TYPES OF INCOME

The Income Tax Act sorts income by source, and the source decides which deductions are available, when the income is recognised and how heavily it is taxed. The T1 return groups income into lines 10100 to 13000, which add up to total income on line 15000.

EMPLOYMENT INCOME

Salary, wages, commissions, bonuses, tips, vacation pay and taxable benefits from an employer are reported on line 10100 from the T4 slip. Taxable benefits include employer-paid group term life insurance premiums, personal use of a company car, and most gifts above $500. Employment income is taxed when received (cash basis). Deductions against it are deliberately narrow; only items specifically permitted, such as union dues, certain employment expenses and RPP contributions, can be deducted. See T4 Slip and Employment Expenses.

BUSINESS AND PROFESSIONAL INCOME

Self-employed individuals report net business income (revenue minus reasonable expenses incurred to earn it) on Form T2125 and lines 13500 to 14300. Business income is calculated on an accrual basis, and a much wider range of expenses is deductible than for employees. Self-employed people pay both halves of CPP contributions. See Self-Employment Income.

PROPERTY INCOME

• Interest: fully taxable, reported on line 12100. Interest on investments such as GICs must be reported annually as it accrues, even when it is not paid until maturity.

• Dividends: taxable Canadian dividends are grossed up (38 percent for eligible, 15 percent for non-eligible) and reported on lines 12000 and 12010, then offset by the dividend tax credit. The system integrates corporate and personal tax so that income earned through a corporation is taxed roughly the same as if earned directly.

• Rental income: net rent after expenses such as mortgage interest, property tax, insurance and repairs, reported on Form T776 and line 12600. See Rental Income.

• Foreign income: reported in Canadian dollars, foreign tax withheld is generally recoverable through the federal and provincial foreign tax credits.

CAPITAL GAINS

A capital gain arises when capital property, such as shares, mutual fund units or real estate that is not a principal residence, is sold for more than its adjusted cost base plus selling costs. Only half of the gain (the taxable capital gain) is included in income on line 12700. Capital losses can only be deducted against capital gains. See Capital Gains and Losses.

OTHER INCOME

• Old Age Security (line 11300) and CPP or QPP benefits (line 11400)

• Other pensions and superannuation (line 11500)

• Employment Insurance and other benefits (line 11900)

• RRSP income, including withdrawals (line 12900)

• FHSA income from taxable withdrawals (line 12905)

• Support payments received that are taxable (line 12800)

• Scholarships, bursaries and research grants above any exempt amount (line 13010)

• Workers' compensation and social assistance (lines 14400 and 14500), which are included in net income but then deducted in arriving at taxable income

NON-TAXABLE RECEIPTS

• Lottery and gambling winnings for casual gamblers.

• Gifts and inheritances (although income later earned on them is taxable).

• TFSA withdrawals and TFSA investment income.

• Qualifying FHSA withdrawals used to buy a first home.

• The Canada Child Benefit, the Canada Groceries and Essentials Benefit, the Canada Disability Benefit, and most provincial benefits.

• Life insurance death benefits.

• Gain on the sale of a principal residence (when the exemption applies).

• Scholarships for full-time students in programs that qualify for the education amount.