ARCHIVED - Order of Provisions Applicable in Computing an Individual's Taxable Income and Tax Payable
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SUBJECT: INCOME TAX ACT Order of Provisions Applicable in Computing an Individual's Taxable Income and Tax Payable NO.: IT-523 DATE: August 25, 1989 REFERENCE: Sections 111.1 and 118.92 APPLICATION This bulletin applies for 1988 and subsequent taxation years. IT-431R2 "Order of Provisions Applicable in Computing Taxable Income of an Individual" and the Special Release thereto remain in effect for taxation years prior to 1988. SUMMARY Section 111.1 provides for the order in which certain deductions must be taken in computing taxable income. This bulletin reflects the fact that section 111.1 has been amended for 1988 and subsequent taxation years as a result of the repeal of the forward averaging and the $1000 Canadian investment income deductions and the conversion to tax credits of certain deductions such as the personal exemptions and the pension income deduction. Section 118.92 provides for the order in which the various tax credits available as a result of Tax Reform shall be applied in computing an individual's tax payable for 1988 and subsequent taxation years. DISCUSSION AND INTERPRETATION 1. In computing the taxable income of an individual for the 1988 and subsequent taxation years, section 111.1 requires that the provisions of Division C of Part I of the Act are to be applied in the following order: (a) to increase taxable income by the elected portion before 1998 of the accumulated averaging amount at the end of the immediately preceding taxation year, reduced by the individual's non-capital loss or farm loss for the current taxation year (subsection 110.4(2)); (b) to decrease taxable income by deductions in respect of: (i) employee stock options, worker's compensation, and social assistance benefits, among others, pursuant to section 110; (ii) losses under section 111 (see 2 below); PAGE 2 (iii) capital gains on qualified farm property, qualified small business corporation shares and other property pursuant to section 110.6; and (iv) northern allowances (section 110.7). LOSSES 2. Under section 111, a taxpayer may carry over losses of a taxation year to be deducted in computing taxable income of other taxation years (see the current version of IT-232 "Non-Capital Losses, Net Capital Losses, Restricted Farm Losses, Farm Losses and Limited Partnership Losses - Their Composition and Deductibility in Computing Taxable Income"). A taxpayer may choose the order in which non-capital losses, net capital losses, restricted farm losses, farm losses and limited partnership losses are to be deducted. Subsection 111(3) requires, however, that losses of any one particular type that have arisen in more than one taxation year are to be deducted in the chronological order in which they were incurred. Thus, taxpayers will not forfeit their right to a loss carry forward solely because of the order chosen in deducting a particular loss. Factors such as the date on which a particular unapplied loss lapses and prospects for future income of the type necessary to absorb the losses will govern a taxpayer's decision as to which losses are deducted. OTHER DEDUCTIONS 3. There is no ordering provision in section 110 itself, and taxpayers may choose in which order to deduct the various deductions permitted therein. For the purposes of the deduction under section 110.6 (see 1(b)(iii) above), where deductions in respect of capital gains on qualified farm property (subsection 110.6(2)) or qualified small business corporation shares (subsection 110.6(2.1)) are being made, these deductions must be made before a deduction can be made in respect of capital gains on other property (subsection 110.6(3)). ORDERING OF TAX CREDITS 4. In computing the tax payable by an individual under Part I of the Act for the 1988 and subsequent taxation years, section 118.92 requires that the tax credit provisions be applied in the following order: (a) personal tax credits, that is the married tax credit, married equivalent tax credit, basic personal tax credit and dependant tax credit (subsection 118(1)); (b) the tax credit for an individual who has attained 65 years of age (subsection 118(2)); (c) the tax credit for employee premiums for Unemployment Insurance and employee contributions to the Canada or Quebec Pension Plans (section 118.7); PAGE 3 (d) the tax credit for an individual who is in receipt of certain pension income (subsection 118(3); (e) the tax credit for severe and prolonged mental or physical impairment of (i) an individual (subsection 118.3(l)) or (ii) a dependant (subsection 118.3(2)); (f) the tax credit for tuition fees of a student who is enrolled at an appropriate educational institution (section 118.5); (g) the tax credit for a student enrolled in a qualifying education program at a designated educational institution (section 118.6); (h) the tax credit in respect of unused tax credits for tuition or education that are transferred to the student's parent or grandparent (section 118.9); (i) the tax credit in respect of unused tax credits for tuition, education, age, pension and mental or physical impairment of an individual that are transferred from the individual to the individual's spouse (section 118.8); (j) the tax credit for medical expenses (section 118.2); (k) the tax credit for charitable donations (section 118.1); and (l) the tax credit in respect of the tax on dividends (section 121). The above description of the tax credits is to assist the reader to identify them. To determine whether an individual is entitled to a specific tax credit the relevant provision of the Act must be consulted. The Department has published the following bulletins which discuss these tax credits: IT-513 Personal Tax Credits IT-515 Education Tax Credit IT-516 Tuition Tax Credit IT-517 Pension Tax Credit IT-519 Medical Expense and Disability Tax Credits
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