# 3520-7-updated 2012

```3520-7: Last updated on 10/8/12
1
Lecture 7: Taxable Income and Tax for Individuals
1.1
Coverage
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2
Exercises 4-1 to 4-9, 4-11, 4-12, 4-14 to 4-21
Self-Study Problem 4-1
Self-Study Problem 4-3
 Ignore the standby charge and the operating cost benefit
Self-Study Problem 11-4 and 11-5
Overview of Computation of Taxable Income and Tax for Individuals
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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
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3.2
deduction for 50% of ITA section 7 stock option benefit (see lecture 2 notes)
ITA 110(1)(f) Deduction for social assistance and other similar payments
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3.3
1-11
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) &amp; (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)
ITA 110(1)(j) Home relocation loan deduction
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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
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3.4
this is a lifetime deduction of \$750,000 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
ITA 111 Loss carryovers from other years
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4
computing the prescribed interest benefit for a home relocation loan you can use the
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
ITA 110.6 Capital Gains Exemption
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3.5
2-11
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
Calculation of Taxes Payable [CTP 4-14 to 4-31]
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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) on Sept 30th
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 &lt; 3% from 1992 to 1999, this resulted in no indexing at all
for those years
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4.1
For 2012:
 Taxable income up to \$42,707: 15%
 more than \$42,707 but up to \$85,414: \$6,406 plus 22% on taxable income in excess of
\$42,707
 more than \$85,414 but up to \$132,406: \$15,802 plus 26% on taxable income in excess of
\$85,414
 more than \$132,406: \$28,020 plus 29% on taxable income in excess of \$132,406
Provincial Taxes
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5
The law changed to restore full indexing in 2000
Federal Tax Brackets
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4.2
3-11
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
Credits against Tax Payable [CTP 4-32 to 4-35]
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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 nonrefundable 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 \$2,000 additional credit for each qualified dependent who is dependent by reason of a
physical or mental infirmity (the test for children &lt; 18 is slightly different…see CTP 4-39).
As you will see, the FCA increases each of the following credits by \$2,000: spousal credit;
spousal equivalent (i.e., eligible dependent) credit; child tax credit; caregiver credit; or infirm
dependent credit
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5.1
Basic personal amount [ITA 118(1)(c)]
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5.2
This credit is available to all individuals
= \$10,822 x 15% = \$1,623
see 4-41
Spousal Credit [ITA 118(1)(a)] [CTP 4-42 to 4-46]
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5.3
4-11
= 15% x (\$10,822 - spouse’s net income for tax purposes)
with FCA = 15% x (\$12,822 - spouse’s net income for tax purposes)
IT-513R: only one spouse or common-law partner may claim the spousal amount; the spouse
making the claim should be the one that financially supports the other
Individuals Supporting An Eligible Dependent [ITA 118(1)(b)]
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= 15% x (\$10,822 – eligible dependent’s net income for tax purposes)
with FCA = 15% x (\$12,822- eligible dependent’s net income for tax purposes)
the CTP calls this the “eligible dependent credit;” it might be easier to think of it as the
“spousal equivalent” since the formula is the same as the spousal credit
dependent defined in ITA 118(6)
for individuals who are single or widowed or divorced or separated and supporting a
dependent
 who is related to the individual by blood, marriage, adoption or common-law
relationship;
