1. Chapter 10 Computation of Taxable Income and Taxes Payable for Individuals 1

2. Calculation of Taxable Income Division B Subsection 3(1) Net Income for Tax Purposes Division C deductions Sections 110–114.2 Subsections 2(1), 2(2) Division E & E.1 Sections 117–127.55 Tax Liability Taxable Income 2

3. Division C Deductions ITA ReferenceDivision C Deductions 110(1)(d)Employee stock option deduction 110(1)(f)Social assistance receipts 110(1)(j)Home relocation loan 111(1)(a)Non-capital loss carryovers 111(1)(b)Net capital loss carryovers 111(8)Farm loss 110.6Capital gains deduction 3

4. Stock Option Deduction Division C deduction = 50% of benefit Non-CCPCCCPC If: FMV at date option granted ≤ exercise price Or Shares held ≥ 2 years from date of purchase (except for deemed disposition at death) Timing of deduction Purchase Disposition or deemed disposition 4

5. Deduction for Certain Receipts Payments included in Division B but not intended to be taxed are deducted under Div. C –Guaranteed Income Supplement, –Social assistance payments, –Workers’ compensation, and –Amounts that are exempt from tax by virtue of a tax treaty. 5

6. Home Relocation Loan “Loan used to acquire a home which is at least 40 km closer to an employee’s new work location than his/her older residence.” Deduction is least of: a)Interest on the whole loan as computed using the “lesser of” rule minus interest paid during that year and 30 days thereafter; b)Interest on $25,000 loan using the “lesser of” rule, but restricted to a max. of 5 years; and c)Total benefits from all low-interest or no-interest loans. 6

7. Loss Carryovers Non-capital loss carryover –If current year’s loss from non-capital sources exceeds income from all other sources in the current year Carry Back Carry Forward For taxation years ending before March 23, 2004 37 For taxation years ending after March 23, 2004 and before 2006 310 For taxation years ending 2006 and later 320 7

8. Loss Carryovers Net Capital Loss Carryovers –Excess of allowable capital losses over taxable capital gains for that particular year plus ABILs not absorbed in the 10-year carryforward period –Carried back three years, forward indefinitely YearsInclusion Rate 1972–1987 ½ 1988, 1989 ⅔ 1990–Feb. 27, 200 ¾ Feb. 28, 2000–Oct. 17, 2000 ⅔ After Oct. 17, 2000 ½ 8

9. Farm Loss Farming as a chief source of income Sideline farming business Hobby farm loss 9

10. Capital Gain Deduction $750,000 of capital gains can be sheltered on qualified small business corporation shares, qualified farm property, or qualified fishing property. Note: The March 21, 2013 federal Budget proposes to increase the capital gains exemption limit to $800,000 starting in 2014. The exemption will be indexed for 2015 and future taxation years. 10

11. Ordering of Division C Deductions As outlined in section 111.1, deductions under Div. C are deducted in the following order: Sec. 110Other deductions Sec. 110.2Lump-sum payments Sec. 111Loss carryovers (oldest should be applied first) Sec. 110.6Capital gains deduction Sec. 110.7Residing in prescribed zone 11

12. Taxable Income of Non-Residents Part-year residence –Entitled to Division C deductions reasonably applicable to the period of part-year residence Non-residents –Pay tax on their “taxable income earned in Canada” –Division C deductions may be claimed as appropriate to Canadian-source income 12

13. Computation of Tax for Individuals 2013 Federal Income Tax Brackets Taxable IncomeTax $43,56115% In excess of $43,561$6,534 + 22% on next $43,562 In excess of $87,123$16,118 + 26% on next $47,931 In excess of $135,054$28,580 + 29% on remainder 13

