Chapter 14

Taxable Income And Tax

Payable For Individuals
Revisited
From Net To Taxable
Income
E m p lo y m e n t
In c o m e

B u s in e s s A n d
P ro p e rty In c o m e

T a x a b le
C a p it a l G a in s Division C
Taxable Income
Deductions
O th e r S o u rc e s
O f In c o m e

O t h e r D e d u c t io n s
F ro m In c o m e

© 2007, Clarence Byrd Inc. 2

From Net To Taxable
Income
• Specified
Deductions
– Employee Stock Options
– Deductions For Payments
– Home Relocation Loan
– Lump-Sum Payments
– Lifetime Capital Gains
Deduction
– Residing In Prescribed
Zone
© 2007, Clarence Byrd Inc. 3
 Lump-Sum Payments
• An income averaging
provision

• Qualifying amounts

• Relief mechanism
– Qualifying amounts
removed from income
– Alternative tax payable
– Notional interest is
added

© 2007, Clarence Byrd Inc. 4

 Treatment Of Losses
• Separate Balances To Be
Tracked
– Listed Personal Property
Losses
– Non-Capital Losses
– Net Capital Losses
– Allowable Business
Investment Losses
– Regular Farm Losses
– Restricted Farm Losses

© 2007, Clarence Byrd Inc. 5

Treatment Of Losses
– Personal Use
Property

• Not Deductible

• $1,000 Minimum =
ACB = POD

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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) jewellery,
– (c) rare folio, rare manuscript, or rare book,
– (d) stamp, or
– (e) coin;
• Deductible Against LPP Gains Only
• Carry Back 3 Years, Forward 7
• $1,000 Minimum = ACB = POD

© 2007, Clarence Byrd Inc. 7

 Treatment Of Losses
• Non-Capital Losses
– Can Result In The Determination Of:
• Employment Income (Rare)
• Business Income
• Property Income
– Carry Over Only Available After Current
Year’s Income Reduced To Nil
– Carry Back 3 Years, Forward 20 Years

© 2007, Clarence Byrd Inc. 8

 Treatment Of Losses
• Net Capital Losses
– Deducted At Rate
Applicable To Carry
Over Year
– Balance Not Adjusted
For Changes In
Inclusion Rate
– General Rules
• Back 3 Years
• Forward Forever
© 2007, Clarence Byrd Inc. 9
 Business Investment
Losses
• 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

© 2007, Clarence Byrd Inc. 10

 Business Investment
Losses
• Special Characteristic: Can Be
Deducted Against Any Type Of
Income
• Deductible One-Half Amount
Referred To As An Allowable Business
Investment Loss (ABIL)

© 2007, Clarence Byrd Inc. 11

 Business Investment
Losses
• Must Be Deducted In Year Realized
To The Extent Of Sufficient Income
• Unused Amounts
– Non-Capital Carry Over
– Back For 3 Years, Forward 20 Years
– After 20 Years, Reverts To Net Capital
Loss Carry Forward

© 2007, Clarence Byrd Inc. 12

 ABILs
• Effect Of Life Time 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
(Treated As Ordinary Capital Gain)
© 2007, Clarence Byrd Inc. 13
 Example: ABIL
In 2007, John Brown has an ABIL of $65,000, 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 $65,000
110.6 In Previous Years ( 22,500)
$42,500
Non-Capital Income ( 20,000)
Unused (To Non-Capital) $22,500

© 2007, Clarence Byrd Inc. 14

 ABIL Example
(Continued)
3(a) $20,000
3(b) ($14,000 - $14,000) Nil
3(c) $20,000
3(d) ABIL ( 20,000)
Net Income
Nil
Non-Capital Losses $22,500

Net Capital Losses:

Disallowed ABIL $22,500
Current Capital Gains (
14,000) © 2007, Clarence Byrd Inc. 15
 Restricted Farm Losses
• Arise When:
– Reasonable Expectation Of Profit
– Not Taxpayer’s Principal Source Of
Income

