type of
income.
Taxpayers may prefer a certain type of tax treatment in order to minimize

their overall tax liability, so understanding the distinction between a capital
gain and ordinary income is critically important for tax planning. Examples
of factors to consider when evaluating whether a transaction is on account
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of income or on account of capital revolve around the question, “What was

the intention at the time the asset was purchased?”
 Why was the property purchased?
 Was it for resale?
 Was it to be developed?
 Was it to support the business?
 Was it for enjoyment?
Another consideration in the distinction is how often the taxpayer buys and
sells similar property; the higher the frequency, the greater the likelihood
it is a business and therefore ordinary income rather than a capital gain.
In general terms, the capital gains system provides tax advantages because:
 Appreciation of capital property is generally only taxable when the gain

is realized at the time the property is sold or disposed of. There are,
however, circumstances in the Income Tax Act when a capital property
may be deemed to have been disposed of for tax purposes, although
no factual disposition occurred
 Only 50% of the gain on capital property must be included in income
 Under pre-defined conditions, a capital gains deduction (50% of the

capital gains exemption) may help to reduce the tax consequences
arising on the disposition of the property
 There is an exemption that can reduce or possibly eliminate the capital

gain realized on the sale of a taxpayer’s principal residence
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Types of capital property

Capital property is defined as non-depreciable and depreciable property.
The disposition of either can result in a capital gain or loss. In addition,
capital cost allowance may be claimed on depreciable property when
calculating taxable income. The disposition of depreciable capital property
can result in either a recapture of previously deducted capital cost
allowance or a terminal loss of any remaining undepreciated balance.
The Income Tax Act classifies three types of capital property, each of
which is subject to different types of tax treatment:
 Other property
Personal-use property
Personal-use property is defined as property that is used primarily for
personal use or enjoyment by the taxpayer or by a person related to the
taxpayer. It includes items such as automobiles, boats, recreational
equipment, a cottage, a principal residence and other similar items.
Personal-use property is used for personal consumption rather than for
generating income.
Listed personal property

Listed personal property is a special subset of personal-use property. The
phrase listed personal property is literally true; the Income Tax Act
provides a “list” of the types of property that are captured within the scope
of LPP. The list is as follows:
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 A print, etching, drawing, painting, sculpture or other similar work of art
 Jewellery
 A rare folio, rare manuscript or rare book
 A stamp
 A coin
Other property
The third category is other property, which includes capital property that
does not fall within the definition of personal-use property or listed
personal property and is acquired for the purpose of earning income.
Examples of items included in this category are capital investments (i.e.,
stocks, bonds and marketable securities) and business assets such as
rental property and equipment. Note that business inventory is not capital
property.
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Figure 10: Capital Property
Basic formulas
The formula for deriving the amount of a capital gain or loss on the
disposition of an asset is:
Capital gain/loss = proceeds of disposition less (adjusted cost base + expenses

associated with the disposition)
The portion of a capital gain that is subject to income tax is referred to as

a taxable capital gain. A taxable capital gain is derived by multiplying the
capital gain by the current inclusion rate (50%):
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Taxable capital gain = capital gain x 50%
The portion of a capital loss that is deductible against a taxable capital gain
is referred to as an allowable capital loss. An allowable capital loss is
derived by multiplying the capital loss by the current inclusion rate (50%):
Allowable capital loss = capital loss x 50%
EXAMPLE
Anna sold her shares of TYT Inc. for $25,000. Her adjusted cost base on the shares
was $15,000, and she paid a sales commission of 2% on the $25,000 of proceeds.
Anna’s capital gain is:

A Proceeds of disposition $25,000
Less:
B Adjusted cost base $15,000
C Commission (2% of $25,000) $500
D Subtotal (B + C) $15,500
E Capital gain (A – D) $9,500
F Taxable capital gain (50% x E) $4,750
G Estimated tax liability (F x marginal tax rate) $2,375
Note: Row G assumes a 50% marginal tax rate. Changing
a taxpayer’s marginal tax rate will increase or decrease
the estimated tax liability. For example, decreasing the
marginal tax rate to 40% results in a tax liability of $1,900.
This represents a 20% reduction to the tax liability when
compared to a marginal tax rate of 50%.
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Capital loss
A capital loss generally occurs when the capital gain calculation above
generates a negative result (row E is negative) — that is, when the sum of
the adjusted cost base and expenses of disposition is greater than the
proceeds of disposition.
There is, however, no loss on depreciable capital property because the

total decline in value is generally accounted for through the capital cost
allowance system. A capital loss can only occur on the disposition of capital
property.
EXAMPLE
Roberta sold her shares of Redo Inc. for $20,000. The ACB on Roberta’s Redo Inc
shares was $22,000, and she paid a sales commission of 2% on the $20,000 of
proceeds.
Roberta capital loss is calculated as follows:

A Proceeds of disposition $20,000
Less:
B Adjusted cost base $22,000
C Commission (2% of $20,000) $400
D Subtotal (B + C) $22,400
E Capital loss (A – D) ($2,400)
F Allowable capital loss (50% x E) ($1,200)
Non-capital loss
A non-capital loss is a loss other than a capital loss. A non-capital loss
would arise when a business’s expenses exceed revenue.
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Disposition
The Income Tax Act defines the term disposition for tax purposes as the
transfer of the ownership of property and may be voluntary or involuntary.
A voluntary disposition includes the sale, gift or transfer of capital property
from a taxpayer to an individual, a trust or a corporation. An involuntary
disposition includes the destruction, theft, foreclosure or expropriation of
the property.
In addition to actual dispositions, there are a number of situations where a

notional disposition occurs for income tax purposes but not factually.
These notional dispositions are referred to as a deemed disposition; a
disposition for tax purposes even though there may not have been a
factual disposition. When a change in use of the property takes place or
when a change in the legal ownership of the property occurs without a
corresponding change in the economic ownership of the property, the
result may be a deemed disposition. Examples of when a deemed
disposition occurs include:
 The death of a taxpayer causes a deemed disposition of the taxpayer’s

capital property
 Some trusts are deemed to dispose of their capital assets every 21

years
 A change in use of property, such as a rental property changed to a

principal residence (or vice versa), can create a deemed disposition
While a capital asset may increase or decrease in value over time, this
change in value has income tax implications only when the gain or loss is
realized through an actual disposition or deemed disposition for income tax
purposes.
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Involuntary disposition
Property stolen or destroyed often qualifies for compensation through
insurance. If the taxpayer receives compensation, that compensation is
deemed to be the proceeds of disposition in the calculation of the
taxpayer’s capital gain or loss.
It is possible to avoid this general rule if the taxpayer uses the proceeds to
repair or replace the damaged property within a reasonable period of time.
Proceeds of disposition
The term proceeds of disposition is a defined term in the Income Tax Act
and includes the sale price of the property that has been disposed of, as
well as the compensation the taxpayer receives for property that is
expropriated, stolen or lost. Proceeds of disposition are the gross amount
before selling expenses. When the payment of insurance occurs on
property that has been damaged, the insurance proceeds are considered
the proceeds of disposition unless the proceeds are used to repair the
damage within a reasonable period of time.
The term deemed proceeds of disposition is the amount the taxpayer is

deemed to have received for a piece of property as a result of the rules in
the Income Tax Act. Deemed proceeds of disposition does not have a
uniform definition across the Income Tax Act, so each situation will need to
be analyzed to determine the value of the deemed proceeds of disposition.
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Inadequate consideration
When transfers of capital property occur between non-arm’s-length
parties, the parties are deemed to transact at fair market value no matter
what other value may be chosen by the parties involved. This rule
prevents the artificial avoidance of tax.
When an asset is transferred to a non-arm’s-length party for an amount

less than the fair market value of the asset, there is deemed to be
inadequate consideration. The Income Tax Act deems the proceeds of
disposition to be the fair market value of the asset, although the buyer’s
adjusted cost base for the asset is set at the amount of actual
consideration.
When an asset is transferred to a non-arm’s-length party for an amount

greater than the fair market value of the asset, the transferor’s proceeds
of disposition are equal to the amount actually received while the
transferee’s ACB is deemed to be equal to the fair market value of the
asset.
EXAMPLE 1
Anita’s stock portfolio has a fair market value of $10,000. She sells the portfolio to her
brother, David, for $2,500, which is her adjusted cost base. Her intention was to avoid
tax on the capital gain and to benefit David who is in a lower tax bracket.
The Income Tax Act deems Anita to have received fair market value on the transfer of
her portfolio.
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Anita (Sister):
Deemed proceeds of disposition $10,000
Less:
Adjusted cost base $2,500
Selling costs 0
Subtotal $2,500
Capital gain $7,500
Taxable capital gain (50% of capital gain) $3,750
Note, however, this is a one-sided adjustment Because while Anita’s proceeds of

disposition is increased, David’s adjusted cost base remain unchanged at $2,500.
David (Brother):
Adjusted cost base: $2,500
If David were to sell his stock portfolio the next day at its fair market value of $10,000,
he will trigger a $7,500 capital gain ($10,000 – $2,500).
EXAMPLE 2
Anita’s stock portfolio has a fair market value of $10,000 and an adjusted cost base of
$2,500. This time, Anita sells the portfolio to her brother, David, for $12,500.
The Income Tax Act deems Anita to have received $12,500 as the proceeds of
disposition for her stock portfolio.
Anita (Sister):
Proceeds of disposition $12,500
Less:
Selling costs 0
Subtotal $2,500
Capital gain $10,000
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David (Brother):
In this case, David’s adjusted cost base on the portfolio is $10,000, the fair market
value of the portfolio.
Adjusted cost base

The term adjusted cost base, commonly referred to by the acronym “ACB”
is a defined term within the Income Tax Act. In general terms, adjusted
cost base refers to the dollar amount paid (in Canadian dollars) for the
property. It is used when calculating the capital gain or loss on a
disposition of capital property. The term adjusted cost base and ACB will
be used interchangeably throughout this material.
In certain circumstances, the adjusted cost base of an asset can be

increased or decreased, depending on the transactions undertaken by the
owner of the asset.
Examples of items that may increase/decrease a taxpayer’s cost to arrive

at the adjusted cost base include:
 When a taxpayer owns a piece of land, any interest or property taxes

that cannot be used as a deduction in computing income can be added
to the taxpayer’s adjusted cost base of the land
 Outlays and expenses incurred in buying, delivering and installing

capital assets are added to the adjusted cost base of the assets
 Some capital contributions taxpayers make to a corporation in which

they hold shares can be added to their adjusted cost base of the shares
 Commissions paid in the acquisition of shares is added to the adjusted

cost base of the shares
 Land surveys and property valuation during acquisition or disposition

may be added to the adjusted cost base
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 Mutual fund distributions that create income without a distribution of

cash can be added to the adjusted cost base of the fund units or shares
 Significant improvements that are more than repairs and maintenance

are added to the adjusted cost base
 A superficial loss is added to the adjusted cost base of the replacement

property
 Some forms of government assistance can reduce the taxpayer’s

adjusted cost base of the property
Taxable capital gain

References to capital losses in this section refer only to non-depreciable
capital property, because losses associated with depreciable capital
property are treated differently. Refer to the “Capital cost allowance”
section for more information about the tax treatment of depreciable capital
property.
Capital gain/loss = (proceeds of disposition) – (ACB + disposition expenses)
Taxable capital gain = 50% of capital gain
Allowable capital loss = 50% of capital loss
There is an exception to the 50% capital gain inclusion rate when a

taxpayer donates publicly listed securities to a charitable organization or
private or public foundation, or donates ecologically sensitive land to a
conservation charity. In these circumstances, the inclusion rate is reduced
to 0%.
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EXAMPLE 1
In January of this year, Ming disposed of capital property that was subject to capital
gains tax. His proceeds of disposition were $20,000, while the adjusted cost base on
the property was $10,000. He incurred no expenses in the acquisition or sale of the
property.
Less:
Selling costs 0
Subtotal $10,000
Capital gain $10,000
EXAMPLE 2
Grant owns 1,000 shares of TopNotch Inc., a publicly traded company, which he
acquired three years ago. The adjusted cost base of the shares is $10 per share,
while the shares are currently valued at $18 each. Grant is interested in making a
significant charitable donation by transferring these shares to a charitable
organization.
Less:
Selling expenses 0
Subtotal $10,000
Capital gain $8,000
Taxable capital gain (0% of capital gain) 0
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Allowable capital loss

