Chapter 11
TAXABLE INCOME AND TAX PAYABLE
FOR INDIVIDUALS REVISITED
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From Net To Taxable Income
Employment
Income
Business and
Property
Income
Net Taxable
Capital Gains
Other Sources
of Income
Other
Deductions
from Income
Division C
Deductions
Taxable Income
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From Net To Taxable Income
• Specific Deductions
– Employee Stock Options
– Deductions For Payments
– Lump-Sum Payments
– Lifetime Capital Gains Deduction
– Residing In Prescribed Zone
– Carry Over Losses Deductible
• Some of these were covered in Chapters 3 and 4
(Lump-sum payments and losses are covered here)
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Lump-Sum Payments
• An income averaging provision
• Qualifying amounts
– Spousal and child support, pension benefits, and EI benefits
– Payments on termination of employment
• Relief mechanism
– Qualifying amounts removed from income
– Alternative tax payable
– Notional interest is added
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Treatment Of Losses
• Losses must be used in year incurred, if possible
– May not have enough income
– May not have right type of income
(e.g., capital gains required to use capital losses)
• Carry backs
– Will result in refund
• Carry forward
– Will result in reduced Tax Payable
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Treatment Of Losses
• Using loss carry overs
– Should not result in the loss of non-refundable tax credits
• Example: An individual should not use a loss carry forward or back
to reduce 2019 Taxable Income below $12,069 (the base for the
basic personal credit)
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Treatment Of Losses
• Need To Track Separate Balances
– Different Carry Over Periods
– Income Type Restrictions
• Separate Balances To Be Tracked
– Listed Personal Property Losses
– Non-Capital Losses (Including Business Investment Losses)
– Net Capital Losses
– Regular Farm Losses
– Restricted Farm Losses
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Treatment Of Losses
• Personal Use Property
– Losses Not Deductible
– $1,000 Minimum = ACB = POD
– Gains Are Taxable
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Treatment Of Losses
• Listed Personal Property
– Defined (ITA 54)
a) print, etching, drawing, painting, sculpture,
or other similar work of art;
b) jewelry;
c) rare folio, rare manuscript, or rare book;
d) stamp;
e) coin.
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Treatment Of Losses
• Listed Personal Property
– Deductible Against LPP Gains Only
(Net gain included in Net Income For Tax Purposes
Prior To The Determination Of Taxable Income)
– Carry Back 3 Years, Forward 7 Years
– $1,000 Minimum = ACB = POD
• Example: Painting with an adjusted cost base of $600 is sold for
$2,500.
• Analysis: Gain would be $1,500 ($2,500 - $1,000 minimum).
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Treatment Of Losses
Non-Capital Losses Defined
Non-Capital Loss = E – F where,
E=
The sum of employment loss,
business loss, property loss,
allowable business investment loss,
and net capital loss carry overs
deducted
F=
Income under ITA 3(c)
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Treatment Of Losses
Non-Capital Loss Example
Harry Rhodes has employment income of $20,000,
taxable capital gains of $30,000, and a business loss
of $70,000. Net and Taxable Income = Nil
Analysis
Amount E = $70,000
Amount F = $50,000 ($20,000 + $30,000)
Non-Capital Loss = $20,000 ($70,000 - $50,000)
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Treatment Of Losses
• Non-Capital Losses
– Carry Over Only Available After Current Year’s Income
Reduced To Nil
– Carry Back 3 Years, Forward 20 Years
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Treatment Of Losses
• Net Capital Losses
– Excess, if any, of allowable capital losses over taxable
capital gains
– General Rules
• Back 3 Years
• Forward For Life Of Taxpayer
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Treatment Of Losses
Example: Conversion of Net Capital to Non-Capital
Martha Stuart has employment income of $50,000, taxable capital
gains of $90,000, and a business loss of $300,000. She also has a net
capital loss carry forward of $120,000.
Non-Capital Loss Calculation
Amount E = $390,000 ($300,000 + $90,000)
Amount F = $140,000 ($50,000 + $90,000)
Non-Capital Loss = $250,000 ($390,000 - $140,000)
This leaves a net capital loss of $30,000 ($120,000 - $90,000). The
use of this loss was limited to the current year taxable capital gains.
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Treatment Of Losses
Example: No Conversion
Martha Stuart has employment income of $50,000, taxable capital
gains of $90,000, and a business loss of $300,000. She also has a net
capital loss carry forward of $120,000.
