ADMS 4562 Lecture 13: 3520-7-updated 2014
11 May 2018
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3520-7: Last updated on October 21, 2014 1-11
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
1 Lecture 7: Taxable Income and Tax for Individuals
1.1 Coverage
▪ Exercises 4-1 to 4-9, 4-11 to 4-13, 4-15 to 4-22
▪ Self-Study Problem 4-1
▪ Self-Study Problem 4-2
▪ Self-Study Problem 11-4 and 11-5
2 Overview of Computation of Taxable Income and Tax for Individuals
▪ The basic calculation of taxable income and tax for individuals is as follows:
▪ Division B Net Income
▪ - Division C Deductions
▪ = Taxable Income
▪ x Tax Rates
▪ = Tax owing (before tax credits)
▪ - Tax Credits
▪ = Federal Tax
▪ + Provincial Income Tax
▪ Total Income Tax
3 Division C Deductions [CTP 4-4 to 4-12]
3.1 ITA 110(1)(d), (d.1) Stock option deduction
▪ deduction for 50% of ITA section 7 stock option benefit (see lecture 2 notes)
3.2 ITA 110(1)(f) Deduction for social assistance and other similar payments
▪ Payments covered are: welfare; workers compensation, guaranteed income supplement (GIS)
▪ These payments are included in net income under other income [ITA 56(1)(a),(u) & (v)] but
are not included in taxable income
▪ Therefore they are not taxed but are taken into consideration in the computation of net income
(which can affect various tax credits and benefits)
3.3 ITA 110(1)(j) Home relocation loan deduction
▪ for a dwelling that is at least 40 km closer to the new work location [ITA 248(1)], a deduction
from taxable income equal to lesser of:
▪ the employment income benefit, calculated by applying the prescribed interest rate that is
applicable to each quarter that the loan is outstanding [ITA 80.4(1)(a)]. Note: when
computing the prescribed interest benefit for a home relocation loan you can use the
3520-7: Last updated on October 21, 2014 2-11
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
prescribed interest rate in effect when the loan was granted (for the entire year) if it results
in a lower amount [ITA 80.4(4)]. The amount of the benefit is reduced by any payments
made by the employee during the year or within 30 days of the end of the year [ITA
80.4(1)(c)]; and
▪ the interest benefit on a $25,000 housing loan – using the lesser of the prescribed rate and
the rate in effect at the time the loan is made
▪ Note: the 110(1)(j) deduction is only available in the first 5 years of a loan
▪ read 4-9 to 4-12 carefully
3.4 ITA 110.6 Capital Gains Exemption
▪ this is a lifetime deduction of $800,000 available for each individual for capital gains realized
from the sale of shares of qualified small business corporations (incorporated small businesses
that meet certain criteria) and qualified farming and fishing properties. Discussed further in
ADMS 4562
3.5 ITA 111 Loss carryovers from other years
▪ Loss carryovers are losses from another taxation year “carried over” as a deduction in
computing the taxable income of the current taxation year
▪ There are two main types of loss carryovers:
▪ Non-capital losses
▪ losses from a source other than allowable capital losses
▪ they can be carried back 3 years, forward 20 years if losses incurred in taxation years
ending after 2005, 10 years if losses incurred in taxation years ending after March 22,
2004 but before 2006 and 7 years if losses incurred in taxation years ending before
March 23, 2004
▪ Net capital losses
▪ allowable capital losses in excess of taxable capital gains
▪ can be carried back 3 years and/or carried forward indefinitely. Can only be used
against taxable capital gains
4 Calculation of Taxes Payable [CTP 4-14 to 4-31]
▪ Since 2000, we have had full annual indexing of tax brackets and credits based on the
Consumer Price Index (CPI; i.e., an official estimate of the rate of inflation)
▪ This means that most tax brackets and tax credits change each year, as does the threshold for
the Old Age Security and EI clawback
▪ Indexing for inflation is important
▪ From 1986 to 1999, the tax system was only partially indexed for inflation in excess of
3% and, because inflation was < 3% from 1992 to 1999, this resulted in no indexing at all
for those years
▪ The law changed to restore full indexing in 2000
3520-7: Last updated on October 21, 2014 3-11
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
4.1 Federal Tax Brackets
▪ For 2014:
▪ Taxable income up to $43,953: 15%
▪ more than $43,953 but up to $87,907: $6,593 plus 22% on taxable income in excess of
$43,953
▪ more than $87,907 but up to $136,270: $16,263 plus 26% on taxable income in excess of
$87,907
▪ more than $136,270: $28,837 plus 29% on taxable income in excess of $136,270
4.2 Provincial Taxes
▪ Individuals also pay personal tax to the province they live in at the end of the year (i.e., on
December 31st)
▪ Each province has their own rate schedule and list of tax credits but, for the most part they are
similar (but generally not identical to the federal credits)
▪ Only Alberta is significantly different because they have a flat tax
▪ Note the difference in rates at 4-23
5 Credits against Tax Payable [CTP 4-32 to 4-35]
▪ Most personal credit amounts are multiplied by the lowest marginal tax rate to determine the
tax credit (so that low-income taxpayers get the same tax credit as wealthy taxpayers)
▪ Most are indexed by the CPI
▪ The credits that are not indexed are the pension, charitable, political and education credits
▪ Sometimes taxpayers have more credits than tax
▪ If this is the case, only the amounts for charitable donations, tuition and education (and to
some extent, medical expenses) can be carried forward. The rest will be lost, i.e., they won’t
be able to be used or carried forward. This is because most personal tax credits are non-
refundable which means that they can only bring taxes owing to zero (not to a negative
number that would result in a tax refund)
▪ See discussion on the new Family Caregiver Amount (FCA) at CTP 4-37 to 4-40. The FCA is
a $2,058 additional credit for each qualified dependent who is dependent by reason of a
physical or mental infirmity (the test for children < 18 is slightly different…see CTP 4-39).
As you will see, the FCA increases each of the following credits by $2,058: spousal credit;
spousal equivalent (i.e., eligible dependent) credit; child tax credit; caregiver credit; or infirm
dependent credit
5.1 Basic personal amount [ITA 118(1)(c)]