Allowable capital losses can only be offset against taxable capital gains and
cannot be claimed against any other type of income. An exception to this
basic rule applies in the taxpayer’s year of death, as discussed below.
Allowable capital losses become net capital losses if they are not used in
the year incurred. Net capital losses are the excess of capital losses over
capital gains. Net capital losses may be carried back three years or carried
forward indefinitely to be claimed against taxable capital gains.
When an allowable capital loss is realized in the taxpayer’s year of death or

a net capital loss is carried forward into the year of death, the allowable
portion may be deducted against any type of income realized in that year.
Allowable capital losses are only deductible to the extent that net taxable
capital gains are greater than zero.
EXAMPLE 1
During the current year, John realized a capital gain of $15,000 on the sale of JKL
shares and a capital loss of $8,000 on the sale of XYZ shares. The net capital gain on
the sale of these two groups of shares is $7,000 ($15,000 - $8,000).
The capital gain inclusion rate is applied against the net capital gain of $7,000.
Therefore, John’s taxable capital gain is $3,500 (50% of $7,000).
If only the XYZ shares were sold with no other capital transactions, the results would
change. This would create a capital loss of $8,000 and an allowable capital loss of
$4,000 (50% of $8,000).
However, an allowable capital loss can only be offset against a taxable capital gain (it
cannot normally be used to offset other sources of income). Because, in this case,
John cannot use the $4,000 allowable capital loss in the current year, it becomes a
net capital loss. John can carry the net capital loss back up to three years to apply
against taxable capital gains in that period. Alternatively, the net capital loss of $4,000
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can be carried forward indefinitely. The net capital loss will be available to John to
apply as an offset against taxable capital gains in the future.
Assume that John carries the $4,000 net capital loss forward. Next year, he sells the
JKL shares and realizes proceeds of disposition of $15,000. The adjusted cost base
on the JKL shares is $7,000, while selling expenses total $1,000. John incurs a
taxable capital gain of $3,500 (50% x ($15,000 – ($7,000 + $1,000))) from the sale of
JKL shares. He can now use the $4,000 net capital loss from the prior year to reduce
the $3,500 taxable capital gain to zero. This leaves $500 of net capital losses that
John can continue to carry forward.
EXAMPLE 2
An allowable capital loss can be used to reduce a taxable capital gain to zero, but the
system does not allow an individual to claim an allowable capital loss against other
income.
Lee sold three groups of marketable securities:
 Asset EFG incurs a capital loss of $5,000

 Asset HIJ incurs a capital loss of $8,000
 Asset KLM incurs a capital gain of $7,000
The net outcome on these transactions is a capital loss of $6,000.
While Lee incurred a capital gain of $7,000 on the KLM asset, the gain is offset by the
capital losses on the other two assets (EFG and HIJ).
The net loss of $6,000 equals a $3,000 allowable capital loss (50% of $6,000). If Lee
cannot use the allowable capital loss this year, it becomes a net capital loss that he
can carry back to the previous three-year period or carry forward indefinitely.
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Superficial loss
The term superficial loss applies when a taxpayer incurs a loss on the
disposition of capital property and an identical property is acquired or
reacquired by the taxpayer or an affiliated person within the period of 30
days before and 30 days after a disposition.
The definition of affiliated person is quite broad. An individual is considered

to be affiliated with:
 Himself or herself
 His or her spouse or common-law partner
 A corporation that the individual or the individual’s spouse or common-

law partner controls
When an individual incurs such a capital loss, it is disallowed because it is

viewed as a superficial loss. To balance the system, the superficial loss is
added to the adjusted cost base of the reacquired property. When the
reacquired property is eventually sold, the higher adjusted cost base
reduces the capital gain.
In this way, the taxpayer does not realize an immediate benefit from
selling and reacquiring property that results in a superficial loss.
The superficial loss rule does not apply to deemed dispositions that occur
due to:
 Death
 Expiry of an option
 Emigration
 Change of use of property
 Recognition of a bad debt
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EXAMPLE
Maria sells her XYZ shares for $50,000 when her adjusted cost base is $75,000.
Maria’s common-law partner, Shartha, buys $50,000 worth of XYZ shares within 30
days of Maria’s disposition.
Less:
Selling expenses – 2% of proceeds $1,000
Subtotal $76,000
Capital loss ($26,000)
Maria cannot claim the capital loss at the time she disposes of the XYZ shares
because of the superficial loss rules. However, the $26,000 capital loss is added to
the adjusted cost base of Shartha’s XYZ shares. Shartha’s adjusted cost base is
$76,000 (her purchase price of $50,000 plus the $26,000 superficial loss Maria
experienced).
Business investment loss

Another term related to capital losses is the term business investment
loss. A business investment loss can result from an actual or deemed
disposition of the following properties to a person who is arm’s length to
the taxpayer:
 A share of a small business corporation
 A debt owed to a taxpayer by a small business corporation
A business investment loss can also arise if the taxpayer is deemed to

have disposed of a debt or share of a small business corporation for nil
proceeds, under specific circumstances. The circumstances are very
specific but in general terms include either of the following:
 When a small business corporation owes the taxpayer a debt and

that debt is considered a bad debt at the end of the year
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 When the taxpayer owns a share of a small business corporation that

has gone bankrupt during the year or is insolvent and a winding-up
order is underway, or is insolvent and no longer carrying on business
The term business investment loss refers to full loss. It becomes an

allowable business investment loss when the capital gains inclusion rate is
applied against the business investment loss. The term allowable business
investment loss is commonly referred to as an ABIL.
ABIL = business investment loss x capital gains inclusion rate
The special advantage of having a capital loss that qualifies as a business

investment loss is that an ABIL can be deducted against all types of
income, not just capital gains. An ABIL in excess of the amount required to
reduce the taxpayer’s income to zero can be carried back three years and
carried forward 10 years. If, after the 10 years, any amount of the ABIL
remains unused, the remaining amount reverts to an allowable capital loss
and can be carried forward indefinitely. At any point in the future, the
taxpayer can deduct the allowable capital loss against taxable capital gains.
Capital gains reserve

When a taxpayer sells a capital property, it is quite normal to receive the
full proceeds from the buyer at the time the transaction closes. There are,
however, transactions where payment from the purchaser to the seller is
designed as a stream of payments over time, often spread across a
number of years. The Income Tax Act recognizes that payments associated
with capital transactions may occur over time and uses what is referred to
as a “capital gains reserve” to account for payments that occur over
multiple taxation years.
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In general, the rules for a capital gains reserve provide that at least one-
fifth of a taxpayer’s taxable capital gain must be reported in the year of
sale and each of the four following years, to a maximum of five years. If a
taxpayer transfers certain farm property or shares in a small business
corporation, he or she can claim a capital gains reserve over a maximum
of 10 years.
Claiming a capital gains reserve is optional, and a taxpayer can claim any
amount up to the maximum allowed. To make a claim, a taxpayer must file
Form T2017, “Summary of Reserves on Dispositions of Capital Property,”
with his or her tax return in the year of sale. Capital gains reserves deducted
from income in one year must be added to income in the subsequent year.
The maximum reserve amount is the lesser of:
 (Proceeds not yet due ÷ total proceeds) x gain
 (1/5 of capital gain) x (4 – number of preceding tax years ending after

disposition)
EXAMPLE
Assume that a taxpayer sells a capital property for $5,000,000 with a nominal
adjusted cost base. The taxpayer receives $1,000,000 immediately when the
transaction closes, and the buyer will pay the remaining $4,000,000 over the next four
years. The taxpayer is permitted to claim a capital gains reserve calculated as follows:
Proceeds of disposition $5,000,000
Less:
Adjusted cost base Nominal
Selling expenses Nominal
Subtotal Nominal
Capital gain $5,000,000
Reserve $4,000,000
Lesser of:
1. (Outstanding proceeds ÷ total proceeds) x capital gain
[$4,000,000]
2. 1/5 of capital gain x 4
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[$4,000,000]
In this case (1) and (2) are each $4,000,000
Declared capital gain $1,000,000
Declared taxable capital gain $500,000
Personal-use property and listed personal property

The personal element associated with personal-use property and listed
personal property means there are additional rules in the tax system
designed to ensure equity and fairness to all taxpayers.
Personal-use property
Only capital gains are considered, for tax purposes, when a taxpayer
disposes of personal-use property; capital losses incurred on the
disposition of personal-use property are not considered for tax purposes.
In other words, capital gains are taxable, while capital losses are not
deductible on dispositions of personal-use property. The rationale for this
difference is built on the premise that the government considers any losses
in these cases to be personal consumption rather than a real economic
loss.
In addition, the Income Tax Act deems that for personal-use property, the
proceeds of disposition and the adjusted cost base are both set at a
minimum of $1,000. This is known as the de minimus rule and it applies as
follows:
 Proceeds of disposition are the greater of actual proceeds and $1,000
 Adjusted cost base is the greater of actual cost and $1,000
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EXAMPLE
Keith recently sold his guitar, piano and sailboat. The table shows the original
purchase price and sale proceeds:
Guitar Piano Sailboat
Cost $900 $2,100 $750
Proceeds at time of sale $1,200 $1,500 $900
Calculation of the taxable capital gain for Keith’s disposition of personal-use property is:
Guitar Piano Sailboat
Proceeds $1,200 $1,500 $1,000

deemed
proceeds
Adjusted cost base $1,000 $2,100 $1,000

deemed ACB deemed ACB
Capital gain $200 N/A $0
Taxable capital gain $100 N/A $0
Notes:
The adjusted cost base for the guitar and sailboat are deemed to be $1,000.
The proceeds of disposition for the sailboat are deemed to be $1,000.
The sale of the piano resulted in a capital loss that is not deductible, so calculation of
the allowable capital loss is not required.
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Listed personal property

As with personal-use property, the de minimus rule applies to listed
personal property. However, in contrast to personal-use property, both
gains and losses are considered in the tax calculation for the disposition of
listed personal property. That said, a taxpayer can only claim any net
capital losses as an offset against taxable capital gains on listed personal
property. Net capital losses on listed personal property may be:
 Carried back three years
 Carried forward seven years
EXAMPLE
Jim’s stamp collection had an adjusted cost base of $7,500. In June of this year, with
the help of a stamp dealer, Jim sold the collection for $12,000. He paid the dealer an
8% commission on the sale. In September of this year, Jim sold a rare book for
$9,000, although his adjusted cost base on the book was $12,300. The table outlines
the tax outcome arising on the sale of Jim’s stamp collection and rare book:
Stamps Book Total
Proceeds $12,000 $9,000
Adjusted cost base $7,500 $12,300
Selling costs $960 $0
Capital gain (loss) $3,540 ($3,300) $240
Taxable capital gain $120
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Replacement property
In the following situations, it may be possible to postpone or defer the
recognition of a capital gain or recapture of capital cost allowance on the
disposition of property:
 If the taxpayer sells a business property and replaces it with a new

property for the same or similar use. This is considered a voluntary
disposition of a former business property
 If the taxpayer’s property is lost, stolen or expropriated and the

taxpayer replaces it with a similar property. These are considered
involuntary dispositions. The date of disposition occurs when the
taxpayer receives the insurance or compensation
Former business property is defined as real property (i.e., land, buildings