Non-Capital Loss Calculation
Amount E = $390,000 ($300,000)
Amount F = $140,000 ($50,000 + $90,000)
Non-Capital Loss = $160,000 ($300,000 - $140,000)
Leaves the net capital loss at $120,000
($160,000 + $120,000) = $280,000 = ($250,000 + $30,000)
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Treatment Of Losses
• Net Capital Losses At Death
– Against any type of income:
• In year of death
• In year preceding death
– Reduced by previous use of lifetime capital gains
deduction
– Deducted at inclusion rate from year of incurrence
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Business Investment Losses
• A Capital Loss On Shares Or Debt Of
“Small Business Corporation”
– CCPC
– Active Business
• Substantially All (90%) Of The FMV Of The Assets
• Primarily (50%) In Canada
– Includes Shares Of Other Small Business Corporations
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Business Investment Losses
• A capital loss resulting from the disposition of shares or debt
of a “small business corporation”
– A CCPC
– 90% or more of FMV of assets producing active business
income
– More than 50% in Canada
• Special Characteristic: Can Be Deducted Against Any Type Of
Income
• Deductible One-Half Amount Referred To As An
Allowable Business Investment Loss (ABIL)
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Business Investment Losses
• Must Be Deducted In Year Realized To The Extent Of Sufficient
Income
• Unused Amounts
– Non-Capital Loss Carry Over
– Back For 3 Years, Forward 10 (Not 20) Years
– After 10 Years, Reverts To Net Capital Loss Carry Forward
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ABILs
• Effect Of Lifetime Capital Gains Deduction
– Realization Of Business Investment Loss Reduces Ability To
Take Advantage Of This Deduction
– To The Extent That A Deduction Has Been Made Under
ITA 110.6, Equivalent Portion Of Loss Will Be Disallowed
– (Disallowed = Treated As Ordinary Capital Loss)
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Example: ABIL
In 2019, John Brown has an ABIL of $66,000, net taxable capital gains
of $14,000, and other non-capital sources of income of $20,000. In
previous years, he has deducted $22,500 [(1/2)($45,000)] under the
lifetime capital gains provisions.
ABIL
$66,000
110.6 In Previous Years
( 22,500)
Allowed Amount
Non-Capital Income
Unused ABIL (To Non-Capital)
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$43,500
( 20,000)
$23,500
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ABIL Example (Continued)
ITA 3(a)
ITA 3(b) ($14,000 - $22,500)
ITA 3(c)
ITA 3(d) ABIL
Net Income
$20,000
Nil
$20,000
(20,000)
Nil
Unused ABIL (To Non-Capital)
$23,500
Net Capital Losses:
Disallowed ABIL (Capital Loss)
Current Taxable Capital Gains
Net Capital Loss Carry Over
$22,500
( 14,000)
$ 8,500
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Farm Losses
• Hobby Farmers
– No losses deductible
• Full Time Farmers
– Losses deductible against any type of income
• Part Time Farmers
– Restricted farm losses (see following slide)
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Restricted Farm Losses
• Arise When:
– Reasonable Expectation Of Profit
– Not Taxpayer’s Principal Source Of Income
(Farming is a subordinate source)
• Restricted Farm Losses
– Back 3 Years, Forward 20 Years
– Only Against Farm Income
• Limit: First $2,500, plus one-half of next $30,000
– Maximum = $17,500
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Regular Farm Losses
• Regular Farm Losses
– Back 3 Years, Forward 20 Years
– Against Any Source Of Income
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Lifetime Capital Gains Deduction - History
– 1985: Introduction of the provision
– 1992: Removed for rental property
– 1994: Removed for all assets except “qualified” farm and
small business property
– 2006: Added qualified fishing property
– 2007: Increased limit to $750,000
– 2014: Limit to $800,000, plus indexing in subsequent years
– 2015: Qualified farm and fishing properties to $1,000,000
– 2019: Qualified small business shares indexed to $866,912
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Qualified Property
• Small Business Corporation Shares
• Farm Property
• Fishing Property
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Lifetime Capital Gains Deduction
• Small Business Corporation (SBC)
– CCPC
– Active Business
• Substantially All Assets (90%)
• Primarily In Canada (50%)
– Includes Shares Of Other SBC
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Lifetime Capital Gains Deduction
• Qualified SBC
– Small Business Corporation
– Not Owned By Anyone Else In Preceding 24 Months
– 50 Percent Active Business Income For 24 Months
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Maximum Deduction: Least Of
• Unused Portion Of Maximum
– $866,912 or taxable amount of $433,456
– Qualified Small Business Shares
• Deducted $50,000 in 2005 [(1/2))($100,000)]
• Deducted $28,500 in 2007 [(1/2)($57,000)]
– Balance For 2019:
$866,912 - $100,000 - $57,000 = $709,912
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Maximum Deduction: Least Of
• Annual Gains Limit (If no non-qualified capital gains)
– Net Taxable Capital Gains For Year
– Less: Net Capital Loss Carry Overs Deducted
– Less: ABILs Realized During Year (Whether Or Not Deducted)