14. Summary of Income Tax Calculation Total federal income tax on taxable income$xxx Subtract:Total non-refundable tax credits$xxx Federal dividend tax creditxxx Basic Federal Tax$xxx Subtract:Federal foreign tax creditxxx Federal tax$xxx Subtract:Federal political contributions tax credit$xxx Other federal tax creditsxxx Net federal tax$xxx Add:Tax on Old Age Security Benefitsxxx Total federal tax$xxx Add:Provincial tax$xxx Provincial surtaxxxx Total Payable$xxx 14

15. Summary of Income Tax Calculation Total payable$xxx Subtract:Total income tax deducted at source$xxx Federal refundable tax creditsxxx Tax paid by instalmentsxxx Provincial refundable tax creditsxxx Balance payable or refundable$xxx 15

16. Types of Non-Refundable Tax Credits Basic personal amount Spousal amount Equivalent-to-spouse Infirm dependent children Child amount Additional personal amounts Caregiver amount Age amount Canada employment amount Adoption expense amount Public transit tax credit Children’s fitness amount Children’s arts tax credit First-time home buyer’s tax credit Volunteer firefighters tax credit CPP or QPP contributions EI premiums Pension income amount Mental/physical impairment amount Disability amount transferred from a dependant other than spouse Tuition, education, and textbooks amounts Tuition, education, and textbooks amounts transferred Amounts transferred from spouse Medical expense Charitable gifts (donations) First-time donor’s super credit Interest paid on student loans Dividend tax credit 16

17. Section 118 Tax Credits A x B Where: A is the lowest % rate of individual tax (i.e., 15% for 2013), and B is the aggregate of the following tax credit bases: (a) married or common-law status; (b) wholly dependent person; (b.1) child amount; (c) single status; (c.1) in-home care of relative; (d) infirm dependants; and (e) additional amount (dependant). 17

18. Non-Refundable Tax Credits Basic personal tax credit (single status) –Tax credit base (2013) - $11,038 Married or common-law partnership credit –Tax credit base (2013) - $11,038 less spouse’s Div. B income 18

19. Non-Refundable Tax Credits Equivalent-to-married status for wholly dependent person credit –$11,038 less Div. B income of dependant –Dependant must: Live with the taxpayer and be wholly dependent for support from taxpayer Be related to the taxpayer by blood, marriage, or adoption Be under 18 years of age or be mental or physically infirm unless dependant is parent or grandparent of taxpayer Not be claimed as equivalent-to-married by another taxpayer Be resident of Canada –Taxpayer cannot be entitled to married credit –Taxpayer can claim only one credit each year 19

20. Non-Refundable Tax Credits Child amount –$2,234 x 15% = $335 for each child under 18 Caregiver credit for in-home care of relative –15% x [$4,490 – (Dependent’s Div. B - $15,334)] –For relative who is dependent due to mental or physical infirmity or a parent/grandparent who has reached age of 65 –If equivalent-to-spouse claimed for a dependant, caregiver cannot be claimed –Only one caregiver credit allowed each year 20

21. Non-Refundable Tax Credits Infirm dependant credit –15% x [$6,530 – (Dependant’s Div B - $6,548)] –Dependant must be: A child, grandchild, parent, grandparent, brother/sister, uncle, aunt, niece, or nephew of taxpayer or taxpayer’s spouse > 18 years of age Dependent on taxpayer due to mental/physical infirmity 21

22. Non-Refundable Tax Credits Age credit –15% x $6,854 –Taxpayer must be at least 65 Pension income amount –15% of the lesser of: 1.$2,000, and 2.The “pension income” (or “qualified pension income” if taxpayer under 65) 22

23. Non-Refundable Tax Credit Canada employment credit –15% x lesser of: Individual’s employment income for the year, and $1,117. 23

24. Non-Refundable Tax Credits Adoption Expense Tax Credit –15% × $11,669 Public Transit Passes Credit Children’s Fitness Credit –15% × (up to $500) for children under 16 Children’s Arts Tax Credit –15% ×(up to $500) for children under 16 First-Time Home Buyer’s Credit and Disability Home Purchase Credit –15% × $5,000 Volunteer Firefighters Tax Credit –15% × $3,000 24

