Individual Tax Series: The General Types of Income, Deductions, and Credits
- Rylan Kaliel
- Apr 7
- 4 min read
Updated: Apr 11
Understanding the general flow of income, deductions, and credits within the Canadian tax system is key to effectively managing your finances and maximizing your tax savings. This overview will clarify how income is processed through the taxation system and how they impact your taxes payable.
Understanding Why Different Types of Income Matters
The Canadian taxation system may apply different tax rates or provide different benefits, such as tax credits, depending on the type of income you receive. Most income is taxed at the marginal tax rates noted in our previous blog (which for the purposes of this blog we will describe as being taxed at the “full rate”), however, income such as dividends may require an adjustment to the amount of income received and a corresponding tax credit. Further, capital gains are generally taxed at only 50% of the actual gain received.
As such, we should dive deeper into the various types of income you may earn to get a better understanding of how different income might impact your taxes.
Identifying Your Income
The taxation process begins with identifying all sources of income you received throughout the tax year. In Canada, you must report income earned from various sources, including but not limited to:
Employment Income
Salary, wages, bonuses, tips, and taxable benefits, typically reported on a T4 slip. Typically, employment income is taxed at the full rate. Some exceptions may apply, such as stock options.
Dividends
Income received from corporations, including private and public corporations, typically reported on a T5 slip. Dividends are tricky when it comes to taxation. The amount of income you report for dividends would be increased through what we call a “gross up”. A tax credit is then available when dividends are received. Generally, dividends are taxed at a lower rate of tax then the standard full rate of tax. More on this in an upcoming blog.
Capital Gains
Income earned on the sale of assets that is considered capital property, or assets held for a long-term, occasionally reported on a T5008 slip. Capital gains are taxed at 50% of the income amount, this means that you would apply the full rate tax on only 50% of the income earned. For example, on a capital gain of $100, you would pay the full rate of tax on $50. More on this in an upcoming blog.
Investment income (other)
Income earned on investments, other than dividends and capital gains, are typically reported on a T5 slip. Investment income is normally taxed at the full rate of tax with some exceptions.
Business or Self-Employment Income
Earnings from your own business, freelance work, and/or side jobs, occasionally reported on a T4A slip. Typically, business income is taxed at the full rate of tax, however, there can be a lot of tax deductions for business income that would reduce the taxes payable. More on this in an upcoming blog.
Rental Income
Earnings derived from renting out property. Similar to business income, deductions may be available for the cost of the rental property. Typically, rental income is taxed at the full rate of tax.
Pension and Retirement Income
Payments from CPP, OAS, private pensions, RRIF withdrawals, and other similar amounts, can be reported on a T4A and/or T4RSP or T4RIF slip. Typically, pension and retirement income is taxed at the full rate of tax.
Government Benefits
Certain taxable benefits such as Employment Insurance (EI), typically reported on a T4E slip. Typically, government benefits are taxed at the full rate of tax.
Partnership Income
Income earned from units held in a partnership, typically reported on a T5013 slip. Partnership income is often referred to as “flow-through” income, which means that the type of income earned by the partnership is considered to be the same type of income the individual receives, which means you’d have to consider the type of income earned from the partnership to determine how this might be taxed.
Trust Income
Income received from a trust, as distributed by the trustees of the trust, typically reported on a T3 slip. Similar to partnerships, trust income is generally flow-through income, meaning you’d have to consider the type of income earned from the trust to determine how this might be taxed.
Income from Foreign Sources
Income received from foreign sources, which could be business, investment, retirement, or other forms of income depending on your situation. Most income from foreign sources is taxed at the full rate of tax, however, some special deductions for this income can be received. More on this in an upcoming blog post.
It's crucial to include all of your income, as omissions can lead to reassessments, penalties, or interest charges from the CRA.
Other Types of Income
While the above would represent the majority of the income sources you can expect to receive, there can be other sources of income that don’t easily fit into the above. It is important that these sources of income be reviewed carefully to ensure they are taxed correctly to avoid any reassessments, penalties, or interest charges from the CRA. Where you earn income that is not easily identifiable, it is recommended you consult with an income tax professional to review these amounts.
Summary
Grasping the general flow of income empowers you to manage your taxes confidently and strategically. With clear knowledge of how each step interacts, you'll be better positioned to optimize your tax situation year after year.
A key step in the process is understanding the different types of tax slips you may receive and what income is reported on these slips. Stay tuned for our next blog, where we'll dive into the common tax slips to give you a better understanding of what is reported on these slips.
Need professional accounting guidance? KLV Accounting is here to help. Contact us today to enhance your financial strategy and drive business success!
For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
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