 under 18 at any time during the year, or the individual’s parent or grandparent, or
mentally or physically infirm;
 living with the individual in a home that the individual maintains (this would not
disqualify a child who moves away during the school year to attend an educational
institution as long as the home remains the child's home); and
An important tax break for single taxpayers supporting minor children or older dependents
who are related or infirm
A taxpayer can claim only one spousal equivalent credit: ITA 118(4)(a)
Cannot claim for a taxpayer who claims the spousal credit
A person who is claimed under ITA 118(1)(b) cannot be claimed by anyone under ITA
118(1)(c.1) or (d) (discussed below) and vice versa: ITA 118(4)(c). Note: the spousal
equivalent credit is higher than the caregiver credit and the credit for infirm dependent over
17; however the income thresholds are different
Taxpayers cannot claim the credit for a child for whom they pay child support: ITA 118(5)
(i.e., the other parent may be able to claim this credit)
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5.4
Child Tax Credit [ITA 118(1)(b.1)]
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5.5
same amount (i.e., \$10,822) as described under ITA 118(1)(a) and ITA 118(1)(b) amount
see 4-60
Caregiver Credit [ITA 118(1)(c.1)]
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5.7
15% x \$2,191 for each child under 18 at the end of the year
with FCA = 15% x \$4,191
no income limit
can be the same child claimed under ITA 118(1)(b)
if child lives with both parents, can be claimed by either parent
if parents are living separately only the parent claiming ITA 118(1)(b) (equivalent to spouse)
can claim this credit
see 4-49
Single Persons (Basic Personal Amount) [ITA 118(1)(c)]
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5.6
5-11
In-home care for an adult (&gt;=18) relative that is depending on the taxpayer
 because of an infirmity or
 as a grandparent or parent who is not infirm but &gt; 65 years
as with the spousal equivalent credit, the dependant must be living with and dependent upon
the taxpayer
= 15% x (\$4,402 - (dependent's net income - \$15,033)) = \$660 maximum
With FCA = 15% x (\$6,402- (dependent’s net income -\$15,033)) = \$960 maximum
not for dependent making (\$4,402 + \$15,033) = \$19, 435 or more (\$21,435 with FCA)
can be claimed for each qualified dependent
Credit for Infirm Dependant Over 17 [ITA 118(1)(d)]
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= 15% x (\$6,402 - (dependent's net income - \$6,420) = \$960 maximum
includes FCA
not for dependent making (\$6402 + \$6,420) = \$12,822 or more
can be claimed for each qualified dependant
similar to the caregiver credit with FCA but has a lower income threshold and no requirement
that the dependant live with the taxpayer
This credit is one of the few credits that can be shared [ITA 118(4)(e)]
Taxpayers cannot claim this credit for a child if they pay tax-deductible child support for the
child [ITA 118(5)]
see 4-66 to 4-72
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5.8
Interaction between Eligible Dependent, Caregiver and Infirm Dependent Over 17 Credits
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5.9
A single person who has only one eligible dependent must claim the dependent under ITA
118(1)(b) because ITA 118(4)(c) states that if a dependent is eligible for a claim under ITA
118(1)(b), he or she cannot be claimed under
 the ITA 118(1)(c.1) caregiver credit or
 the ITA 118(1)(d) infirm dependent over 17 credit
But what happens if the (c.1) or (d) claim would have been larger? ITA 118(1)(e) rectifies
the situation by allowing an additional credit to be taken to make up the difference.
A single parent who &gt; one eligible dependent can decide which one to claim under 118(1)(b).
E.g. if dependent #1 was a child &lt; 18 with no income and dependent # 2 was an adult who
could be claimed under 118(1)(c.1) or (d), then the child (dependent #1) should be claimed
under ITA 118(1)(b).
under ITA 118(4)(d), if a taxpayer is entitled to claim the caregiver credit for an individual,
the individual will be deemed not to be a dependent for the purpose of the infirm dependent
over 17 credit for the taxpayer (hence only one \$6,402 credit can be claimed for each
qualified dependent). Of the two, the caregiver credit is usually the better claim, because it
has the higher income limit.