25. Charitable Gifts Credit 15% of the first $200 and 29% of gifts in excess of $200 Eligible donations limited to 75% of Div. B income Five-year carryforward 25

26. First-time donor’s super credit Proposed in March 21, 2013 Budget –An additional 25% non-refundable credit for first-time donors on up to $1,000 of donations as a supplement to the regular charitable donation tax credit –Subject to a number of conditions 26

27. Medical Expense Credit A x [(B – C) + D] Where: Ais 15% Bis medical expenses for individual, spouse and children < 18 Cis the lesser of: $2,152 (2013), and 3% of individual’s net income Dis the lesser of: $10,000, and E – F where: Eis the total medical expenses incurred by taxpayer on behalf of any other dependant, and Fis the lesser of: $2,152 (2013), and 3% of other dependant’s net income 27

28. Medical Expense Credit Qualifying expenses listed in ITA Expenses can be incurred in any 12-month period ending in the year 28

29. Disability Tax Credit 15% x $7,697 for 2013 For taxpayers who have “one or more severe and prolonged impairments in physical or mental functions” Must be certified by medical doctor Supplement ($4,490) for disabled child under 18 Transfer available 29

30. Tuition, Education, and Textbook Credits Tuition Fees –15% × eligible tuition fees Education Credit –Full-time: 15% × $400 × number of qualifying months –Part-time: 15% × $120 × number of qualifying months Textbook Credit –Full-time: $65 × number of qualifying months –Part-time: $20 × number of qualifying months 30

31. Tuition, Education, and Textbook Credits Indefinite carryforward Transfer to spouse/common-law partner and parent/grandparent –Must designate in writing amount transferred –Amount transferred is lesser of: a)Lesser of: a)$750, and b)Students tuition credit and education credit for the year Less student’s Part I tax payable after deducting certain credits b)Amount designated by student to transfer. 31

32. Credit for EI and CPP 15% credit of: –EI premiums payable by individual –CPP/QPP contributions by individual 32

33. Transfer of Unused Credits to Spouse or Common-Law Partner Transferable credits include: –Tuition, education, and textbook credits –Age amount –Pension income amount –Mental or physical impairment credit –Child amount 33

34. Dividend Tax Credit Non-refundable tax credit available to individual at either: –2/3 of the gross-up on dividends paid before 2014 by CCPC from income subject to tax at the low corporate tax rate applicable to ABI and AII; –13/18 of the gross-up applies to dividends paid after 2013 by a CCPC from income subject to tax at the low rate applicable to ABI and AII; and –6/11 of the gross-up applies to dividends paid out of income taxed at the general corporate rate by: A public corporation resident in Canada, and A CCPC. 34

35. Dividend Tax Credit Alternative Calculations Source of Dividend CCPC, on income taxed at the low rate (before 2014) CCPC, on income taxed at the low rate (after 2013) Canadian- resident public corporation or other on income taxed at general rate (2010) Fraction of gross- up 2/313/186/11 Fraction of dividend paid 16 2/3%13%20.7% Fraction of grossed up dividend 13 1/3%11% (rounded)15% (rounded) 35

36. Dividend Tax Credit Provincial Rates (for purposes of textbook) –1/3 where the 25% gross-up applies for dividends before 2014, –5/18 where the 18% gross-up applies (for dividends paid after 2013), and –5/11 where the 38% gross-up applies 36

37. Election to Transfer Dividends to Spouse Subsection 82(3) Election –If spouse/common-law partner cannot use the dividend tax credit due to low income –Only available if married personal tax credit claimed by higher income spouse is increased or created by transferring the dividend income in this way –If election made, taxpayer must include grossed-up dividend transferred from spouse but may claim the dividend tax credit 37