• Restricted Farm Losses

– Back 3 Years, Forward 20 Years
– Only Against Farm Income

© 2007, Clarence Byrd Inc. 16

 Regular Farm Losses

• Regular Farm Losses

– Back 3 Years, Forward 20 Years
– Against Any Source Of Income

© 2007, Clarence Byrd Inc. 17

 Lifetime Capital Gains
Deduction
• History
– 1985: Introduction Of
The Provision
– February, 1992:
Removed For Rental
Property
– February, 1994:
Removed For All Assets
Except “Qualified” Farm
And Small Business
Property
– May, 2006: Added
Qualified Fishing Property
– March 19, 2007,
Increased Limit To
$750,000 © 2007, Clarence Byrd Inc. 18
 Qualified Property
• Small Business
Corporation
• Farm Property
• Fishing Property

© 2007, Clarence Byrd Inc. 19

 The $750,000 Super
Deduction
• Small Business Corporation
– CCPC
– Active Business
• Substantially All Assets (90%)
• Primarily In Canada (50%)
– Shares Of Other SBC

© 2007, Clarence Byrd Inc. 20

 The $500,000 Super
Deduction
• Qualified SBC
– Small Business
Corporation
– Held For 24 Months
– 50 Percent For 24
Months

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Maximum Deduction: Least
Of
• Unused Portion Of Maximum –
Example
Deducted $50,000 in 1986 (1/2)

Deducted $38,000 in 1989 (2/3)

© 2007, Clarence Byrd Inc. 22

Maximum Deduction: Least
Of
• Annual Gains Limit
– Net Taxable Capital Gains For Year
– Less: Net Capital Loss Carry Overs Deducted
– Less: ABILs Realized During Year (Whether Or
Not Deducted)

© 2007, Clarence Byrd Inc. 23

 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

© 2007, Clarence Byrd Inc. 24

 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

© 2007, Clarence Byrd Inc. 25

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

© 2007, Clarence Byrd Inc. 26

 Lifetime Capital Gains -
Example
An individual has a $20,000 taxable capital gain in May, 2007 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 1986 and has a net capital
loss carry over from 1988 of $12,000 [(2/3)($18,000)].

Unused portion of deduction ($375,000 - $6,000) = $369,000

Annual gains limit ($20,000 - $9,000) = $11,000

Cumulative gains limit ($6,000 + $11,000 - $6,000) = $11,000

© 2007, Clarence Byrd Inc. 27

 Ordering Of Deductions
And Losses
• Significance Of Ordering
• Deductions May Be Lost
If Not Used
– Example: Spousal Support
– Example: Child Care
Costs

© 2007, Clarence Byrd Inc. 28

Ordering Of Deduction And
Losses
• Ordering Rules -
Net Income - ITA 3
– 3(a) Non-Capital
Positive Sources
– 3(b) Net Taxable
Capital Gains
(Positive Only)
– 3(c) 3(a) + 3(b),
Less Subdivision e
Deductions
– 3(d) Non-Capital
Losses And ABILs
© 2007, Clarence Byrd Inc. 29
Ordering Of Deduction 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
© 2007, Clarence Byrd Inc. 30
 Tax On Split Income
• Applicability
– Under 18 At End Of Year
– Private Company
Dividends, Shareholder
Benefits, Partnership And
Trust Allocations (If
Related Party)
• Application
– Tax At 29 Percent
– Deductible From Total
Income
– Only The Dividend
© 2007, Tax
Clarence Byrd Inc. 31
Tax On Split Income
• Example: A 14 year
old individual
receives non-eligible
dividends from a
private company in
the amount of
$18,000. In addition,
she has employment
income of $8,500
from her summer
job. She has no
deductions in the
calculation of her
Taxable Income.
© 2007, Clarence Byrd Inc. 32
 Tax On Split Income
Dividends (125%)($18,000)
$22,500
Employment Income
8,500
Total Income
$31,000

Tax On Split Income (29%)($22,500)

$ 6,525
Regular Tax (16%)($8,500)
1,360
Total Tax Payable (Before credits) $
7,885 © 2007, Clarence Byrd Inc. 33
Transfer Of Dividends To A
Spouse