see 4-73 to 4-77
Age Credit ITA 118(2)
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5.10
6-11
Seniors who are 65 or older at the end of the year are eligible
= 15% x (\$6,720 - 15% x (net income - \$33,884) = \$1,008 max
 those who earn ((\$6,720/15%) + \$33,884) = \$78,684 or more cannot claim
Can transfer unutilized credit to spouse [ITA 118.8]
see 4-82 to 4-83
Pension Credit ITA 118(3)
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= 15% x first \$2,000 of &quot;pension income&quot; = \$300 maximum (not indexed)
if age 65 or older at year-end and have “pension income” according to ITA 118(8) (i.e.,
employer RPP payments, RRSP annuity payments, RRIF payments)
 “pension income” excludes: OAS, CPP, Quebec Pension Plan (QPP) and certain other
amounts [ITA 118(8)]
if under age 65, the credit is limited to “qualified pension income”, which is basically
employer RPP payments according to ITA 118(7)
Can transfer unutilized credit to spouse [ITA 118.8]
see 4-84 to 4-88
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5.11
Canada Employment Tax Credit [ITA 118(10)]
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5.12
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15% of cost of eligible public transit passes. Passes must be monthly; or weekly with 4 or
more weekly passes purchased in a row to be eligible
credit is reduced by any reimbursement
credit can be shared if the pass is used by more than one person
Child Fitness Tax Credit and Child Art Credit [ITA 118.03 and ITA 118.031]
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5.15
Can only be claimed in the year when adoption is finalized (the expenses can be incurred
over several years) to a maximum of \$11,440 per adoption
= 15% x the eligible adoption expenses (up to the maximum)
if child adopted by couple, credit can be shared
see 4-92 to 4-96
Public Transit Pass Credit [ITA 118.02]
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5.14
= 15% x lesser of
 \$1,095; and
 employment income (calculated without any employee expenses allowed under section 8
of the Act)
see 4-89 to 4-91
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5.13
7-11
Two credits for children under 16 at the beginning of the year (under 18 if eligible for the
disability tax credit) who are registered in an eligible program. For more information, see 4106 (fitness credit) and 4-107 (arts credit)
Each credit = 15% x the costs of the program, up to a maximum of \$500 per year. Maximum
\$75 per credit.
Each credit has an additional 15% x \$500 credit for children qualifying for the disability tax
credit if a least \$100 paid in the year.
see 4-102 to 4-107
Charitable Donation Credit [ITA 118.1]
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The amount of the donations cannot exceed 75% of net income for tax purposes
Credit = 15% of first \$200 and 29% of the balance of donations (if any)
If the eligible donations &gt; 75% of net income for tax purposes, excess donations can be
carried forward 5 years (discretionary deduction). If a taxpayer does not want to claim a
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5.16
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credit for taxpayer who pays the eligible expenses (or the taxpayer’s spouse)
Can claim expenses paid for any 12-month period ending in the year
= 15% x ((B - C) + D) where
 B = eligible medical expenses of the taxpayer, spouse or minor dependants
 C= the lesser of 3% of the taxpayer’s net income and \$2,052
D=E–F
 E = eligible medical expenses of the adult dependant
 F= the lesser of 3% of the adult dependant’s net income and \$2,109
Certain low income taxpayers who have medical expenses (above the threshold) may be able
to receive an additional refundable medical expense credit/supplement (not discussed in this
course)
Purely cosmetic medical procedures incurred after March 4, 2010 (that are not required for
medical or reconstructive purposes) are not allowed as medical expenses
see examples at 4-138 and 4-139
see 4-130 to 4-139
Disability Credit [ITA 118.3]
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5.18
charitable donation in the year the donation was made then the donation can be claimed in
any of the next 5 years [ITA 118.1(1)]
There is a one year carry back in the year of death that applies to donations in the year of
death
 A 100% of net income limit applies in the year of death and in the immediately preceding
year
see 4-118 to 4-129
Medical Expense Credit [ITA 118.2]
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5.17
8-11
a Form T2201 must be filled out by doctor or optometrist and updated as requested by the
CRA
= 15% x \$7,546 = \$1,132
conditions for qualifying for credit in ITA 118.4(1)
A person qualifying for this credit can transfer any unutilized credit to a spouse or supporting
person who could have claimed the person as eligible dependent credit, infirm dependent
over 17 credit, or the caregiver credit
Tuition Credit [ITA 118.5]
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= 15% x qualifying tuition fees paid to a college, university, or certified educational
institution for the taxation year (e.g., cannot claim fees paid for next year until next year)
ITA 118.5(3) includes
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9-11
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5.19
Education Credit [ITA 118.6]
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5.20
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=15% of interest paid in the year on a qualifying student loan (or paid in any of the five