38. Credits for Part-Year Residents Tax credits prorated for number of days individual is resident: –Basic personal amount, married amount, equivalent-to-married amount, dependant amount, and caregiver amount; –Age amount; –Disability amount, either for the taxpayer or transferred from a dependant; –Unused credits transferred from a spouse; and –Unused tuition and education amounts transferred from a child or grandchild. All other personal amounts may be fully claimed if they relate to the period of residence. 38

39. Credits for Non-Residents Tax credits for the following amounts may be deducted: –Charitable donations –Impairment amount for the taxpayer, but not for a dependant; –Tuition credit; and –EI, CPP (or QPP) credits. 39

40. Ordering of Credits Section 118.92 outlines ordering rule for computing basic federal tax payable 40

41. Income Not Earned in a Province Surtax of 48% imposed on federal tax of an individual applicable proportionally to income for the year not earned in a province. 41

42. Credit for Employment Outside Canada Available for employee who is employed outside of Canada temporarily but will be phased out over 4 years starting in 2013 Tax credit based on the proportion of tax otherwise payable. Fraction is lesser of: –$80,000, prorated on a daily basis, and –80% of the employment income attributed to those specified duties, to his/her income; Reduced by: –Certain deductions provided in Division C 42

43. Refundable Tax Credits Refundable GST/HST Credit Refundable Medical Expense Supplement Refundable Canada Child Tax Benefit Working Income Tax Benefit (WITB) 43

44. Foreign Tax Credits Resident of Canada subject to tax on worldwide income To prevent double taxation on foreign income (in foreign country and in Canada), foreign tax credit provided 44

45. Foreign Tax Credit Foreign non-business tax credit is lesser of: a)Non-business income tax paid to a foreign country, and b) 45 Net non-business foreign income Included under Division B Total income included under Division B net of certain adjustments Tax for the year otherwise payable under Part I ×

46. Foreign Tax Credit Foreign business tax credit is lesser of: a)Business income tax paid to a foreign country, and b) –Any business income tax paid but not deducted is available as an “unused foreign tax credit” to be carried back 3 years and forward 10 years 46 Net business foreign income included under Division B Total income included under Division B net of certain adjustments Tax for the year otherwise payable under Part I ×

47. Federal Political Contribution Tax Credit Available on contributions to –A registered federal political party, or –A candidate for election to the House of Commons Maximum credit: $650 (reached with a contribution of $1,275 or more) 47

48. Tax on Old Age Security Benefits Part I.2 tax –Results in repayment of federal Old Age Security benefits –Computed as the lesser of: 48 (a) Old Age Security benefits $xxx (b) Income under Div. B without par. 60(w) deduction $ xxx Less:70,954 Excess, if any$ xxx 15% of excess, if any$ xxx

49. Tax Reduction on Retroactive Lump-Sum Payments Reduction of tax available on the following lump- sum payments: –Income from an office/employment/income received because of termination of office/employment; –Superannuation/pension benefits; –Spouse or a child support payments; and –EI and other benefits that may be prescribed by regulations. 49

50. Minimum Tax To prevent some high-income individuals from taking advantage of tax incentives to shelter virtually all of their income. Calculated as: A × (B – C) – D Where: A is 15% B is adjusted taxable income C is the basic exemption ($40,000) D is the basic minimum tax credit 50

51. Minimum Tax Adjusted taxable income is taxable income but –Add: Portion of loss from certified film/videotape properties Losses on resource properties 30% of excess of capital gains over capital losses for the year 3/5 of employee stock option deductions Home relocation loan deduction and Losses of investments from tax shelters –Deduct: Gross-up of Canadian dividends Non-deductible fraction of ABIL claimed in the year 51

52. Minimum Tax Basic Exemption: $40,000 Basic minimum tax credit –Sum of tax credits (sec. 118) that may be deducted in computing tax payable under Part I of Act –Does not include dividend tax credit or political donation credit –Allowed a special foreign tax credit Minimum carryforward – seven years 52