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Cumulative Net Investment Loss (CNIL)
• Additions
– Property income (interest, rents, dividends) for individual or a
partnership of which the individual is a specified member
(limited partner)
– Income from rental properties and leasing properties
– Recapture on property, the income of which would be property
income
– One-half of the income that derives from the recapture of
exploration and development expenses
– Non-eligible portion of capital gains arising upon dispositions of
non-qualifying real property
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Cumulative Net Investment Loss (CNIL)
• Deductions
– Amounts deducted by the individual (including interest) in
computing income from property
– Losses from rental properties and leasing properties
– Interest and other financing costs deducted in computing
income from a limited partnership interest
– Losses allocated to the individual by a limited partnership
– One-half of amounts deducted for exploration and development
expenses that have been allocated by a corporation (flow
through shares) or an interest in a limited partnership
– Net capital loss carry overs deducted against non-eligible
portion of gains on non-qualifying real property
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Maximum Deduction: Least Of
• Cumulative Gains Limit
– The Sum Of All Annual Gains Limits After 1984
(No Adjustments For Changing Inclusion Rates)
– Less: Capital Gains Deduction Claimed In Previous Years
(No Adjustments For Changing Inclusion Rates)
– Less: CNIL
– If no CNIL the Cumulative Gains Limit will generally equal the
annual gains limit for the current year
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Lifetime Capital Gains - Example
An individual has a $20,000 taxable capital gain in 2019 on the
disposition of shares in a qualified small business corporation. He
deducted a taxable capital gain of $6,000 [(1/2)($12,000)] in 2012 and
has a net capital loss carry forward from 2014 of $9,000
[(1/2)($18,000)] which he deducts in 2019. He has no CNIL.
– Unused portion of deduction ($433,456 - $6,000) = $427,456
– Annual gains limit ($20,000 - $9,000) = $11,000
– Cumulative gains limit ($6,000 + $11,000 - $6,000) = $11,000
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Ordering of Deductions And Losses
• Significance Of Ordering – Net Income For Tax Purposes
• Subdivision e Deductions May Be Lost If Not Used
– Example: Spousal Support
– Example: Child Care Costs
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Ordering of Deductions And Losses
• Ordering Rules
– Net Income - ITA 3
• 3(a) Non-Capital Positive Sources
• 3(b) Net Taxable Capital Gains (Positive Amounts Only)
• 3(c) 3(a) + 3(b), Less Subdivision e Deductions
• 3(d) Non-Capital Losses And ABILs
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Ordering of Deductions And Losses
• Ordering In Computing Taxable Income (Individuals Only)
– ITA 110: Stock Options And Other
– ITA 110.2: Retroactive Lump Sum Payments
– ITA 111: Loss Carry Overs (In Order Incurred)
– ITA 110.6: Lifetime Capital Gains Deduction
– ITA 110.7: Northern Residents Deductions
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Tax On Split Income (TOSI)
• The Problem
– Use of private corporations and other arrangements to split
income with related individuals in a manner that the
government deems inappropriate
• The Solution
– The Tax On Split Income
• Federal tax at maximum rate of 33 percent
• Tax credits limited to the dividend tax credits and foreign tax credits
related to the split income
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Tax On Split Income (TOSI)
• History
– Introduced by 1999 budget
– Prior To 2018: Applied only to minors (under 18)
– 2018 and subsequent: Applies to adults as well as related
minors
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Tax On Split Income (TOSI)
• Basic Concepts
– Specified Individuals
• Any resident of Canada
• Generally will be a low income individual related to a source
individual
– Source Individuals
• An individual who is related to a source individual
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Tax On Split Income (TOSI)
• Basic Concepts
– Related Business
• A source individual is actively and regularly engaged in the
business
• Or
• If a corporation, a source individual owns 10 percent or more of the
fair market value of all of the issued shares
• If a partnership, a source individual has any ownership interest
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Tax On Split Income (TOSI)
• Potential split income
– Dividends from a private company that is a related business
– Shareholder benefits or loans from a related business
– Interest from a related business
– Distributions from a related proprietorship or partnership
– Capital gains on shares of a private company that is a related
business
– Distributions from trusts where the source of the income is a
related business
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Tax On Split Income (TOSI)
• TOSI is applicable if a specified individual receives split
income from a business that is related to a source individual
– Any of the preceding amounts MAY be split income
– They are not split income if they are one of the “Excluded
Amounts”
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TOSI (Excluded Amounts)
