Computing Income

Question 1

How do you compute income under Section 3 of the ITA?

Answer 1

To compute income under section 3, you need to:

• understand the source concept in section 4
• compute each source of income separately, as defined in section 4
• allocate amounts using the format of section 3

Question 2

What is the source concept in section 4?

Answer 2

A taxpayer must compute his or her income or loss from each source independently by allocating deductions in amounts that can be applied reasonably to each revenue source.

Division B Sources are:

• Subdivision a - Employment Income
• Subdivision b - Business or Property Income
• Subdivision c - Taxable Capital Gains and Allowable Capital Losses
• Subdivision d - Other Income

Question 3

List the 4 steps for computing income.

Answer 3

1. determining the liability, (i.e., whether Part 1 tax applies)
2. computing income:
   
   • employment income
   • business income
   • property income
   • capital gains/losses
   • other income
3. computing taxable income
4. computing taxes payable

Question 4

List the steps in ITA Section 3 calculation of Net Income.

Answer 4

• Par. 3(a) Sopurces of income (all positives)
• +Par. 3(b) Net capital taxable gains
• • Par. 3(c) Subdivision and deductions
• • Par. 3(d) Losses from employment, property or business
• = Division B income or “income for tax purposes” (cannot be less than 0).
  
  • This is the same as “Net Income” on the T1 tax return
  • This is not the same as taxable income. Taxable income is Division B income minus Division C deductions

Question 5

List the details of Paragraph 3(a) Sources of income

Answer 5

The total of:

• Employment income
• Business income
• Property income
• Other income

Question 6

How do you calculate Employment Income?

Source concept example: Employment Income

Answer 6

• Use only those items (income/loss, deductions) from that source (section 4)
• Basic rules section 5 details what can be included and excluded
• Add benefits under sections 6 and 7
• Deductions under section 8
• = Employment income

Question 7

Paragraph 3(b): How do you calculate Taxable Capital Gains

Answer 7

• Taxable Capital Gains
• • Taxable Net Gain from listed personal property (LLP)
• • Allowable Capital Loss (not including ABIL)
• = Amouint, cannot be less than 0

Question 8

Paragraph 3(c): Explain this paragraph

Answer 8

• Paragraph 3(c) is deducted from Paragraphs 3(a) and 3(b)
• consists of Subdivision e and deductions
• These are General deductions not attributable against any one source
• Examples include:
  
  • Child care expenses
  • Moving expense
  • RRSP contributions

Question 9

ExplainLo

Paragraph 3(d)

Answer 9

• This paragraph, along with 3(c) is deducted from 3(a) and 3(b)
• The total of:
  
  • Loss from Office or Employment
  • Loss from Business
  • Loss from Property
  • Other losses
  • ABIL (Allowable Business Investment Loss)