3.3 What are some common Division ‘C’ deductions and how do they impact taxes payable?
Falak Sharma
The taxable Income of an individual is equal to Net Income for Tax Purposes (also known as Division ‘B’ Income) less a group of deductions found in Division ‘C’ of the ITA. There are lots of Division ‘C’ deductions however we will focus on two important ones: Net Capital Losses and Non-Capital Losses.
Net Capital Losses are generated when Allowable Capital Losses (1/2 of Capital Losses) exceed Taxable Capital Gains (1/2 of Capital Gains) in a year. In this scenario, the net taxable capital gain in S3(b) will be $Nil, and the negative amount will become a Net Capital Loss. Net Capital Losses can only be applied against S3(b) net Taxable Capital Gains in a year. They can be carried back 3 years or forward indefinitely. See ITA 111(1.1) for more details
Non-capital losses are created when the S3 ordering rules create a negative amount. In this situation, Net Income For Tax Purposes (‘NITP’) will be $Nil, and the negative amount will become a Non-Capital Loss. Non-Capital Losses can be applied against NITP in a given year. They can be carried back 3 years or forward 20 years. See ITA 111(5.4) for more details.
Example 3.3.1
Mr. Smith has NITP of $25,000. He has a Net Capital Loss of $4,000, and a Non-Capital Loss of $2,200 carried from previous years. Mr. Smith’s S3(b) amount is $1,500. His Taxable Income would be calculated as follows:
NITP………………………………….. $25,000
Less:
Net Capital loss…………………… $(1,500) (can only be applied against S3(b) amount)
Non-Capital loss…………………. $(2,200) (can be applied against all sources of income)
Taxable income = $21,300
The remaining Net Capital Loss of $2,500 ($4,000-$1,500) could be applied against net TCG’s in other years.
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References and Resources
- Income Tax Act, RSC 1985, c1, (5th Supp.) ss 111(1.1), 111(5.4)
- Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.3.2
“What are some common Division ‘C’ deductions and how do they impact taxes payable?” from Introductory Canadian Tax Copyright © 2021 by Falak Sharma is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