preceding years if not deducted previously)
see 4-166
Carry Forward of Education-related Credits
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5.23
= 15% x \$65 per month for full-time students
= 15% x \$20 per month for part-time students
see 4-164 and 4-165
Interest on Student Loans Credit [ITA 118.62]
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5.22
= 15% x \$400 per month for full-time students
= 15% x \$120 per month for part-time students
see 4-160 to 4-163
Textbook Tax Credit [118.6(2.1)]
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5.21
all mandatory ancillary fees imposed on all students and
allows up to \$250 ancillary fees not imposed on all full-time or all part-time students
The cost of examination fees paid in order to obtain professional status recognized by
federal or provincial statute (for example, CA, CGA and CMA final examination fees)
are eligible for a tuition credit starting in 2012
 Entrance exam fees paid in order to begin study in a profession or field are not
eligible
see 4-156 to 4-159
only to the extent that the student can't use them and has not transferred them to a spouse,
parent, or grandparent
ITA 118.61 allows for the carry forward of unused tuition, education, and textbook credits
indefinitely
ITA 118.62: there is a five year carry forward of unused interest expense (i.e., not previously
claimed) on student loans
see 4-167 to 4-170
Transfer of Education-related Credits
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ITA 118.9: can transfer to a parent or grandparent
ITA 118.8: can transfer to a spouse or common-law partner
ITA 118.81: the transfer amount is limited to the lesser of
 the available credits and \$5,000 (per year)
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5.24
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see lecture 3 notes
Foreign Tax Credit
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5.28
six transferable credits:
 age
 pension
 disability (also to child, grandchild, parent, grandparent, brother, sister, aunt, uncle,
nephew, niece of the taxpayer)
 current year tuition, education and textbook credits to a max of \$750 (i.e., \$5,000 x 15%)
Spouse must first use most personal, EI and CPP credits before claiming these credits, then
the unused/unneeded credits (listed above) can be transferred. The exact calculation is
surprisingly complex
see 4-183 to 4-184
Dividend Tax Credit
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5.27
Taxpayers earning employment income have EI &amp; CPP premiums withheld from their pay
(employers also pay a premium). Employee can claim tax credits = 15% of the EI &amp; CPP
Taxpayers earning business income typically do not pay EI but must pay 2 x the CPP
(because there is no employer matching premium). In these cases they can claim
 a tax credit = 15% of half of the CPP they pay and
 an ITA 60(e) deduction of the matching contribution from net income for tax purposes (=
the other half of the CPP they pay)
see 4-176 to 4-180
Transfer of Unused Credits to Spouse [ITA 118.8]
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5.26
the transferred credit is then multiplied by 15%
taxpayers can only transfer these credits to the extent that they do not need them
see 4-171 to 4-175
see example at 4-175
EI &amp; CPP [ITA 118.7]
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5.25
10-11
assume that all foreign taxes paid are eligible for a foreign tax credit in this course. There are
2 types: foreign non-business tax credit and foreign business tax credit [ITA 126]
see lecture 3 notes
Political Contribution Tax Credit [ITA 127(3)]
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5.29
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15% x a max of \$5,000 for investments in qualifying labour sponsored funds (not very
common)
see 4-188 to 4-190
Refundable Working Income Tax Benefit [ITA 122.7]
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7
= 75% for the first \$400 of contributions, 50% on the next \$350 of contributions and 1/3 for
the next \$525 of contributions up to a max. credit of \$650
see 4-185 to 4-187
Labour Sponsored Funds Tax Credit [ITA 127.4]
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6
11-11
This credit is refundable, i.e., it can result in negative taxes owing which will trigger a tax
refund (recall that most personal tax credits are non-refundable)
This credit is only available for individuals who are 19 or older; who are not full-time
students in the year; and who have income (from employment and/or business) above a
certain threshold (i.e., \$3,000) and below a certain threshold (\$17,477 for single childless
individuals and \$26,952 for married individuals or parents in 2012). Most taxpayers do not
qualify for this tax credit (only low income individuals with at least \$3,000 of working
income qualify)
read 4-202 to 4-206 for information
EI &amp; OAS Clawbacks
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Employment insurance (EI) benefits are paid to qualifying employees who have been laid off
or who qualify for maternity leave. Old Age Security (OAS) is paid to qualifying seniors
(aged 65 and older) in addition to any CPP. CPP is not subject to a clawback
the system is income-tested so that high income earners do not receive a benefit
the threshold is indexed for inflation by the increase in the CPI
Note: the EI clawback is not part of the Income Tax Act (it’s part of the Employment
Insurance Act) but the OAS clawback is part of the Act
 calculate OAS clawback to be added to taxes due
 = 15% x (net income - \$69,562)