• Available to individuals under 25
– Taxable capital gains from a property acquired as the result of:
• The death of a parent; or
• The death of any person if the individual is either:
– Enrolled full time at a post secondary university
– Eligible for the disability tax credit
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TOSI (Excluded Amounts)
• Excluded Business (Available to any individual 18 and over)
– A business in which the individual is actively engaged on a
regular, continuous, and substantial basis
– Current year or any five previous years
– Bright line test = 20 hours per week
– Other tests can apply
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TOSI (Excluded Amounts)
• Excluded Shares (Individuals age 25 and over
– Shareholder owns at least 10 percent of outstanding shares
(both fair market value and voting rights
– The corporation:
• Must not be a professional corporation
• Less than 90 percent of its income in the previous year from the
provision of services
• Less than 10 percent of its income in the previous year from a
related business
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TOSI (Excluded Amounts)
• Reasonableness Test (Individuals age 25 and over)
– Income received is reasonable based on all factors (labour,
capital, and the assumption of business risk)
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TOSI (Excluded Amounts)
• Reasonableness Tests (Individuals age 18 to 24)
– Safe harbor capital return – Based on lowest prescribed rate
– Reasonableness – For this age group, only capital contributions
are considered
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TOSI (Excluded Amounts)
• Excluded Amounts For Individuals Of Any Age
– Capital Gains on qualified property
– Amounts from property acquired through marriage breakdown
– Amounts from property acquired as the result of the death of a
parent or, in some cases, any individual
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TOSI (Excluded Amounts)
• Spouse Is 65 Or Over
– Income received by a spouse of any age if:
• Spouse is 65 or older
• The income would not have been split income if it had been
received by the over 65 spouse.
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Tax On Split Income
Example:
A specified individual receives $18,000 in non-eligible dividends from a
private company controlled by a source individual.
In addition, the individual has employment income of $8,500 from her
summer job. She has no deductions in the calculation of her Taxable
Income.
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Tax On Split Income
Regular Tax Payable
Dividends (115%)($18,000)
Employment Income
Total Income
Split Income Deduction
Net And Taxable Income
$20,700
8,500
$29,200
( 20,700)
$ 8,500
Tax At 15%
Personal Credit
Regular Tax Payable
$ 1,275
( 1,810)
Nil
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Tax On Split Income
Dividends
(33%)($20,700)
$ 6,831
Dividend Tax Credit
(9/13)(15%)($18,000)
( 1,869)
Tax Payable On Split Income
$ 4,962
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Tax On Split Income
Regular Tax Payable
Nil
Tax on Split Income
$ 4,795
Total Tax Payable
$ 4,795
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Transfer Of Dividends to a Spouse
Example:
Mr. Bartlett’s only income consists of $13,000 in eligible dividends
received from taxable Canadian corporations.
There would be no Tax Payable on this amount of dividends for an
individual with no other source of income.
As a consequence of this income receipt, Mrs. Bartlett is not able to
claim a spousal tax credit. Mrs. Bartlett has other income of $25,000.
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Transfer Of Dividends to a Spouse
• Transfer:
– Mrs. B Gets Full Spousal Credit Of $1,810
– Taxable Dividends = $17,940 [(138%)($13,000)]
– Mrs. B Pays Taxes Of [(15%)($17,940)] = $2,691
– Gets Dividend Tax Credit = $2,695 [(6/11) (38%)($13,000)]
– Decrease in Tax Payable = $1,814 ($2,691 - $1,810 - $2,695)
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Charitable Donations
• General Rules
– Credit
• 15% of $200
• 33% of lesser of:
– Amount of gift in excess of $200
– Amount of Taxable Income in excess of $205,842
• 29% of amount of gift in excess of ($200 + amount credited at 33%)
– Limit: 75% of net income
– Limit: 100% of net income in individual’s year of death and
preceding year
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Gifts Of Capital Property
• If FMV > ACB, Taxpayer Can Elect Any Value Between FMV
And ACB For Purposes Of Determining The Credit
• Maximum Charitable Donations Of Capital Property:
– 75% Of Net Income For The Year; Plus
– 25% Of Any Taxable Capital Gain Resulting From Gift; Plus
– 25% Of Any Recaptured CCA Resulting From Gift
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Gifts Of Capital Property
Example –
Gift Has FMV = $100,000;
Cost = $80,000; UCC = $50,000
– Taxable Capital Gain = $10,000
– Recapture = $30,000
– Net Income = $40,000
• Usual Limit = $30,000 [(75%)($40,000)]
• Extra $10,000 [(25%)($10,000 + $30,000)] Eliminates TCG And
Recapture
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Gifts Of Capital Property
An asset with an ACB of $100,000 and a FMV of $200,000 is gifted to a
charity by an individual with a marginal tax rate of 29 percent.
