9.2.3 Main groups of income
The types of income listed fall into four main groups:
- general income, including income from employment, pensions and other social benefits, interest, etc.
- income from dividends paid to company shareholders (dividend income receives a special deduction that can reduce the rate of taxation, but the effect of the deduction varies)
- income you make by selling shares or other property, which are taxed on only half the profit made on the sale (except your home, which is exempt from tax when it is your principal residence)
- income from insurance, gaming and gifts, which are generally tax-free (except gifts from your employer, and some gifts of capital, such as company shares—if the gift produces income, then the income is usually taxed).
The next sections describe how these kinds of income are treated for income tax purposes using Canada's federal T1 tax return and Quebec's TP-1.D-V tax return. Although the forms follow a similar approach, each is unique.
Refer to the section of the T1 tax return and the TP-1.D-V tax return titled Total Income (see illustrations). Where would your income fit in the tax returns? Make a note of any that apply to you on the following forms.
Employment income (lines 101 to 104 of the T1, lines 101 to 107 of the TP-1.D-V) includes all the money and other benefits you make while working for an employer. It includes commissions, tips and gratuities (line 102 of the T1, line 100 of the TP-1-V), even if they are not reported on your employer’s tax records. It also includes benefits you might get from your job, such as the use of a car, free health benefits or travel.
Your employer is required to withhold from your paycheque the taxes you will owe, and sends the appropriate amounts to the Canada Revenue Agency (CRA) and the Agence du Revenu du Québec (ARQ). Once a year, your employer issues slips reporting to you (and to the tax agencies) what you earned and what taxes were withheld (T4 for federal tax, RL-1 for Quebec tax). Check to make sure your employer is withholding the correct amount. Ask your pay clerk for more information.
Employment insurance (line 119 of the T1, line 111 of the TP-1.D-V) and similar benefits are also taxed as if they were employment income.
Income from self-employment
Income from self-employment (lines 135 to 143 of the T1, line 164 of the TP-1.D-V) is income you make by working for yourself in a trade or business. The money you make is taxed like employment income, but only net income is included, that is, total income minus the expenses of running the business. So keep careful track of self-employment business expenses, such as the costs of maintaining a home office or vehicle if you use them. Most self-employed people have to send in their taxes in instalments every quarter.
Income you make from investments falls into several different categories:
- Interest income (line 121 of the T1, line 130 of the TP-1.D-V) earned on deposits or bonds does not receive special treatment. You must report it as income and pay tax on it each year. Usually you will receive an information slip stating the amount of interest you have earned.
- Dividends (line 120 of the T1, line 128 of the TP-1.D-V) are profits that companies make and pay to their shareholders. Since Canadian companies pay a corporate tax on their profits, you adjust the amount you report on dividends from Canadian companies and you can request a credit for dividends to avoid paying tax twice on the same income. This can result in a reduced rate of tax on dividend income. Usually you will receive an information slip stating the amount of dividends you have earned.
- Rental income (line 126 of the T1, line 136 of the TP-1.D-V) is income you make by renting out property. Like income from self-employment, you pay tax on the revenue received less the expenses of operating the business, such as maintenance and repairs, financing costs and property taxes. You must report your rental income and expenses on a Statement of Rental Income (Form T776) and Income and Expenses Respecting the Rental of Immovable Property report (Form TP-128-V).
- Profits from the sale of property (line 127 of the T1, line 139 of the TP-1.D-V), such as shares or real estate, are known as capital gains. You pay income tax on only half of a capital gain. Usually you pay tax only when the property is actually sold. However, if the property is transferred, such as through a gift to a family member or a bequest, it will be treated as a sale, and the capital gain will then have to be calculated and paid. Special rules may apply to transfers of assets between spouses (sections 436 and 504 LI).
Pension and other income
Pension income (lines 113 to 116 of the T1, line 114 to 123 of the TP-1.D-V) must be reported like other income. However, a special age or disability exemption may protect a portion of the pension income from tax, and you may be permitted to split eligible pension income with a spouse. Your pension manager will send you a pension income slip such as a T4A or an RL-2 stating the amount you received.
Other social benefits that you receive, such as Old Age Security, disability pensions or the Universal Child Care Benefit, may also be taxed as part of your income. Certain social benefits, such as the Child Tax Benefit, the Child Assistance Payment, the Goods and Services Tax (GST) credits, Solidarity Tax Credit, and the Guaranteed Income Supplement are tax-free. However, these social benefits may be reduced or cut off as your income increases. For details, go to Service Canada, Revenu Québec, or the agency that provides your benefit.
Most other forms of income are treated as standard income with no special provisions, except for gifts and windfalls, insurance, lotteries and gaming wins—which are tax-free. (However, professional gamblers have to pay income tax on their winnings as self-employment income.)
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