INCOME TO TAX PAYABLE

The T1 return follows a fixed sequence. Each step produces a defined amount on a numbered line, and many benefits and credits look to a specific one of those lines. Understanding the sequence explains why a deduction and a credit of the same size have different values.

STEP 1: TOTAL INCOME (LINE 15000)

All sources of income are added together: employment, pension, investment, rental, business, capital gains, and other income. Net self-employment income is included after business expenses.

STEP 2: NET INCOME (LINE 23600)

Deductions on lines 20600 to 23500 are subtracted from total income. They include:

• Pension adjustment reversal and RPP contributions (line 20700)

• RRSP and PRPP deduction (line 20800) and FHSA deduction (line 20805)

• Union and professional dues (line 21200)

• Child care expenses (line 21400) and disability supports deduction (line 21500)

• Business investment loss (line 21700), moving expenses (line 21900)

• Support payments made (line 22000), carrying charges and interest (line 22100)

• CPP or QPP contributions on self-employment and enhanced contributions (lines 22200 and 22215)

• Other employment expenses (line 22900), clergy residence (line 23100), other deductions (line 23200)

• Social benefits repayment, the OAS and EI clawback (line 23500)

Net income is the key figure for income-tested programs: the age amount, the medical expense threshold, the OAS clawback, the Canada Child Benefit, and the Groceries and Essentials Benefit all use it.

STEP 3: TAXABLE INCOME (LINE 26000)

Further deductions on lines 24400 to 25600 are subtracted: the Canadian Forces and police deduction, the employee home relocation loan deduction, security options deductions, other payments (workers' compensation and social assistance), prior-year losses, the capital gains deduction, northern residents deductions, and additional deductions. Taxable income is the base to which tax rates apply.

STEP 4: FEDERAL TAX (SCHEDULE 1)

Bracket rates are applied to taxable income. Non-refundable credits (line 35000) are subtracted, then the federal dividend tax credit (line 40425), the minimum tax carryover, and the foreign tax credit. The result is basic federal tax, then net federal tax (line 42000) after political contribution and investment tax credits.

STEP 5: PROVINCIAL TAX (FORM 428)

The same steps are repeated using provincial brackets and credits. For Ontario, surtax, the Ontario tax reduction, the LIFT credit and the Ontario Health Premium are added or subtracted. The result is entered on line 42800.

STEP 6: TOTAL PAYABLE (LINE 43500)

Net federal tax, CPP contributions payable on self-employment, EI premiums on self-employment, the social benefits repayment and provincial tax are added together.

STEP 7: REFUND OR BALANCE OWING (LINE 48400 OR 48500)

Total credits (line 48200) are subtracted from total payable. They include income tax deducted at source (line 43700), CPP and EI overpayments (lines 44800 and 45000), refundable credits such as the Canada Workers Benefit and medical expense supplement, and instalments paid (line 47600). A negative result is a refund; a positive one is a balance owing, due April 30.

DEDUCTION OR CREDIT: WHY IT MATTERS

• A deduction reduces income, so it saves tax at the taxpayer's marginal rate. A $1,000 RRSP deduction saves about $296 for an Ontario resident in the 20.5 percent federal and 9.15 percent Ontario brackets.

• A non-refundable credit reduces tax at a fixed rate (14 percent federal plus 5.05 percent Ontario), no matter how high the income. A $1,000 credit amount saves about $190.

• A refundable credit is paid even if no tax is owed.

• Deductions also reduce net income, which can increase income-tested benefits; credits do not.