1.2 How do you get from Net Income for Tax Purposes to Taxable Income to Tax Payable?
Gurveer Brar
After determining Net Income for Tax Purposes using the Section 3 ordering rules, Division C deductions are subtracted to get to the Taxable income (note, don’t confuse Division ‘C’ deductions with Section 3(c) deductions). Then, Marginal rates are applied to the Taxable Income to calculate the Tax Payable before credits. Lastly, credits are deducted to get to the Tax Payable. This is best illustrated with an example using 2023 marginal rates and tax credits.
| FORMULA | EXAMPLE |
|---|---|
| Section 3 ordering rules | |
| 3a. Employment Income | $72,000 |
| Business Income | $1,200 |
| $73,200 | |
| + | $73,200 |
| 3b. (TC Gains > AC Losses) | |
| Taxable Capital Gains | $4,500 |
| Allowable Capital Losses | -$700 |
| $3,800 | |
| – | $77,000 |
| 3c. RRSP Deduction | -$2,000 |
| -$2,000 | |
| – | $75,000 |
| 3d. Loss from Property | -$4,000 |
| -$4,000 | |
| $71,000 |
Reference: ITA 3(a)-3(f)
| Net Income for Tax Purposes | $71,000 | |
|---|---|---|
| Less: Division C Deductions | ||
| Non-capital Loss | -$6,000 | See ITA 109 to |
| Net-capital Loss | -$2,000 | |
| -$8,000 | ||
| Taxable Income | $63,000 | |
| Apply Marginal Rates | 15% for $53,359 | ITA 117 |
| $8,004 | ||
| 20.50% for $9,641 | ||
| Tax payable before credits | $1,976 | $9,980 |
| Less: | ITA 118 | |
| Personal credits | -$2,250 | |
| EI credits | -$150 | |
| Employment credits | -$205 | |
| CPP credits | -$468 | |
| -$3,074 | ||
| Tax Payable (after credits) | $6,906 | |
Interactive Content
Author: Anthony Au, June 2019
This is a video walkthrough of a tax payable worksheet. Note that some tax rates and credits used in the video may be slightly outdated, but the concepts remain the same.
Interactive Content
Video author (Sam Newton); Source document (BCIT, author unknown).
Video: “Walkthrough of the Part I tax payable handout” by Kwantlen Tax [5:14] is licensed under the Standard YouTube License. Transcript and closed captions available on YouTube.
References and Resources
- Income Tax Act, RSC 1985, c1, (5th Supp.) ss 3(a)-(f), 109-114, 117, 118
- Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.3.2
“How do you get from Net Income for Tax Purposes to Taxable Income to Tax Payable?” from Introductory Canadian Tax Copyright © 2021 by Gurveer Brar is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