or leaseholds) that is capital property used primarily for the purpose of
earning business income.
The taxpayer must recognize the capital gain and/or recapture of capital
cost allowance in the year of disposition and can defer the gain/recapture
if the taxpayer replaces the property within the same tax year. If
replacement takes longer than the current tax year, the taxpayer must pay
the associated income tax in the current year and may refile when the
replacement property is acquired.
For involuntary dispositions, the taxpayer must replace the property by the
later of 24 months after the taxation year in which the disposition
occurred, or by the end of the second taxation year following the taxation
year in which the disposition occurred.
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For voluntary dispositions, the taxpayer must replace the former business
property by the later of 12 months after the taxation year in which the
disposition occurred, or by the end of the first taxation year following the
taxation year in which the disposition occurred.
EXAMPLE
A business is in need of expanded warehouse space, so it sells the current
warehouse and buys a new warehouse. As the table shows, the sale (or disposition)
of the warehouse must be separated into the land and building components:
Land Building
ACB FMV ACB UCC FMV
Old $1,000,000 $2,000,000 $1,000,000 $900,000 $2,000,000
warehouse
New $2,000,000 $3,000,000 $2,000,000 $1,900,000 $3,000,000
warehouse
The sale of the old warehouse resulted in a capital gain of $1,000,000 ($2,000,000
FMV - $1,000,000 ACB) on the land and $1,000,000 ($2,000,000 FMV - $1,000,000
ACB) on the building. In addition, the building is depreciable property, so a calculation
of potential recapture is required. The recapture on the disposition of the old
warehouse is $100,000, derived as the UCC balance reduced by (the lesser of
proceeds of disposition and capital cost of the building).
[$900,000 – $1,000,000, where the $1,000,000 is calculated as the lesser of
$2,000,000 and $1,000,000].
The replacement property rules allow the taxpayer to defer the capital gain and
recapture arising on the disposition because a similar property was purchased. The
result in this case is that the adjusted cost base of the new land and building is
reduced by the gain arising on the disposition of the old land and building.
In this example, the adjusted cost base of the new land and building should be
$3,000,000 and $3,000,000, respectively, without the replacement property rules.
However, because the replacement property rules allow the taxpayer to defer the
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gain, the adjusted cost base of the new land and building is $2,000,000 and
$2,000,000 respectively.
The new undepreciated capital cost on the building without the replacement property
rules would be $3,000,000. However, with the replacement property rules, the new
undepreciated capital cost is $1,900,000. The new undepreciated capital cost under
the deferred rules is derived as the new cost of the building ($3,000,000) less the
deferred gain arising on the disposition of the old building ($1,000,000) less the
deferred recapture of $100,000 on the disposition of the old building.
The deferred gain and recapture because of the replacement property rules is
reflected in a lower adjusted cost base and undepreciated capital cost of the
replacement property. The taxpayer has deferred a $2,000,000 capital gain on the
disposition of the old land and building and $100,000 recaptured capital cost
allowance on the disposition of the old building.
Summary
Table 14 shows how the terminology fits together.
Table 14: Capital Gains System Terminology
Capital gain Proceeds less adjusted cost base and selling expenses
(if a positive result)
Capital loss Proceeds less adjusted cost base and selling expenses
(if a negative result)
Taxable capital gain 50% of capital gain
Allowable capital loss 50% of capital loss
Net capital loss An allowable capital loss that is not used in the year
incurred is added to the taxpayer’s pool of net capital
losses. It can be carried back three years or carried
forward indefinitely. It can be claimed only against
taxable capital gains, except in the year of death when
it can be claimed against any type of income.
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Business investment 100% of a capital loss that meets special qualifying

loss criteria
Allowable business 50% of a business investment loss. Deductible against

investment loss any income for up to 10 years, after which it reverts to
a net capital loss and follows the net capital loss rules.
Transfers of capital property

Capital property that is transferred from one spouse or common-law
partner to the other spouse or common-law partner transfers without
immediate tax consequences (rollover basis), unless the transferor makes
a specific tax election to have the transfer occur at fair market value.
When no election is made, the receiving spouse is considered to have

bought the capital property for the same amount as the transferor is
considered to have sold the property for. In other words, the receiving
spouse assumes the transferor’s adjusted cost base of the capital property,
and the transfer takes place on a rollover basis.
The election to opt out of the automatic rollover and to have the
transaction occur on a fair market value basis must be filed with the
transferor’s income tax return for the year in which the transfer occurs.
Although the transfer of capital property between spouses or common-law

partners can occur without immediate tax consequences, the potential for
income attribution and capital gain attribution still applies if the receiving
spouse earns income on the transferred asset or disposes of the
transferred asset. The automatic rollover feature available for the transfer
of capital property between spouses or common-law partners does not
eliminate the potential for attribution.
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If a transfer of capital property occurs between spouses or common-law

partners and an election is filed so the automatic rollover does not apply,
the transferring spouse is subject to the tax consequences that would
normally arise on the disposition (potential capital gain or capital loss). A
capital gain becomes taxable income to the transferor, whereas a capital
loss is not deductible because it is treated as a superficial loss.
A transfer of capital property between spouses or common-law partners

completed on a fair market value basis is not subject to the income
attribution or capital gain attribution rules.
Principal residence exemption
Special exemption
A taxpayer’s personal residence is considered personal-use property and,
while gains on personal-use property are taxable, the Income Tax Act
provides an exemption from taxation for the taxpayer’s principal residence.
Defining a principal residence

The term principal residence is defined in the Income Tax Act and includes
a housing unit owned by an individual and ordinarily inhabited in the year
by that individual or the individual’s spouse, common-law partner, former
spouse, former common-law partner or child.
The definition of a housing unit is very broad and includes a house,

cottage, condominium, mobile home, trailer or even houseboat. Also
included in the definition is a leasehold interest in a housing unit and a
share of capital stock of a co-operative housing corporation when the
share is acquired for the sole purpose of obtaining the right to inhabit a
housing unit owned by that corporation.
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Ordinarily inhabited
While the Income Tax Act does not define ordinarily inhabited, it uses the
term in conjunction with the phrase in the year, not throughout the year.
As such, this allows for the periodic use of a cottage or vacation property.
For example, if a taxpayer owns both a home and a cottage and inhabits
both on a periodic basis, even if the cottage is only used during a small
portion of the year, it would be reasonable to consider the taxpayer as
meeting the criteria of ordinarily inhabited. Alternatively, a piece of land
purchased for the intention of future development would not qualify under
the definition of a principal residence because it is not ordinarily inhabited.
One exemption per family

The taxpayer may own the property individually or jointly with another
individual, but each family unit may claim only one principal residence for
each taxation year. A family unit is defined as the mother, father and
unmarried children under age 18; together they may claim only one
principal residence for tax purposes, either directly or through a personal
trust.
The property for which the principal residence exemption is being claimed
does not need to be located in Canada, provided that all of the qualifying
conditions apply.
While a taxpayer may claim only one principal residence for any taxation
year, he or she has discretion to select which property to claim (provided
the property meets the principal residence criteria) for each year of
ownership. For example, if a taxpayer owns both a home and a cottage
simultaneously, the taxpayer may claim only one of them in each year of
ownership; however, he or she can choose which to claim for any
particular year. It is generally advantageous to claim the exemption on the
property with the greater capital appreciation, when possible.
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Calculating the exemption

Beginning in the 2016 taxation year, individuals must report the
disposition of their principal residence and associated claim for the
principal residence exemption. The formula for the principal residence
exemption is:
{ ( 1 + A ) ÷ B } x the gain realized upon disposition
Where,
“A” is the number of years the property is designated as the principal residence and
the owner was resident in Canada. This would be whole years; for example, 1979 to
2010 would be 32 years of ownership regardless of when in the year the home was
bought or sold.
“B” is the number of years of ownership
The “1+” element in the numerator of the principal residence formula is

intended as a bonus to compensate the taxpayer for situations such as
when one home is sold, and another is purchased in the same year. The
bonus element provides a year of overlap because the taxpayer may
designate only one home as a principal residence for each taxation year.
This “1+” element also means that if a taxpayer owns a home and a
cottage at the same time and wants to claim 100% of the principal
residence exemption on a single property, he or she can designate one
property as a principal residence for one year less than the time it was
actually owned to derive a full exemption. This leaves one year not yet
designated, which the taxpayer can subsequently designate toward the
second property as a principal residence.
The “1+” element is only available if the homeowner was resident in

Canada at the time of purchase.
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Change in use
When there is a complete change in use of a property (100% change), the
owner is deemed to have immediately sold the property and immediately
reacquired the property. This means the accrued capital gain is triggered
when the property ceases to be a principal residence and is changed to a
rental property, or when a rental property is changed to become a
principal residence.
When use of a property changes from a principal residence to a rental

property, the owner may use his or her principal residence exemption to
shelter the gain. Alternatively, the individual can elect to defer recognition
of the gain to a later year by electing to be deemed not to have made the
change in use of the property. This can be achieved by submitting a letter
with the individual’s tax return for the year in which the change occurred.
However, any claim for capital cost allowance on the property will result in
a rescission of the election on the first day of the year in which the capital
cost allowance claim is made.
While this election remains valid, the property could continue to qualify as
the individual’s principal residence for up to four years even though the
property is not ordinarily inhabited by the taxpayer or other qualifying
individuals, provided the taxpayer is a resident of Canada and no other
property is designated for a similar claim. This election provides the
taxpayer with an opportunity to defer the associated income tax liability
until the property is eventually disposed of.
EXAMPLE
Pat and Chris bought their home for $300,000 in 1988.
They moved out in 2012 when the home was worth $500,000 and began to rent it to a
tenant. This change would be classified as a complete change in use of the property.
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They elected to defer recognition of the deemed gain by filing a letter with the Canada
Revenue Agency and chose to not claim CCA on the rental property. Pat and Chris
remained resident in Canada.
Pat and Chris sold the rental property in 2019 for $750,000, which requires them to
recognize a capital gain of $450,000 ($750,000 proceeds less $300,000 cost).
Over the couple’s 32 years of ownership, they can claim 25 years as a principal
residence (1988 to 2012), plus they can elect to treat four years of the rental property
period as a principal residence.
The formula for determining the principal residence exemption is (1 + 29) ÷ 32, which
results in 93.75% of the $450,000 capital gain being exempt ($421,875).
The outcome for Pat and Chris is a tax liability on the remaining $28,125 of capital
gain realized in 2019.
During the period when Pat and Chris did not reside in the home, they were living in a
rental property so did not claim any principal residence exemption in respect of any
other property.
Partial change in use

A partial change in use occurs when a property owner decides to rent out
part of his or her home to an arm’s length individual. Alternatively, a
partial change in use also occurs when an individual no longer rents out a
portion of the home and reclaims the space for his or her personal needs.
The change in use must be substantial, such as building a self-contained
dwelling in the basement or converting the front of the home into a
business. In such a situation, the change in use rules apply, and the
individual experiences a partial disposition of the portion of the home that
is no longer for personal use. With a partial change in use, there is no
opportunity to make an election to defer the gain as is available with a
complete change-in-use.
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It is the Canada Revenue Agency’s administrative practice not to apply the

deemed disposition rules when the income-producing element is ancillary
to the main use of the property and provided no structural changes have
been made to the home and no capital cost allowance has been claimed on
the property.
For example, renting out one or two existing bedrooms generally fits within
the Canada Revenue Agency’s administrative practice as being ancillary in
nature. However, building a new self-contained rental unit in the basement
would generally not be considered as ancillary.
It is important to note that administrative practices can change and are

utilized at the Canada Revenue Agency’s discretion.
Larger properties
The definition of a principal residence limits the amount of land associated
with the home to one-half hectare. A hectare is a metric unit of 10,000
square metres, or about 2.47 acres.
The taxpayer may be able to claim more land as part of his or her principal
residence but would have to prove the excess land was necessary for the
use and enjoyment of the property as a principal residence. For example, a
municipality may have a minimum lot size in excess of one-half hectare.
Farmers
It is common to find a family home located on the family farm property. In
these cases, when the farm (including the family home) is sold, it is
possible to shelter some of the resulting gain from tax by claiming the
principal residence exemption.
There are two options for individuals in this situation:
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 The individual can make a reasonable allocation of the sale proceeds and
determine a fair amount to be allocated between the family home and
surrounding land. In this situation, a capital gain is determined for each of
the home and surrounding land. The principal residence exemption is
applied as a reduction to the gain in respect of the principal residence
portion.
 The individual can claim a principal residence exemption comprised of

