The Canadian Income Tax Act contains ordering rules and general principles for calculating net income for tax purposes and taxable income. The accumulation of income and deductions must follow a chronological order and is summarized as follows:
1. Calculate total income
- Income from employment + Income from property + Income from a business + Other income
- Plus “net” capital gains (Capital gains less capital losses)*
- Less deductions such as RRSPs, RPP, union or professional dues, child care expenses, moving expenses.
2. Calculate net income for tax purposes
- Deduct employment, property and business losses.
- Deduct allowable business investment losses (ABIL)
3. Calculate taxable income
Taxable income is the income in which federal and provincial taxes will be calculated from.
- Deduct personal deductions such as home relocation loan deduction, stock option deduction, non-capital and net capital losses from prior years, and capital gains deductions.
4. Calculate federal taxes
- Basic federal tax = Taxable income x federal tax rates
- Less: Tax credits (basic personal amount, spousal credit, medical expense credit, tuition fees, donations, transit pass and other tax credits.
5. Calculate provincial taxes
- Calculated in much the same manner as federal taxes and credits (except for Quebec).
The balance owing or refund due is the federal tax less federal tax credits plus provincial taxes less provincial credits plus any provincial surtaxes less amounts deducted from pay cheques or paid in installments.
* Capital losses may only reduce capital gains to zero. Any remaining capital net capital loss may be carried back three years or forward indefinitely against net capital gains.
Tax software is always a good choice to calculate your taxes and often can help you find hidden credits or deductions. If you have renal income or investments try TurboTax Premier or TurboTax Canada Business Tax Software if you are self-employed or have a corporation.