Elect $200,000
Credit = [(15%)($200) + (29%)($199,800)]
$57,972
Less Tax = [(29%)(1/2)($100,000)]
( 14,500)
Net Credit
$43,472
Elect $100,000
Credit = [(15%)($200) + (29%)($99,800)]
Less Tax
Net Credit
Savings If $200,000 Elected ($43,472 - $28,972)
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$28,972
Nil
$28,972
$14,500
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Charitable Donations
• General Rules
– Carry Forward: 5 Years
– Subject To The Same Limitations In Carry Forward Years
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Charitable Donations
• No Capital Gain
– Publicly Traded Securities
– Ecologically Sensitive Land
– Canadian Cultural Property
• Recipients
– Registered Charities
– Amateur Athletic Associations
– United Nations
– Universities
– Foreign (If Canadian Government Contributes)
– Registered Journalism Organization (as of 2020)
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Shares Acquired With Options
• The Problem
– The net gain is a combination of employment income and a
Taxable Income deduction
• The Solution
– Donated Within 30 Days Of Acquisition
– Get Extra 50 Percent Deduction
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Foreign Tax Credits
• Basic Concept: Include Full Amount In Income And Get Credit
For Foreign Withholding
– Receive $850 After Withholding Of 15%
– Tax On $1,000 At 45% = $450
– Tax After Credit = $450 - $150 = $300
– Tax Paid = ($150 + $300) = $450
– Same As If Earned In Canada And Taxed At 45%
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Foreign Non-Business Tax Credit
Credit Equals The Lesser Of:
• Actual Withholding (Limited To 15 Percent)
• Net Foreign Non-Business Income X Tax Otherwise
Adjusted Net Income
Payable
Adjusted Net Income = Net Income, Reduced By ITA 110.6,
111(1)(b), 110(1)(d), (d.1), (d.3), (f), (j)
Tax Otherwise Payable = Part I Tax Before Dividend Tax Credit,
Investment Tax Credit, And Political Contributions Tax Credit
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Foreign Business Tax Credit
Credit Equals The Least Of:
– Actual Withholding
– Net Foreign Business Income X Tax Otherwise
Adjusted Net Income
Payable
– Tax Otherwise Payable, Less Foreign Non-Business Credit
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Alternative Minimum Tax (AMT)
• The Problem
– High Income Individuals
– Little Or No Tax Payable
– A Public Relations Issue
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AMT - Procedure
The Minimum Tax Is Equal To:
[A (B - C) - D]
Where:
A = 15%
B = Adjusted Taxable Income
C = The Basic Exemption ($40,000)
D = The Basic Minimum Tax Credit
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AMT - Adjusted Net Income
• Add Back
– 30 Percent Of Net Capital Gains
– 3/5 Stock Option Deduction
– Loss: CCA On Buildings And Films
– Loss: Depletion, Exploration, Development
– Certain Tax Shelter And Limited Partnership Losses
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AMT - Adjusted Net Income
• Deduct
– Gross up of Canadian dividends
– 60 percent of ABILs deducted
– 60 percent of net capital loss carry overs deducted
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Basic Minimum Credit
• Allowed
– Personal Credits
– Age Credit
– Canada Employment Credit
– Adoption Expenses
– Home Accessibility
– First Time Home Buyer's
– Volunteer Firefighter, and
Volunteer Search And
Rescue
– Charitable Donations
– Medical Expense Credit
– Disability Credit
– Tuition Credit
– EI And CPP Credits
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Minimum Tax Carry Over
• 7 Years Carry Forward
• Against Any Excess Of Regular Tax Payable Over Minimum Tax
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THE END
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