$1,000 plus an additional $1,000 for every year of ownership since
1971. In this situation the principal residence exemption is deducted
from the overall capital gain otherwise determined.
Value of exemption
The principal residence exemption is a valuable benefit that many
Canadians enjoy. However, the Canada Revenue Agency has been paying
increased attention to the administration and taxpayer compliance
associated with this generous tax provision.
The value to Canadian residents is the benefit of tax-free growth in the

capital value of their home. From a planning perspective, many Canadians
can sell their home tax-free, provided they have complied with the
requirements of the principal residence exemption. Often, the net value of
an individual’s home is his or her single largest asset, so understanding
whether the individual qualifies for the exemption is important to the
calculation of the individual’s net asset value.
In addition, when an individual owns both a cottage and a home,

understanding how to optimize the exemption helps to ensure a good
understanding of the individual’s potential tax liability. Actual dispositions
can occur during an individual’s lifetime and deemed dispositions when an
individual dies or there is a change in use of the property. When planning,
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keep in mind that an actual or deemed disposition may be far into the
future and requires that assumptions be made. The financial planner
should fully vet all assumptions with the client and clearly document them
so individuals understand that changes in circumstances can affect the
anticipated tax consequences.
EXAMPLE
Dennis purchased his home in 2010 and his cottage in 2015. In 2019, he sold both
the home and the cottage. The home has a capital gain of $100,000, and the cottage
has a capital gain of $40,000. Due to the home’s significant appreciation, it is
advantageous for Dennis to claim the principal residence exemption on the home.
However, because of the “1+” element in the formula, Dennis only needs to designate
the home as his principal residence for nine years to derive a full exemption. This
leaves one year that he can apply to the cottage.
Years of home ownership: 10 (2010 to 2019)
Designated years for home: 9 (2010 to 2018)
Years of cottage ownership: 5 (2015 to 2019)
Designated years for cottage: 1 (2019)
Capital gains exemption calculation for home:
Capital gain x ((1 + A) ÷ B)

= $100,000 x ((1 + 9) ÷ 10
= $100,000 x 100%
= $100,000
Capital gains exemption calculation for cottage:
Capital gain x ((1 + A) ÷ B)

= $40,000 x (1 + 1) ÷ 5
= $40,000 x (2 ÷ 5)
= $40,000 x 40%
=$16,000
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By designating his home as a principal residence for only nine years, Dennis acquires
a full exemption on the capital gain for his home. In addition, he derives a $16,000
capital gains exemption on the cottage that he would not have had if he had
designated the full 10 years on his home.
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Capital Cost Allowance
Introduction
Financial planners who are familiar with the practice of accounting may be
aware of the variety of methods by which depreciation may be applied
across different assets and different companies from an
accounting/bookkeeping perspective.
From an income tax perspective, depreciation is not an allowable expense.

Instead, recall that the Income Tax Act has developed a methodology,
referred to as the capital cost allowance system, to which all taxpayers
must subscribe. The deduction of capital cost allowance is optional for the
taxpayer, who may claim any amount up to the maximum calculated for
each class of assets. A taxpayer may decide not to claim capital cost
allowance in order to preserve tax losses or other tax attributes.
Capital cost allowance is a deduction from net income available to a

taxpayer to reflect, in part, wear and tear or declining utility on
depreciable capital property. A feature of the capital cost allowance system
is the grouping of depreciable assets into different prescribed classes. For
some assets that are similar in nature the Income Tax Act groups them
into the same class and treats the class as one unit for the purposes of
capital cost allowance. The capital cost allowance system directs the
calculation methods and rates for each prescribed class.
The Income Tax Act defines depreciable property as property the taxpayer
owns that is entitled to the deduction of capital cost allowance. The
disposition of depreciable capital property may cause a recapture of capital
cost allowance, which means amounts previously deducted must be taken
back into income, if the property is sold for more than its depreciated
value. In addition, a disposition of depreciable property could result in a
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capital gain if the property is sold for more than the property’s adjusted
cost base.
Capital cost allowance classes

The Income Tax Act and Regulations set out the capital cost allowance
system’s classes of assets. Each class prescribes the rate a taxpayer may
claim in any one taxation year. Table 15 lists some of the more common
classes.
Table 15: Capital Cost Allowance Classes
Prescribed
Class Description
Rate (%)
1 4 Most buildings acquired after 1987
3 5 Most buildings acquired before 1988 (or 1990, under

certain conditions)
8 20 Equipment, furniture, fixtures and machinery
10 30 Automotive equipment that cost less than $30,000 plus

GST, PST and HST
10.1 30 Automobile equipment that cost more than $30,000

plus GST, PST and HST; the addition to the CCA pool is
limited to $30,000 plus GST, PST, and HST, and each
such automobile has its own separate class for the
purpose of determining CCA and recaptured CCA.
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14.1 5 This is a new class, beginning January 1, 2017, and

includes the following types of property:
 Goodwill
 Property that was eligible capital property (ECP)
immediately before January 1, 2017 and is owned
at the beginning of January 1, 2017
 Property acquired after 2016, other than:
o Property that is tangible or corporeal property
o Property that is not acquired for the purpose of
gaining or producing income from business
o Property in respect of which any amount
is deductible (otherwise than as a result of
being included in class 14.1) in computing the
income from the business
o An interest in a trust
o An interest in a partnership
o A share, bond, debenture, mortgage,
hypothecary claim, note, bill or other similar
property
o Property that is an interest in, or for civil law a
right in, or a right to acquire, a property
described in any of the above sub-bullets
Examples of class 14.1 property include:
 For farming — milk and eggs quotas
 For business, professional and fishing — franchises,
concessions or licences for an unlimited period
For tax years that end prior to 2027, properties
included in Class14.1 that were acquired before
January 1, 2017 will be depreciable at a CCA rate of
7% instead of 5%. This is a transitional rule.
Properties that are included in this class and acquired
after 2016 are included in this class at a 100%
inclusion rate with a 5% CCA rate on a
declining-balance basis and the existing CCA rules
normally apply
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Basic capital cost allowance formula

The basic formula for calculating the value of the capital cost allowance
deduction is:
CCA = undepreciated capital cost (of the class) x prescribed rate (for the class)
Undepreciated capital cost is a continuous calculation. It is calculated at

the fiscal year-end (not before). The terms undepreciated capital cost and
UCC will be used interchangeably throughout this material. To calculate the
undepreciated capital cost at the end of the fiscal year, begin with the
undepreciated capital cost closing balance from the prior year-end and:
Add: The amount of any recapture to be included in income

Add: The cost of new purchases
Deduct: CCA claimed
Deduct: The lesser of net sale proceeds and capital cost for each disposition
Deduct: Investment tax credits or assistance received
The outcome of this calculation is the balance in the undepreciated capital

cost at the end of the current fiscal year.
Each asset class in which a taxpayer has assets carries its own
undepreciated capital cost balance. The balance is generally updated each
year by beginning with the previous year’s ending balance.
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First-year rule
In the year an asset is purchased, the taxpayer may only claim capital cost
allowance on 50% of the net additions to the particular class. This rule is
commonly known as the first-year rule or half-year rule. There are a few
exceptions, such as small tools in class 12, where the half-year rule does
not apply.
The calculation of net additions is the sum of the capital cost of all new
additions into the class less the proceeds of disposition from that same
class.
EXAMPLE
During the 2019 fiscal year, Anthony purchased a piece of new equipment with a
capital cost of $15,000 and disposed of $7,000 in equipment (the $7,000 is the lesser
of capital cost and the proceeds of disposition). The balance in his class 8 capital cost
allowance account at the beginning of 2019 was $80,000.
How are these transactions accounted for?

Class 8 – 20%
Opening balance, 2019 $80,000
Additions $15,000
Dispositions $7,000
Base for CCA (opening balance plus 50% of net additions), derived $84,000
as $80,000 + (50% x ($15,000 – $7,000))
CCA (20% x $84,000) $16,800
Closing balance (opening balance + additions – dispositions – CCA) $71,200
at end of fiscal 2019, derived as
$80,000 + $15,000 – $7,000 – $16,800
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Short taxation year

In situations where a short taxation year occurs (shorter than 365 days),
such as the first year of business operations or a newly incorporated
business, the Income Tax Act limits the capital cost allowance deduction to
a maximum based on a prorated number of days. The formula is:
CCA x (number of days in taxation year ÷ 365)
If, for example, a sole proprietor starts a business on July 1, a maximum

of 50% of the capital cost allowance is permitted during the first taxation
year that ends December 31. This reduction in the allowance for a
shortened taxation year is in addition to the first-year rule. For example, if
the business has a six-month taxation year, perhaps during the first year
of operation, and also acquires depreciable capital property, the first-year
rule also applies, resulting in a capital cost allowance of 25% (50% of
50%).
The calculation only considers the fact that the taxpayer purchased the
property within a taxation year; it does not matter at what point in the
year the property was purchased.
General principles
Purpose
Simply owning an asset that falls within one of the capital cost allowance
classes does not make the property a depreciable asset. To be depreciable,
the taxpayer must purchase the asset for the purpose of gaining or
producing income.
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Change in purpose
When a taxpayer acquires capital property for a purpose other than
generating business income and later commences to utilize the asset to
generate business income, the property becomes eligible for capital cost
allowance.
Passenger vehicles
The Income Tax Act limits the maximum capital cost for passenger
vehicles to $30,000 plus applicable GST, HST and PST, subject to an
annual maximum capital cost allowance of 30%. This group of vehicles is
categorized into class 10.
Passenger vehicles where the actual cost exceeds the prescribed maximum
of $30,000 are added to a separate class 10.1 and also subject to a
maximum annual capital cost allowance of 30% (based on the threshold
maximum of $30,000 plus GST, HST and PST, not the actual cost).
Zero-emission vehicles are categorized as class 54. The maximum capital

cost for additions to class 54 is $55,000 plus applicable GST, HST and PST.
For this class, the taxpayer is permitted 100% capital cost allowance.
Combined personal and business use

When a taxpayer regularly uses an asset for personal and business
purposes, the capital cost allowance is based on a proportion of the total
capital cost determined by the ratio of business use to total use. For
example, if the taxpayer used the asset for business purposes 60% of the
time, only 60% of the capital cost allowance calculated on the asset’s total
undepreciated capital cost is permitted. Changes in the proportion of use
for business purposes flow through accordingly.
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Availability of asset
To be eligible for capital cost allowance, assets must be available for use
during the taxation year.
Disposition of depreciable property