– Example: Mr.
Bartlett’s total Net
Income consisted of
$8,000 in eligible
dividends received
from taxable Canadian
corporations. As a
consequence of this
income receipt, Mrs.
Bartlett is not able to
claim a spousal tax
credit. Mrs. Bartlett
© 2007, Clarence Byrd Inc. 34
has other income of
Transfer Of Dividends To A
Spouse
• Transfer:
– Mrs. Bartlett Gets Full Spousal Credit Of $1,384
– Taxable Dividends = $11,600
– Pays Taxes Of [(15.5%)($11,600)] = $1,798
– Gets Dividend Tax Credit = $2,200
[(11/18)($3,600)]
– Decrease in Tax Payable
= $1,786 ($1,798 - $1,384 - $2,200)
© 2007, Clarence Byrd Inc. 35
 Charitable Donations
• General Rules
– 15.5%(1st $200) + 29% Of Excess

© 2007, Clarence Byrd Inc. 36

 Charitable Donations
• General Rules
– Limit: 75% Of Net
Income
– 100% In Individual’s
Year Of Death And
Preceding Year

© 2007, Clarence Byrd Inc. 37

Gifts Of Capital Property
• If FMV > ACB, Taxpayer Can
Elect Any Value Between
FMV And ACB For Purposes
Of Determining The Credit
• Base For 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
© 2007, Clarence Byrd Inc. 38
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

© 2007, Clarence Byrd Inc. 39

 Gifts Of Capital Property
An asset with an ACB of $100,000 and a FMV of
$200,000 is gifted to a charity
Elect $200,000
Credit = [(15.5%)($200) + (29%)($199,800)] $57,973
Less Tax = [(29%)(1/2)($100,000)] 14,500
Net $43,473

Elect $100,000
Credit = [(15.5%)($200) + (29%)($99,800)] $28,973
Less Tax Nil
Net $28,973
Savings ($43,473 - $28,973) $14,500

© 2007, Clarence Byrd Inc. 40

 Charitable Donations
• General Rules
– Carry Forward: 5 Years
– Subject To The Same Limitations

© 2007, Clarence Byrd Inc. 41

 Charitable Donations
– No Capital Gain: Canadian Cultural
Property – Ecologically Sensitive Land –
Publicly Traded Securities
– Recipients
• Registered Charities
• Amateur Athletic Associations
• United Nations
• Universities
• Foreign (If Canadian Government
Contributes)

© 2007, Clarence Byrd Inc. 42

 Shares Acquired With
Options
• The Problem
• The Solution
– Donated Within 30
Days Of Acquisition
– Get Extra 50
Percent Deduction
(2006 Budget)

© 2007, Clarence Byrd Inc. 43

 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%

© 2007, Clarence Byrd Inc. 44

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

110.6, 111(1)(b), 110(1)(d), (d.1), (d.3)
Tax Otherwise Payable = Part I Tax Including
Surtax, But Before Dividend Tax Credit, Investment
Tax Credit, And Political Contributions Tax Credit
© 2007, Clarence Byrd Inc. 45
 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

© 2007, Clarence Byrd Inc. 46

 Alternative Minimum Tax
(AMT)
• The Problem
– High Income
Individuals
– Little Or No Tax
Payable
– A Public
Relations Issue

© 2007, Clarence Byrd Inc. 47

 AMT - Procedure
• The Minimum Tax Is Equal To:
[A(B - C) - D]
Where:
A = 15.5%
B = Adjusted Taxable Income
C = The Basic Exemption ($40,000)
D = The Basic Minimum Tax Credit

© 2007, Clarence Byrd Inc. 48

 AMT - Adjusted Net
Income
• Add Back
– Loss: CCA On Buildings
And Films
– Loss: Depletion,
Exploration,
Development
– 30 Percent Of Capital
Gains
– 3/5 Stock Option
Deduction
– Home Relocation
Deduction
– Certain Tax Shelter
© 2007, Clarence Byrd Inc.
And 49
 AMT - Adjusted Net
Income
• Deduct
– Gross Up Of
Canadian Dividends
– Non-Deductible
Fraction Of ABILs

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 Basic Minimum Credit
• Allowed
– Personal Credits
– Age Credit
– Canada Employment
Credit
– Adoption Expense,
Transit Pass, and Child
Fitness Credits
– Charitable Donations
– Medical Expense Credit
– Disability Credit
– Tuition, Education and
Textbook Credits
– EI And CPP Credits
© 2007, Clarence Byrd Inc. 51
 Minimum Tax Carry Over
• Seven Years
• Against Any Excess Of
Regular Tax Payable
Over Minimum Tax

© 2007, Clarence Byrd Inc. 52