What is income?
Income is basically the money you get regularly from different sources like your job, business, investments, and property. In tax terms, the law has a more detailed way to define income. It's the total money you get from:
Your job or employment.
A business or property you own.
Money you make when you sell something for more than you bought it (known as capital gains).
Other specific types of money like pension benefits.
This is the money you have to report when you're doing your taxes.🥴
How to Determine Taxable Income?
Total Income: Sum up all sources of income.
Net Income=Total Income−Basic Deductions
Taxable Income=Net Income−Specific Deductions
In Canada, to determine the "Net Income", one must subtract basic deductions from the total income. When calculating "Taxable Income", additional specific deductions are considered. Such deductions encompass Worker’s compensation payments, Social assistance payments, Net federal supplements, and Income exempted under tax treaties. Hence, "Taxable Income" differs from "Net Income".
Employment Income Overview:
Employment Income: Employment income is the most common type of income in Canada and includes all amounts received as an employee's salary. This income is generally outlined on the T4 slip provided by employers.
Types of Employment Income:
Regular Salary & Wages: The most common type, includes regular salaries and hourly wages.
Bonuses: Additional amounts received, typically as a reward for good performance.
Tips and Gratuities: Earned often in service industry jobs.
Commission: Income earned by salespeople, usually a percentage of sales made.
Vacation Pay: Pay received while on vacation.
Overtime Pay: Compensation for hours worked in excess of normal working hours.
Stock Options: Income realized when exercising employer-granted stock options.
Employer Contributions to Employee Benefits: Such as contributions to a registered pension plan.
Other Compensation: Such as severance pay, awards, or taxable allowances.
Employment income is subject to various deductions that reduce taxable income:
Canada Pension Plan (CPP) Contributions: Mandatory contribution to Canada’s public retirement system for employees aged 18 to 70.
Employment Insurance (EI) Premiums: Mandatory insurance providing financial assistance to unemployed Canadians.
Registered Pension Plan (RPP) Contributions: Voluntary contributions to employer-sponsored pension plans.
Union Dues: Fees paid to labor unions for representation and other services.
Professional or Business Dues: Fees paid to professional or business associations.
Other Employment Expenses: Certain employed individuals can deduct specific work-related expenses (with significant restrictions and conditions). Examples include home office expenses, vehicle expenses, travel expenses, and supplies.
T4 Slip: Employers provide employees with a T4 slip which outlines the total amount of income earned and the amount of federal and provincial tax deducted. The information on the T4 slip is used to fill out the T1 Income Tax and Benefit Return.
Understanding the various types of employment income and applicable deductions is crucial for accurately reporting income and calculating taxes owed when filing your Canadian tax return. Always refer to the most current CRA guidelines and tax laws for the most accurate and relevant information, as these may have changed after my last knowledge update in January 2022. For complex situations, consider consulting with a tax professional.
What is Capital gain/Loss?
The term "capital gain" refers to the profit realized from the sale of a capital asset, such as stocks, bonds, or real estate. Conversely, a "capital loss" occurs when there's a decrease in the value of a capital asset below the purchase price upon sale.
Reporting Capital Gain/Loss on T1 Form:
When filing your T1 income tax return in Canada, you need to report both capital gains and losses. Here's how it's done:
Calculate Total Capital Gains: Sum up the profits from all capital assets sold during the tax year.
Apply Inclusion Rate: As of my last knowledge cut-off in January 2022, only 50% of your total capital gains are taxable in Canada. (Check for the current rate as it may vary.)
Report on T1: The taxable amount of capital gains should be reported on line 12700 of the T1 form.
Calculate Total Capital Losses: Sum up the losses from all capital assets sold during the tax year.
Apply Inclusion Rate: Only 50% of your total capital losses are deductible (Again, check for current rates).
Deduct from Taxable Capital Gains: These deductible losses can be used to offset taxable capital gains.
Carryover Provision: If your capital losses exceed capital gains, you might not be able to deduct the entire capital loss in the current year. However, you may carry back the loss to any of the three preceding years or carry it forward to future years until it's fully deducted.
Schedule 3: This form is used for recording capital gains or losses. You must complete and attach it to your T1 Income Tax and Benefit Return.
Understanding and accurately reporting capital gains and losses is crucial when filing your T1 income tax return in Canada. If this process seems complicated, consider consulting a tax professional to assist you in accurately completing your tax return. Always refer to the most current Canada Revenue Agency (CRA) guidelines and tax laws, as these may have changed after my last knowledge update in January 2022.
Other Employment Income
Understanding Tax Implications of Employer-Paid and Employee-Contributed Premiums in Wage Loss Insurance Plans
"Full Employer Coverage (Fully Taxable Benefit)"
Situation: When your employer pays all the premiums for a wage loss insurance plan, and you haven't contributed.
Example: In this scenario, if you receive benefits due to temporary disability, the entire amount is taxable income.
"Shared Premiums (Partially Taxable Benefit)"
Situation: When both you and your employer contribute to the insurance plan.
Example: This scenario involves a situation where the benefits are taxable, but you can reduce the taxable portion by reporting your personal premium contributions, which helps lower your tax liability.
"Reporting Employee Contributions (Tax Reduction and Documentation)"
Situation: When income from a wage loss insurance plan is reported on a T4 slip, and you need to report your own contributions on your tax return.
Example: Here, you inform the tax agency (CRA) about your contributions on Line 10130, resulting in a reduction of the taxable income. Maintaining documentation from your employer or insurance company is important to support this reduction if the CRA requests verification.
Self-Employment Income (If you have)
In Canada's T1 Personal Income Tax Return form, “Self-employment income” is an item that is reported, not subtracted. When filing taxes, you need to report all income earned from self-employment activities. This includes income derived from your business, profession, commission, farming, or fishing activities.
However, when calculating your “Net self-employment income”, you are allowed to subtract reasonable and necessary business expenses directly related to your self-employment activities. These expenses might include:
Office supplies and equipment expenses
Vehicle and transportation expenses
Advertising and promotion expenses
Professional and business insurance expenses
Business-related travel and entertainment expenses
Professional dues and license fees
After subtracting these expenses, you arrive at your net self-employment income, which is included in your taxable income and used to calculate the taxes you owe. These deductions are in place to ensure taxpayers are taxed only on the net income they actually earn, rather than their gross income.
For accurate completion of the T1 form and correct reporting of self-employment income and associated expenses, you might need to seek the help of a professional tax advisor. These professionals can assist you in understanding allowable expenses and ensure you fill out the tax forms correctly to avoid any potential tax issues or audits.
Note: tax laws and policies may change over time, so it's advisable to consult with professionals for the most accurate and current information when planning your taxes or completing tax forms. The information I provided may not be entirely accurate or may be outdated, so you should refer to the most recent tax laws and policies or consult a tax professional to get the most accurate and relevant information.