When a taxpayer disposes of depreciable capital property, an amount
equal to the lesser of the proceeds of disposition and the capital cost is
deducted from the undepreciated capital cost balance. The outcome of this
calculation could result in no tax consequences, a recapture of previously
claimed capital cost allowance or a terminal loss. In addition, there could
be a capital gain if the net proceeds of disposition are greater than the
taxpayer’s adjusted cost base.
The outcome of the disposition will result in one of the following scenarios:
 A positive UCC balance with assets remaining in the asset class
 A positive UCC balance with no assets remaining in the class
 A negative UCC balance, with or without assets remaining in the class
1. A positive UCC balance with assets remaining in the class
Within each class is a pool of assets that meet the criteria for inclusion in
the CCA class. After the disposition of one asset, there may still be assets
remaining in the class and a positive undepreciated capital cost balance. In
this case, capital cost allowance continues to be calculated on the
remaining undepreciated capital cost balance.
2. A positive UCC balance with no assets remaining in the class
After a taxpayer disposes of the last asset within a class, leaving no assets
in that class but a positive undepreciated capital cost balance, the
remaining undepreciated capital cost balance may be deducted as a
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terminal loss. A terminal loss is fully deductible against any type of

income.
3. A negative UCC balance with or without assets remaining in the

class
When the lesser of capital cost and the proceeds of disposition exceed the
undepreciated capital cost balance in the class (i.e., the undepreciated
capital cost balance becomes negative), a recapture of capital cost
allowance occurs. A recapture of capital cost allowance describes the
situation when the taxpayer must include in income an amount of capital
cost allowance previously claimed as a deduction.
A negative undepreciated capital cost balance, and therefore the

requirement to recapture some or all previously claimed capital cost
allowance, can occur either when assets remain in a class or when no
assets remain in the class.
Recapture of undepreciated capital cost allowance can occur following the

disposition of an asset from any class, but it is quite common with real
estate assets (i.e., buildings) because of the potential for appreciation
rather than depreciation. The concept underlying the recapture of some or
all of an amount of capital cost allowance previously claimed is that the
asset disposed of did not depreciate as quickly as the amount of capital
cost allowance previously claimed suggested.
The recapture of capital cost allowance is treated as income in the year the
disposition occurs, with no opportunity for deferral. This means the
amount of the recapture is fully taxable as income — so a recapture
amount of $10,000 means the full $10,000 (not just a portion of it) is
taxable income.
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EXAMPLE
Samantha, a financial planner, is working with a client who owns a small business.
While discussing the tax consequences of disposing of depreciable capital property,
Samantha creates a table to demonstrate the tax results associated with four different
disposition scenarios. Each column reflects a different set of circumstances.
A — Proceeds of disposition are greater than the capital cost and assets remain in
the class after the disposition.
B — Proceeds of disposition are less than the capital cost, creating a negative
balance in the undepreciated capital cost account, and assets remain in the class
after the disposition.
C — After disposition, the undepreciated capital cost account balance is positive, and
no assets remain in the class.
D (the most common) — After disposition, the undepreciated capital cost account
balance is positive, and assets remain in the class.
A B C D
Facts
UCC balance $10,000 $10,000 $10,000 $10,000
Proceeds of disposition $12,000 $12,000 $8,000 $8,000
Capital cost of property sold $8,000 $20,000 $20,000 $20,000
Assets remaining in class Yes Yes No Yes
Results
Capital gain $4,000
Recaptured CCA $2,000
Terminal loss $2,000
UCC balance $2,000 $0 $0 $2,000
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Scenario A — The taxpayer realizes a capital gain of $4,000, which translates into a
$2,000 taxable capital gain. In addition, the taxpayer has a remaining undepreciated
capital cost balance of $2,000 against which she can continue to claim a capital cost
allowance deduction.
Scenario B — The taxpayer realizes a $2,000 recapture of capital cost allowance,

which is fully taxable as income in the year it occurs. In addition, she has no
undepreciated capital cost balance so she can no longer claim a capital cost
allowance deduction. If the taxpayer sells any other asset remaining in the pool,
additional recapture will occur for the newly disposed asset.
Scenario C — No assets remain in the class, which means the taxpayer can claim a
terminal loss of $2,000. The $2,000 terminal loss is fully deductible against other
business income.
Scenario D — There are no immediate tax consequences as a result of the

disposition. The taxpayer continues to have a positive undepreciated capital cost
balance against which she can continue to claim a capital cost allowance deduction.
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Attribution
Introduction
The Income Tax Act includes an extensive set of attribution rules that
apply to property individuals transfer or lend to their spouse or common-
law partner or to an individual under age 18 who is non-arm’s length or a
niece or nephew of the transferor. The intention of these rules is to
prevent a taxpayer from splitting income among a pre-defined group of
family members and thereby reduce the amount of tax payable.
Designated person
The term designated person is used for purposes of the attribution rules. A
designated person in respect of an individual is either:
 The spouse or common-law partner of the individual
 An individual under age 18 who is either:
o Non-arm’s length to the individual
o A niece or nephew of the individual
Recall that non-arm’s length individuals include a child, grandchild or

great-grandchild. Note also that, in addition to non-arm’s length minors, a
designated person, for purposes of the attribution rules, also includes a
niece or nephew.
Broad restrictions limit transfers and loans between designated persons. In

addition, there are special rules governing interest-free and low-interest
loans between non-arm’s length parties.
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Transfers and loans to a spouse or common-law

partner
Attribution rule
When an individual transfers or lends property, either directly or indirectly,
to his or her spouse or common-law partner (or to a person who has since
become the individual’s spouse or common-law partner):
 Any income or loss from the property is attributed to the transferring

individual
 Any taxable capital gain or allowable capital loss resulting from the
disposition of the property is attributed to the transferring individual
The description above includes the phrase directly or indirectly. These

words are intended to extend the breadth of the attribution rules and
capture transfers to an inter vivos spousal trust or any trust under which
the transferor’s spouse is a beneficiary. It can even capture a series of
transfers that ultimately results in a benefit to the spouse, with a
corresponding application of the attribution rules.
These rules apply not only to the property transferred but to substituted
property. If, for example, the transferred property is sold and replaced
with another property, the attribution rules continue to apply to the
substituted property. This could occur, for example, when the original
property is a set of common shares but, through one or a series of
transactions, the common shares are replaced with preferred shares or
another asset.
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Fair market value exception

Attribution does not apply to property an individual transfers to his or her
spouse or common-law partner for consideration equal to fair market
value. When making a fair market value purchase, the purchasing spouse
or common-law partner must use his or her own money or the prescribed
rate loan strategy described below. To use the fair market value exception,
the transferring spouse or common-law partner must elect out of the
automatic rollover, which means the transferor must pay tax on any
capital gain arising from the disposition at the time of transfer.
Prescribed rate loan exception

The selling spouse or common-law partner may lend money to the
purchasing spouse or common-law partner for the acquisition of the
property, but the loan must meet all of the following conditions to avoid
attribution on the loan:
 There must be a written agreement between the spouses or common-

law partners that includes specific terms for repayment of the loan
 At the time of borrowing, the loan arrangement must use a rate of

interest equal to or greater than the lesser of:
o The current prescribed rate of interest
o A rate that would be viewed as reasonable for parties dealing at

arm’s length
 The borrowing spouse or common-law partner must pay the loan

interest no later than 30 days after the end of each taxation year as
long as the loan is outstanding
If the borrowing spouse or common-law partner does not pay interest in

any year or within the 30-day period after December 31, all income earned
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for that taxation year and all future income is attributed to the lending
spouse.
The lending spouse or common-law partner must include the interest

payments in his or her income.
Second-generation income exception

The income attribution rule that applies to spouses or common-law
partners does not apply to income earned on income that has been
attributed to the transferring spouse.
EXAMPLE
Bert gave $50,000 to his common-law partner, Ernie. Ernie used the funds to invest in
a portfolio that generated annual income of 3%.
The following table shows how, over time, the first-generation income remains the
same and the second-generation income slowly increases.
First-generation Second- and

income subsequent-
generation income
Year 1 $1,500.00 Zero
Year 2 $1,500.00 $45.00
Year 3 $1,500.00 $136.35
Year 4 $1,500.00 $275.44
The first-generation income ($1,500 annually) is attributed to Bert, making Bert

responsible for the income tax arising on this income. However, over time, this
strategy can be beneficial if Ernie is in a lower marginal tax bracket than Bert. Ernie
pays tax on the second-generation income at his lower marginal tax rate. Second-
generation income increases over time. While subtle, this is a permitted shift of
income from Bert to Ernie and contributes to an overall lower tax liability for the family
unit.
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Death of transferor
Income and capital attribution apply to transfers of property between
spouses or common-law partners while alive; this is referred to as an inter
vivos transfer. However, attribution stops for inter vivos transfers when
either spouse dies. In other words, attribution “ceases at the grave.”
There is no income or capital attribution on testamentary transfers

between spouses or common-law partners. In other words, when assets
pass from a deceased individual to a surviving spouse or common-law
partner, the transferred assets are not subject to the attribution rules.
Long-term holding of asset

Transfers between spouses or common-law partners occur on an automatic
rollover basis, with the deferral of any tax consequences associated with
the transfer. The attribution rules apply to all transfers of assets between
spouses, but only causes an income affect when the transferred property
generates income or a capital gain.
In other words, a transfer between spouses or common-law partners held

for a long period of time is subject to the income and capital attribution
rules, but the transferor will not experience any income attribution effect
until some type of income is earned on the property. There will be no
capital gain attribution effect until the property is disposed of.
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If, for example, property is transferred from Spouse A to Spouse B and the
intention is to hold the non-income-producing property for the long term,
while the attribution rules apply they have no effect during any period
when the property generates no income. The capital gain attribution rules
apply when Spouse B disposes of the property, if Spouse A is still alive.
EXAMPLE 1
Hank owns shares of Bayhampton Inc. that have an adjusted cost base of $7,500.
If he decides to give the shares (transfer ownership) to his spouse, Shawna, as a gift
when the fair market value of the shares is $10,000, what tax consequences arise?
The shares transfer from Hank to Shawna on an automatic rollover basis, with all
immediate tax consequences deferred, because Hank and Shawna are spouses. The
facts indicate the shares were a gift, which means Shawna did not pay for the shares.
Once the shares transfer, Shawna is the new owner of the shares. Provided there are
no dividends paid on the shares and Shawna does not dispose of the shares, there
are no tax consequences for either Shawna or Hank.
Tax consequences arise if a dividend is paid on the shares or if Shawna disposes of

the shares. The receipt of a dividend creates income and, although Shawna is the
owner of the shares, the attribution rules cause any income earned on the shares to
be attributed to Hank. Similarly, when Shawna sells the shares, any capital gain or
loss arising on the disposition of the shares is attributed to Hank.
If Bayhampton Inc. pays dividends that total $1,000 on the Bayhampton Inc. shares,
what are the tax consequences?
While the dividend is paid to Shawna, Hank bears the income tax consequences
because of the income attribution rules. Hank must pay income tax on the dividend
income. The dividend gross-up and dividend tax credit scheme will apply to the cash
amount of the dividend payment, just as if Hank had retained ownership of the shares
and received the dividend directly. There are no tax consequences for Shawna.
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If Shawna sells the Bayhampton Inc. shares for $16,000, what are the tax
consequences?
Less: ACB $7,500
Equals: capital gain $8,500
Tax consequences for Shawna None
Tax consequences for Hank (taxable capital gain) $4,250
The taxable capital gain of $4,250 on the Bayhampton Inc. shares is attributed to
Hank because the shares were a gift to Shawna, so she did not pay fair market value
consideration. While there was no immediate tax consequence at the time of transfer,
the consequences arise if the receiving spouse — in this case, Shawna — disposes
of the shares while Hank is still alive.
EXAMPLE 2
On September 15, Haley loaned $50,000 to her spouse, Jonathan, so he could
purchase shares of EverMore Industries. The Evans drew up a formal agreement that
included a repayment schedule and an interest charge equal to the prescribed rate at
the time of the transfer. However, Jonathan never paid interest during the year nor did
he pay any interest by January 30 of the following year.
Since Jonathan did not pay interest by the January 30 deadline, the prescribed rate
loan exception does not apply. As such, all income Jonathan earns on the EverMore
Industries shares and any capital gain or loss he realizes on the disposition of the
shares while Haley is alive is attributed to Haley.
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Summary of exceptions to the spousal attribution

rules
The spousal attribution rules do not apply in the following circumstances:
 Property is transferred for consideration equal to the property’s fair

market value
 Loans that bear a reasonable interest rate (market rate or prescribed

rate)
 Spouses or common-law partners are separated due to a relationship

breakdown:
o To income or loss related to the period of separation
o To a capital gain or loss arising from the disposition of property

during the period of separation, provided that both parties jointly
elect to have the exception apply
 Some changes in circumstances occur
 When anti-avoidance rules apply
Fair market value transfer
The transfer of property from an individual to a designated person for

