Understanding Income, Total Income, Net Income, and Taxable Income in Canada

Income

Under the provisions of the Income Tax Act, individuals are required to calculate their "income" for each tax year. While the Act does not provide an exact definition of "income," it can be understood by referring to Section 3 of the Income Tax Act.

Section 3 establishes guidelines for combining a taxpayer's income from different sources. It requires individuals to calculate income from each source separately and combine the amounts to determine the total income for the year.

The main sources of income include:

• Employment.
• Property/Investments.
• Business.
• Other sources of income.

However, "income" is a general term and, for tax purposes, it is not restricted only to income from these mentioned sources. Section 3 also states that income from any other source is also taxable.

Amounts Not Included as Income on a Tax Return

The following types of income are not included as income on the tax return:

• Certain Civil and Military Service Pensions, allowances, or compensations under the Act or orders.
• Lottery winnings or inheritances.
• Winnings from betting or gambling.
• War disability pensions.
• Goods and Services Tax Credit.
• Canada Child Benefit payments (other than universal).
• Most amounts received from a life insurance policy following someone's death.
• RCMP pension or compensation for injury, disability, or death that occurred in the course of duty.
• Uniform and supplies paid by an employer and given to an employee.
• Meals at cafeterias or dining rooms provided at low prices.
• Foster parent payments.
• Expense allowances of MLAs, MPs, and other elected officials.
• Gifts or inheritances (gifts from an employer are taxable if they exceed $500).
• Amounts received from the province by a victim of a criminal act or motor vehicle accident.
• Maintenance insurance policies if the employer pays no part of the premium, such as proceeds from accident or disability coverage.
• Capital elements of annuities.
• Non-taxable dividends paid by a Canadian corporation.
• Income of an Indian living on a reserve, if earned on reserve.
• Windfall gains.

Income earned on any of the above amounts is taxable, such as interest earned on the investment of lottery winnings.

Total Income

Total income is income from all sources except those sources of income, such as lottery winnings, that are not required to be reported for tax purposes.

The sum of income from all sources is totaled at Line 15000.

Net Income

Net income is determined by subtracting all current-year deductions from the total income earned from both Canadian and non-Canadian sources.

Net income plays an important role in calculating various credits, including:

• GST Credit.
• Canada Child Benefit.
• Spousal Amount.
• Provincial Tax Credits.
• Medical Expenses.

Net income is reported on Line 23600 of the T1-General form.

Taxable Income

Taxable income is determined by subtracting allowable deductions, such as Worker's Compensation, Social Assistance, Guaranteed Income Supplements, and spouse's allowances, from net income.

Taxable income represents the income on which both Federal and Provincial taxes are calculated.

The taxable income amount is reported on Line 26000 of the tax form.