consideration equal to the property’s fair market value generally does not
result in any attribution back to the transferor. For fair market value
transfers between spouses or common-law partners, the taxpayer must
elect for the spousal rollover provision to not apply (recall that the rollover
provision applies automatically unless an election is made).
EXAMPLE
Sam sells his portfolio of stocks to his common-law partner, Pat. Sam and Pat elect
out of the rollover provision, which means that Sam realizes the accrued capital gain
on his stock portfolio at the time of the sale to Pat.
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Pat must use his own financial resources to complete the purchase or accept a
prescribed rate loan from Sam with terms of repayment and a reasonable (or
prescribed) rate of interest. To avoid attribution, Pat must pay Sam interest on the
loan (according to the terms of the loan agreement) during the year or within 30 days
following year-end. Sam must include the interest payment in his income for the year
he receives it.
Market rate loans
Loans from an individual to a designated person or non-arm’s length

person that bear a reasonable interest rate (equal to market rates or
prescribed rate) and meet the repayment requirements discussed earlier
are not subject to attribution.
Separation
When an individual transfers property to a spouse or common-law partner

from whom the individual is separated due to a relationship breakdown:
 Income or loss from the property during the period of separation is not
attributed to the transferring individual
 There is no attribution of capital gain or loss from the disposition of

property during the period of separation, provided that both parties
jointly elect to have this rule apply. However, if both parties do not file
the joint election, capital gains are attributed to the transferring
individual
 In the case of divorce, attribution of capital gains no longer applies. In

the case of separation of common-law partners, a common-law partner
becomes a former common-law partner on the first day after a 90-day
separation and attribution no longer applies.
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Changes in circumstances
There are times when attribution applies, and then ceases to apply.
Common examples include:
 When any individual involved in the transaction dies (no attribution

beyond the grave)
 When the transferor leaves Canada and is no longer resident in Canada

for income tax purposes (no attribution beyond the border)
 In the year a designated minor turns age 18
Anti-avoidance rule
Deliberately using the attribution rules for tax planning is not permitted.
The Income Tax Act considers this type of use as an artificial transaction
and treats it as if it had not occurred. In addition, there is the overarching
general anti-avoidance rule (GAAR) that has been applied successfully to
scenarios where the strategy was to purposely cause the attribution rules
to apply and shift income to the designated person to lower the family
unit’s overall income tax consequences.
EXAMPLE
George and Marie Easton, a married couple, look for every opportunity to minimize
income tax. Marie’s marginal tax rate is 38%, whereas George’s marginal tax rate is
22%.
The Eastons decided that George will guarantee a loan incurred by Marie to buy
investment certificates.
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Under the attribution rules, the investment income on the certificates is attributed to
George because he guaranteed Marie’s loan. However, transactions such as this are
designed to artificially attribute income to the lower-income designated person, which
means the rules are being applied to achieve the reverse of their intended purpose.
There is a specific anti-avoidance rule that prevents a taxpayer from using artificial
transactions to benefit from the attribution rules. If the circumstances do not fall within
the artificial transaction rule, the Canada Revenue Agency can rely on GAAR as an
overarching anti-avoidance rule. As such, the attribution rules will not apply in this
specific scenario, and the Eastons will not benefit from attributing income to the lower-
income spouse.
Transfers and loans to minors
Attribution rule
Property that an individual transfers or lends, either directly or indirectly,
to a person under age 18 and who is non-arm’s length to the individual or
is a niece or nephew of the individual results in:
 Any income or loss from the property is attributed to the transferor
These rules apply when the individual is under age 18 for the entire year
(i.e., has not turned age 18 by December 31). Income attribution ceases
to apply in the year the minor turns age 18.
Property subject to this attribution rule includes any property transferred

from an individual to another person or entity when the transfer is for the
benefit of the minor — for example, a transfer to an inter vivos trust under
which the minor is a beneficiary. Even a series of transfers that ultimately
results in a benefit to the minor is captured by the term indirectly and
could result in application of the attribution rules.
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These rules apply not only to the property transferred but to substituted
property. If, for example, the transferred property is sold and replaced
with another property, the attribution rules continue to apply to the
substituted property. This could occur, for example, when the original
property is a set of common shares but, through one or a series of
transactions, the common shares are replaced with preferred shares or
another asset.
While a minor may not be in a position to own the property directly, this
type of transaction could occur using an inter vivos trust. In addition to
using the terms directly or indirectly to encompass any type of transfer,
the Income Tax Act specifically states that transfers using a trust are
subject to the attribution rules. The attribution rules are all-encompassing,
as the policy intent is to preclude income splitting with non-arm’s length
minors and nieces and nephews who are minors.
Nieces and nephews who are minors do not fall within the Income Tax
Act’s definition of non-arm’s length. They are, however, specifically
mentioned in the income attribution rules because the intent is to prevent
planning strategies that may involve adult siblings doing parallel transfers
to each other’s children.
Income only, not capital gains

The attribution rule governing transfers to minors applies only to income
attribution, not capital gains attribution. The transfer of property from an
individual to a minor, perhaps through a trust, that results in capital gains
is not attributed to the transferor. Any income the transferred property
earns is attributed to the transferor.
When property transfers from an individual to a minor, there is an

immediate deemed disposition for the transferor (no rollover opportunity)
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and any resulting capital gain is taxable to the transferor at the time of
disposition. However, once the asset is in the hands of the minor, perhaps
owned by a trust with the minor as a beneficiary, appreciation on the
property is taxed in the hands of the minor (or the trust).
Second-generation income exception

The income attribution rule governing transfers to minors does not apply
to income earned on income that has been attributed to the transferor.
EXAMPLE
Ben settled $50,000 on an inter vivos trust set up for the benefit of his 12-year-old
son, Barny. The trustee invested the capital in a portfolio of investments that
generated annual income of 3%.
The table shows how, over time, the first-generation income stays the same, while the
second-generation income slowly increases. Second-generation income refers to
income earned on the income that has already been attributed to the transferor.
First-Generation Income Second- and
Subsequent-Generation
Income
Year 1 $1,500.00 Zero
Year 2 $1,500.00 $45.00
Year 3 $1,500.00 $136.35
Year 4 $1,500.00 $275.44
The first-generation income is attributed to Ben who is responsible for the income tax
consequences on the income. The second-generation income is included in Barny’s
income, and he is responsible for the income tax arising on it. This strategy could
provide a benefit to Ben and Barny when Barny’s marginal tax rate is lower than
Ben’s. While attribution causes the first-generation income to be taxed at Ben’s
marginal tax rate, this is no different than if Ben had not undertaken the transfer.
The benefit of income splitting arises as time passes, because Barny’s income
increases over time with the second-generation income. Tax on the second-
generation income is calculated at Barny’s lower marginal tax rate because there is
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no attribution. While subtle, this is a permitted shift of income from Ben to Barny that
can lower the family unit’s overall tax liability and ultimately increase the family unit’s
disposable income.
As an aside, if the assets are disposed of by the trust resulting in a capital gain on the
disposition, the capital gain can be flowed out to Barny and taxed at his lower
marginal tax rate because capital gains are not subject to attribution.
In this case, the trust is used because a minor is involved and there are limitations
associated with minors executing contracts. As such, the trustees of a trust can
handle the transactions on behalf of the minor beneficiary.
Fair market value exception

Income attribution does not apply to property an individual transfers to a
minor for consideration equal to fair market value. If, for example, a
parent transfers an asset to a trust for the benefit of his or her minor child,
attribution would not apply if it is a fair market value transfer. This means
the parent would have to pay tax on the disposition at the time of transfer.
In addition, when making the fair market value purchase, perhaps through
a trust, the purchaser must use his or her own money.
Prescribed rate loan exception

When an individual lends money to a trust where a minor is a beneficiary,
the loan must meet all of the following conditions to avoid attribution on
the property purchased with the loan proceeds:
 There must be a written agreement between the transferor and the

trust that includes specific terms for repayment of the loan
 At the time of borrowing, the loan arrangement must use a rate of

interest equal to or greater than the lesser of:
o The current prescribed rate of interest

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o A rate that would be viewed as reasonable for parties dealing

at arm’s length
 The borrowing trust must make payments on the loan interest no later
than 30 days after the end of each taxation year as long as the loan is
outstanding
If interest is not paid by the trust in any year, or within the 30-day period
after December 31, all income earned for that taxation year and all future
income is attributed to the transferor.
The interest payment from the trust to the transferor must be included in
the transferor’s income.
Death of transferor
Income attribution applies to property transferred while the transferor is
alive, so it applies to inter vivos transfers. Attribution ceases, on prior
transfers to which it applied, when the transferor dies. There is no income
attribution on testamentary transfers.
EXAMPLE
Harvey’s three grandchildren - George, Benson, and Harry - are ages 12, 15, and 18,
respectively. As a special gift, Harvey gave each grandson a $5,000 term deposit that
earned annual interest of $225.
Interest earned in the first year for investments owned by George and Benson ($225 x
2) is attributed to Harvey because of the attribution rules. Interest earned on the
investment owned by Harry is not attributed to Harvey because Harry is 18 years old,
so attribution does not apply.
If the $225 of interest income received by George and Benson is reinvested,

attribution does not apply to any income they earn on the $225 that has been
reinvested (second-generation income).
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Loans to non-arm’s length persons

The Income Tax Act also limits income-splitting opportunities between
other types of individuals who are also considered to be non-arm’s length
in their dealings. Examples of such individuals are adult children and adult
siblings. This section discusses individuals who are non-arm’s length to the
transferor but does not include designated persons (because designated
persons are subject to the rules outlined in previous sections).
If an individual lends property to a non-arm’s length person and it would

be reasonable to conclude that one of the main reasons for the loan is to
reduce or avoid tax for the transferor, any resulting property income is
attributed to the transferor. Attribution applies in this circumstance only to
property income; there is no attribution for property losses, capital gains
or capital losses.
Avoiding attribution
Proof that one of the main purposes for the loan was not for tax avoidance
or tax reduction may include:
 The existence of a reasonable interest rate charge
 The explanation that the taxpayers are in the same tax bracket
 The explanation that the loan was to buy personal-use property that
will not produce taxable income
Loan for value exception

This attribution rule does not apply to loans for value, where there is a
reasonable rate of interest charged on the loan and there are specific
repayment terms (prescribed rate loan).
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Gift exception
This attribution rule applies to loans and should not be confused with gifts.
Gifts to non-arm’s length persons who are not designated persons are not
subject to attribution. In other words, individuals can gift assets to their
adult children without the consequence of attribution. Keep in mind,
however, a parent who gives a capital asset to an adult child means the
parent will have a disposition of the capital asset at the time the gift is
made. The disposition has immediate tax consequences for the parent if
the fair market value is greater than the asset’s adjusted cost base. If the
parent has an inherent loss on the property, it is treated as a superficial
loss.
Other considerations related to attribution
Tax liability
When a loan or transfer of property results in the application of the income
attribution rules, the transferor and transferee are jointly and severally
liable for the transferor’s tax liability because of attribution.
Dividend income
When dividends from a taxable Canadian corporation are attributed to a
taxpayer, the dividend gross-up and dividend tax credit rules apply. The
taxpayer to whom the dividend income is attributed must include the
grossed-up amount in his or her income but may also claim the dividend
tax credit.
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Capital gains exemption

When a taxpayer incurs a capital gain because of the application of the
attribution rules, the transferor (to whom the capital gain is attributed) is
entitled to use any available capital gains exemption for qualifying
property. This could occur when a transfer of property between spouses
involves shares of a qualified small business corporation.
If Spouse A transfers the qualified small business corporation shares to

Spouse B, and Spouse B disposes of the shares, any capital gain arising
when Spouse B disposes of the shares is attributed to Spouse A. If Spouse
A has capital gains exemption available, it can be used to offset any capital
gain arising on the attributed capital gain.
Property income versus business income

Income attribution rules apply to property income, which includes interest,
dividends, rent and business income earned by a specified member of a
partnership. A specified member of a partnership is a limited partner in a
limited partnership. The income attribution rules do not apply to business
income or losses. Therefore, it is important to determine the type of
income when assessing whether the attribution rules apply.
EXAMPLE
Samuel loaned $200,000 to his spouse, Joan, who used the money to establish a
bookstore. The money was used to pay the first and last month’s rent on the building,
purchase inventory and cover leasehold improvements.
The money Joan earns from the bookstore is business income, not property income,
so attribution does not apply to income Joan earns from the business.
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Samuel loaned an additional $100,000 to Joan, which she used to acquire an interest
in a limited partnership (she was not actively involved). Joan earned $15,000 in
income from the partnership.
In this case, because it is a limited partnership and Joan is a limited partner, the
$15,000 is considered property income and is attributed to Samuel.
Loans and transfers to a trust

Income attribution rules apply if an individual lends or transfers property
to a trust in which a designated person has a beneficial interest at any
time. The term beneficial interest refers to the individual’s right to receive
benefits arising from or in respect of the property held by the trust.
Typically, this describes the beneficiaries of a trust.
Borrowed funds
If an individual repays the debt of a designated person who used the
original debt to acquire income-producing property, the income attribution
rules apply.
Loan guarantee
When a transaction requires a taxpayer to provide a guarantee for the
payment of interest or repayment of capital on a loan between a specified
person and a third party, the property loaned by the third-party is deemed
to have been lent by the taxpayer, resulting in income attribution. This
applies to absolute and contingent assignments. A specified person is
defined as an individual’s spouse or common-law partner or related minor.
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Income Splitting
Introduction
Income splitting strategies are designed to shift income from a family
member in a higher marginal tax bracket to another family member in a
lower marginal tax bracket, with the primary objective of paying less
income tax overall across the family unit. These types of strategies can
work when the individuals involved are in different marginal tax brackets
and provided the transfer of income between the individuals is acceptable
within the rules of the Income Tax Act. The concept of income splitting is
considered one of the most-effective ways to decrease taxes and maximize
cash flow within a family unit.
The federal government has focused a great deal of attention on income

splitting in recent years, from the perspective of what is permissible and
what is no longer permissible.
The Income Tax Act defines specific rules that permit or preclude certain
income splitting transactions when they occur between parties who are
non-arm’s length. As well, there are rules that preclude splitting income
with minors who are non-arm’s length, as well as minors who are nieces or
nephews. The new tax on split income rules are broad-based and do not
focus narrowly on related minors.
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Suitability
The suitability of any income splitting strategy should take into account
some or all of the following points:
 The marginal tax rates of the individual giving up the income and the
individual receiving the income: The marginal tax rate may be a
consideration when the income splitting strategy begins, throughout
the period when income is being split, and when the income splitting
strategy is being wound-up. These time references can be important
considerations when measuring the net tax savings over the life of an
income splitting strategy.
 The impact on government benefits for the individuals involved: A

transfer between spouses or common-law partners could adjust income
and allow both to qualify for income-tested government benefits.
Careful analysis undertaken in advance will ensure the impact is
understood – pros and cons - before the transfer occurs. For example,
a transferor may benefit from the reduction of his or her income,
allowing him or her to qualify for income-tested benefits that might not
otherwise be available. However, the recipient’s income will increase so
an evaluation of the impact on his or her government or social benefits
should also be undertaken.
 The risk of creditors seizing either individual's assets: When income

splitting involves shifting assets, the assets could be exposed to the
creditors of the new owner.
 The expenses associated with implementing the strategy: It is

important to consider the costs and fees that may be incurred when
implementing an income splitting plan, including fees associated with
legal and professional services.
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Pension income splitting
Spouses and common-law partners

Under prescribed circumstances, couples are permitted to split pension
income for income tax purposes, although the definition of the type of
income that qualifies is very specific. This tax-saving opportunity allows
married and common-law couples to transfer income from a higher-income
spouse to a lower-income spouse, thereby reducing the total amount of
income tax the family unit would otherwise have to pay. Find a detailed
discussion of the pension income splitting opportunity earlier in this
module.
In addition to lowering the family’s overall income tax liability, pension

income splitting can, in some circumstances, increase the combined
amount of the pension income credit. For example, assume a couple with
only one income earner has qualifying pension income of $60,000 and no
other income. The couple could split the qualifying pension income equally
between the two spouses to allow the spouse with no income to claim the
full value of the pension income credit.
Notional transfer
Pension income splitting is unique because the pension income remains
with the recipient spouse. Income splitting occurs through a notional split
on the couple’s tax returns. The result is that the tax liability arising from
the split is the responsibility of the spouse who picks up the notional
allocation of pension income.
Pension income splitting has the potential to benefit all couples who
receive qualifying pension income. The challenge, however, often occurs
with second marriages or common-law relationships that occur in mid-life
and later-life. There are often agreements in place that designate the
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sharing of income and expenses. It can be helpful to explicitly state how

tax benefits may be used within the marriage or common-law relationship.
To be able to benefit from these types of tax-savings opportunities,
couples need to share information and have a level of understanding and
trust.
Canada Pension Plan/Quebec Pension Plan sharing
Spouses and common-law partners

Under specific circumstances, couples are permitted to share a prescribed
portion of their CPP/QPP income. This, too, provides a unique opportunity
for couples to balance their overall family income during their retirement
years, shifting income from a higher-income spouse to a lower-income
spouse, with the effect of reducing the family’s overall income tax liability.
Amount eligible for sharing

The rules to share a pension depend on whether one spouse or both
spouses contributed to CPP/QPP. If one spouse contributed to CPP/QPP,
the couple can share one pension. If both spouses contributed to CPP/QPP,
the couple may receive a share of each other’s pension.
The portion of each spouse’s pension that can be shared is based on the
number of months each spouse or common-law partner lived together
during their joint contributory period. The joint contributory period is the
time when either spouse could have contributed to CPP/QPP, while living
together. This is an important consideration and is one that is often
beneficial for those in long-term relationships, but less beneficial for
second marriages or relationships that occur in mid- to late-life.
Pension sharing is not permitted for post-retirement CPP/QPP benefits.

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Timeline for sharing

A pension sharing arrangement begins as soon as the government
approves it; it cannot be backdated. A couple can apply for CPP/QPP
pension sharing when they apply for CPP/QPP benefits or at any
subsequent time while receiving benefits.
Pension sharing stops at the earliest of:
 The month after the month in which the government approves a

cancellation request received from either spouse
 The month a divorce is finalized
 The month a spouse or common-law partner who had not contributed

previously begins to contribute to CPP/QPP
 The month in which one of the two spouses or common-law partners

dies
Impact
When CPP/QPP pension sharing ends, the income of the couple is adjusted
to reflect their original CPP/QPP earnings. As such, the spouse whose
original CPP/QPP earnings were lower (and adjusted upward because of
sharing) will receive less pension income and therefore the associated
income tax liability will also decrease. The spouse whose original CPP/QPP
earnings were higher (and adjusted downward because of sharing), will
receive a higher pension income and have a corresponding increase in the
associated income tax liability.
CPP/QPP sharing tends to be more valuable for couples who are married or
in common-law relationships during their income-earning years, when
CPP/QPP applies. Couples in second marriages that occur in mid-life or
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later-life will not benefit as much from this sharing opportunity as those
who were together during their income-earning years.
Spousal RRSP
A spousal Registered Retirement Savings Plan (spousal RRSP) permits a
couple to save taxes immediately and balance income across the family
unit over the longer term. The contributing spouse uses his or her
contribution room and benefits from the tax deduction when making a
contribution, but the RRSP belongs to the annuitant spouse.
Value to family unit

A couple generally uses a spousal RRSP when they expect one spouse will
have a lower income than the other during their retirement years. Using a
spousal RRSP while accumulating wealth helps shift future income to the
spouse who is expected to have a lower income during retirement. This
shift of future income can help reduce the couple’s overall tax liability
during retirement and increases tax planning opportunities for a family
unit.
While the pension income splitting rules appear to achieve a similar result,
a spousal RRSP creates far more certainty because the plan to income split
is put into action immediately when the contribution is made. Contributions
become the property of the RRSP annuitant (generally the spouse who is
anticipated to have the lower income during retirement). A spousal RRSP
remains a spousal RRSP forever.
The pension income splitting rules arise because of the generosity of the
government in power and, in many senses, they have a political
undertone. The rules are designed to benefit a specific segment of voting
taxpayers. The end of pension income splitting could occur at any time,
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without notice. For example, a change in political parties, a downturn in

the Canadian economy or an assessment that pension income splitting is
too costly are examples of reasons that could prompt the government to
eliminate the benefit. As such, a spousal RRSP can create certainty for the
couple that is not available through the pension income splitting rules.
And, if retirement results in income levels different than anticipated, the
pension income rules also include a spousal RRSP.
Withdrawals
A withdrawal from a spousal RRSP is included as income to the annuitant
(non-contributing spouse), unless the timing of the withdrawal falls within
the RRSP spousal attribution rules.
Attribution rules
There are specific attribution rules associated with spousal RRSPs. Only the
annuitant (non-contributing spouse) may withdraw assets from a spousal
RRSP. However, those withdrawals are attributed to the contributing
spouse when contributions were made in the current or prior two taxation
years. In that case, the contributing spouse must include in his or her
income the lesser of:
 The amount withdrawn from the spousal RRSP
 The amount of any contribution made to any spousal RRSP during the
current or two immediately preceding years
The purpose of including attribution rules is to ensure that the spousal

RRSP is used for its intended purpose of retirement savings, not as a
short-term income splitting opportunity.
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Tax-Free Savings Account

While individuals cannot make a direct contribution into their spouse’s or
common-law partner’s Tax Free Savings Account (TFSA), they are
permitted to give their spouse or common-law partner money to make
their own contribution. Since there is no income realized by a plan holder
of a TFSA, there is no income that can be attributed to the gifting spouse.
Value to family unit

Contributing to a TFSA reduces the amount of investment income exposed
to annual taxation. To measure the tax savings, consider the type of
investment income the gifting spouse foregoes and multiply these amounts
by his or her effective marginal tax rates.
EXAMPLE
Mary gave her spouse, Louise, $25,000 so she could top up her TFSA. The income
earned in Louise’s TFSA is not taxable, therefore there is no income to attribute to
Mary.
Mary now has less investment income to report, and Louise’s TFSA has more
investment earnings.
Assume Mary’s effective marginal tax rate is 40% on dividends and 25% on capital
gains, and that she could have earned a $750 dividend and a $500 capital gain on the
$25,000 she gifted to Louise.
If Mary has reduced her income by $750 of dividend income and $500 of capital gain,
the income tax savings is $425. This savings is derived as $750 of dividend income
taxed at a marginal rate of 40% plus $500 of capital gain taxed at a marginal rate of
25%.
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Registered Education Savings Plan

A RESP is a savings account available for parents who want to save for
their child’s post-secondary education. While parents are often the
subscriber and contributor for the RESP, it is also common for a
grandparent to fulfil the role of subscriber and/or contributor.
Potential value
A RESP provides the opportunity for parents and grandparents to split
income with their children and grandchildren. Contributing to a RESP
reduces the contributor’s capital base and, by extension, the contributor’s
investment income. The investment income earned inside the RESP is not
taxable while retained within the plan. Eventually, when withdrawals are
made from the plan, they are taxed to the child (or grandchild) and the
attribution rules do not apply to this income.
To measure the tax savings, consider the type of investment income the
contributing family member foregoes and multiply these amounts by his or
her effective marginal tax rates.
Suitability of strategy
The suitability of this income splitting strategy should take into account
some or all of the following points:
 The effective marginal tax rates of the contributor at the time the
contribution is made, throughout the deferral period and when
withdrawals occur
 The type of investments the contributor foregoes
 The marginal tax rate of the student when withdrawals occur
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 The risk of creditors seizing the contributor’s assets if not contributed

to the plan
 The risk of creditors seizing the student’s assets
 The costs and fees associated with the plan
 Investment earning opportunities that might otherwise be available
Registered Disability Savings Plan

A Registered Disability Savings Plan (RDSP) is a savings plan designed for
the benefit of individuals who are eligible for the disability tax credit. The
RDSP allows parents and others, often family members such as
grandparents or uncles and aunts, to contribute to the plan for the benefit
of an individual with a disability.
The overall lifetime maximum for contributions to an RDSP is $200,000.

There is, however, no annual contribution limit. A parent or the beneficiary
may open the plan, but others can contribute to the plan. The only
requirement for contributing is written permission from the plan holder.
Contributions to the plan are not tax-deductible and can be made until the
end of the year in which the beneficiary turns age 59. Earnings and growth
accrue tax-deferred in the plan. The plan also offers families an
opportunity to supplement the plan with Canada Disability Savings Grants
and Canada Disability Savings Bonds for RDSP beneficiaries age 49 and
under.
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Module 9: Taxation
Potential value
By contributing to an RDSP, a parent or grandparent (or aunt, uncle, even
a close family member) reduces their capital base and, by extension, their
investment income. To measure the tax savings, consider the type of
investment income the contributing family member foregoes and multiply
these amounts by his or her effective marginal tax rate.
Suitability of strategy
To evaluate the suitability of this income splitting strategy, consider:
 The effective marginal tax rate of the contributor at the time the
contribution is made, throughout the deferral period and when
withdrawals occur
 The type of investments the contributor foregoes
 The marginal tax rate of the RDSP beneficiary when withdrawals occur
 The risk of creditors seizing the contributor’s assets if not contributed

to the plan
 The risk of creditors seizing the beneficiary’s assets
 The costs and fees associated with the plan
 Investment earning opportunities that might otherwise be available
Income splitting summary

Table 16 shows examples of opportunities an individual may have to split
income with another family member. This is a general summary, not an
exhaustive list. Each strategy should be fully evaluated relative to the
specific circumstances.
320
Module 9: Taxation
Table 16: Summary of Income Splitting Opportunities
Spouse
Post- Mid-
or Individuals
Minor secondary years
Common- with
Children and
law Students Disabilities
Seniors
Partner
Prescribed X
X X X X
rate loan (via
trust)
RESP X X
RDSP X
Pension
income X
splitting
CPP/QPP
pension X
sharing
Spousal
X X
RRSP
Second-
generation X X X X
income
Capital gains X X
321
Module 9: Taxation
Taxation for First Nations people of Canada

Aboriginal people are subject to the same tax rules as other Canadian
residents unless their income is eligible for the tax exemption under the
Indian Act. To be eligible for exemption, the taxpayer must register as an
Indian, which is a defined term within the Indian Act. Throughout the
following discussion, reference to the term Indian aligns with the legal
meaning as defined within the Indian Act.
Employment income
Employment income is exempt if that income is situated on the reserve.
The employment must be connected to the reserve to be exempt. This
means that an Indian living off the reserve but working for an employer
resident on the reserve would be exempt. Pro-rating is possible when
some of the duties are connected to the reserve.
Business income
A series of factors arising from common law principles are used to evaluate
the tax-exempt status of business income. The factors are used to
evaluate the connection of the income to the reserve. The most significant
factor is the location where the business carries on its revenue-generating
activities. When activities take place on the reserve, the location of
customers becomes an important consideration, along with a series of
other less important factors that include:
 Whether the recipient of the business’s services or products lives on the

reserve
 Whether the income recipient maintains an office on a reserve or takes

business orders from a location on the reserve
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Module 9: Taxation
 Whether the books and records of the business are kept on the reserve
 Whether the administrative and clerical activities of the business,

including accounting, take place on the reserve
Business income is generally exempt from income tax if the income-

earning activities of the business are located on the reserve. When
business activities are located entirely on the reserve, business income is
generally exempt from income tax. If, however, the business activities
take place mostly off the reserve and the income is generated from
customers not situated on the reserve, that income could be considered
taxable and not exempt.
The Indian Act also allows for pro-rating if the revenue-generating

activities take place both on and off the reserve. The on-reserve portion of
income may be tax-exempt, while the off-reserve portion is taxable. Of
significance is the fact that the Canada Revenue Agency generally permits
the allocation of business expenses in the same ratio as the income, unless
there is substantive evidence to support a different allocation.
Partnership income, income from a commercial fishing business and

farming income are all taxed in a similar manner to business income. The
factors used to evaluate the connection to the reserve will reflect the
nature of the activities undertaken.
Interest income
Interest income is exempt if that income arises from an on-reserve
investment. This has been interpreted to mean that the investment must
have been made on the reserve at a bank branch, investment office or
financial institution that is physically located on the reserve, and paid at
the on-reserve location. In addition, if it is a GIC or term deposit, the
323
Module 9: Taxation
interest must be fixed or able to be calculated at the time the investment

occurs.
Capital gain
The gain on the disposition of capital property located on a reserve is tax-
exempt. If, however, the gain arises from the disposition of business
assets that were used to generate both exempt and non-exempt income,
pro-rating of the gain is acceptable.
All taxpayers are required to file an income tax return when there is a
disposition of capital property, regardless of whether the disposition is
taxable, exempt or a combination of both. To be clear, all dispositions
must be reported on an income tax return filed by the taxpayer.
Dividend income
An Indian who is a shareholder of a corporation that operates only on a
reserve can receive dividend income that is exempt from income tax. For a
corporation to qualify as being located on the reserve, the head office
management and principal income-generating activities of the corporation
must all be situated on the reserve.
Rental and other income from property

When an Indian earns rental income or other income from property, this
income can be exempt under pre-defined circumstances. The rental
income must be from a property physically located on the reserve. The
rental of moveable property to someone off the reserve when the property
is generally stored on the reserve is considered off-reserve income and is
taxable.
324
Module 9: Taxation
Royalty income
The taxation of royalty income depends on where the right is exploited or
can be enforced. If these rights are on-reserve, the related royalty income
is exempt from income tax; otherwise, the income is taxable.
RRSP
Recall that to create RRSP contribution room, a taxpayer must have
eligible earned income.
Indians who earn taxable income create RRSP contribution room and are
subject to the normal RRSP rules. However, when Indians earn only
exempt income, contributions to an RRSP cannot be deducted. In such a
case, withdrawals from original RRSP contributions are not taxable. Note,
however, because exempt income does not create RRSP contribution room,
an Indian will pay a penalty under Part X.1 of the Act, when making non-
deductible contributions to an RRSP.
Old Age Security benefits

Old Age Security and Guaranteed Income Supplement benefits are not
eligible for any exemption under the Indian Act and follows the normal
rules. The reason these payments are not eligible for exemption is that
these sources of income do not have a connection to the reserve, and
simply living on-reserve is not a significant connection. This makes Old Age
Security taxable income.
325
Module 9: Taxation
Income from the United States

United States social security benefits and pension income from the United
States are taxable and not eligible for exemption under the Indian Act,
even when the recipient lives on a reserve.
Support payments
Support payments (spouse, common-law partner, child) received by an
Indian resident on the reserve are exempt from income tax. The Canada
Revenue Agency suggests that when these payments are received by an
Indian who does not reside on a reserve they may be taxable; however,
the worst case would be that the payments align with the regular income
tax rules.
Trust income
Trust income earned by a trust is taxable. An Indian beneficiary receiving
trust income is taxable on the income except when the trust income paid
to the Indian beneficiary can be shown to have a connection to the reserve
(i.e., it is earned on the reserve as discussed in relation to property and
business income).
Payroll deductions
Income tax deductions do not apply to income that is exempt under the
Indian Act. An Indian may request that the employer waive the deductions
at source for exempt payroll.
326
Module 9: Taxation
Employment and self-employment income that is exempt is also exempt

from Canada Pension Plan (CPP) contributions. Note, however, that either
the employer or employee may elect to participate in the CPP.
Since Employment Insurance (EI) is not a tax, it is not exempt, and

employment income earned is subject EI withholding. Note that EI benefits
received by an Indian are exempt from income tax when the benefits
relate to employment that was exempt.
While income earned and paid to an Indian may qualify as exempt income
for income tax purposes, the employer must still report the income on a T4
slip. Employees who qualify for tax-exempt earnings do not need to report
the income when filing their income tax return, except if there are
pensionable earnings when an employer has elected to cover exempt
employment income under the CPP.
GST/HST
An Indian purchasing goods or services on the reserve is exempt from the
goods and services tax (GST) or harmonized sales tax (HST). As well,
services performed off the reserve, but which relate to real property
interests located on a reserve, are exempt from GST/HST.
A non-Indian purchasing goods or services on the reserve must pay

GST/HST.
An Indian purchasing goods off of the reserve must pay GST/HST, except if
the good is delivered to the reserve by the vendor. The requirement that
the vendor must delivered the good may be waived for stores in remote
locations.
As well, Ontario has a process in place that provides for an exemption for
the provincial portion of HST when an Indian makes off-reserve purchases.
327
TAXATION
Financial Services professionals are expected to possess knowledge to allow them to
complete and interpret an individual’s basic personal tax return, including identifying and
explaining the income tax assessment rules for individuals, explaining the tax implications
of how different types of income received by individuals may be taxed, and identifying the
tax deductions and credits for which an individual may be eligible. They should further be
able to identify and estimate the benefit of engaging in foundational income splitting
strategies.
Taxation is one of twelve modules in the Advocis Core Curriculum Program for CFP®
and QAFP™ Certification.

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Advocis Core

Advocis Core Curriculum Program for

About the Advocis Core Curriculum Program

Working with industry experts, Advocis has developed an FP Canada

comprehensive exam. By focusing on the most important concepts and

About the Certified Financial Planner (CFP) Certification

Qualifying to take FP Canada’s CFP Examination is a demanding process,

This Advocis Core Curriculum Program is an accredited qualifying program

Advocis Core Curriculum Program, 2020 Edition

James W. Kraft, CPA, CA, MTAX, TEP, CFP, CLU

Deborah Kraft, MTAX, LLM, TEP, CFP, CLU

Legislation in-force, Summer 2019

With past contributions from:

Michael Callahan, B.Sc., CHS, CIM, CFP

Jamie Aldcorn, CPA, CA, CFP, MBA, M.Ed.

Robert Ransom, CLU, ChFC

Income tax ..................................................................................... 10

GST, HST and sales tax .................................................................... 11

Property tax .................................................................................... 12

Income taxation structures ............................................................... 13

Effective marginal tax rate ................................................................ 19

Fair market value ............................................................................. 21

Liquidity of assets ............................................................................ 24

Definition of child ........................................................................... 26

INCOME TAX ADMINISTRATION ..................................................... 32

Resident of Canada ......................................................................... 32

Primary factors ................................................................................ 33

Part-time resident ............................................................................ 37

Dual resident ................................................................................... 38

The federal departments ................................................................... 41

Municipal and regional governments ................................................... 42

Concept of tax planning .................................................................. 42

Tax minimization ............................................................................. 43

Tax deferral .................................................................................... 43

General Anti-Avoidance Rule ............................................................. 45

Sources of tax information ............................................................. 46

Other sources of information ............................................................. 46

Types of taxpayers ......................................................................... 47

Requirement to file a tax return ..................................................... 48

Who should file? .............................................................................. 49

Tax return filing dates .................................................................... 50

Self-employed taxpayer and spouse ................................................... 52

Assessment and appeals ................................................................ 58

Amending a tax return...................................................................... 62

Due dates ....................................................................................... 63

Alternative minimum tax ................................................................ 64

Tax refunds ..................................................................................... 68

PERSONAL INCOME TAX ................................................................. 70

Income tax calculation ................................................................... 72

Employment income ......................................................................... 79

Non-taxable benefits ...................................................................... 103

The financial planner ...................................................................... 118

Pension and retirement income ........................................................ 124

Registered annuities ....................................................................... 125

Pension income splitting ................................................................. 125

RRSP, PRPP and RPP contributions ................................................... 183

Annual union, professional, or like dues ............................................ 185

Disability supports deduction ........................................................... 190

Allowable business investment losses ............................................... 192

Support payments ......................................................................... 197

CPP/QPP contributions on self-employment ....................................... 199

Other employment expenses ........................................................... 200

Social benefit repayment ................................................................ 204