8.2.3 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. However, 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).
Refer to the section of the T1 tax return below titled Total Income. Where would your income fit in the tax return?
Make a note of any that apply to you on the following form.
Employment income (lines 10100 to 10400) includes all the money and other benefits you make while working for an employer. It includes commissions, tips and gratuities, 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 send them to the Canada Revenue Agency (CRA). Once a year, your employer issues a T4 slip, which shows you (and the CRA) what you earned and what taxes were withheld. Check to make sure your employer is withholding the correct amount. Ask your pay clerk for more information.
Employment insurance (line 11900) and disability benefits (line 11410) are also taxed as if they were employment income.
Income from self-employment
Income from self-employment (lines 13500 to 14300) 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 month or quarter.
Income you make from investments falls into several different categories:
- Interest income (line 12100) 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 a T5 or other information slip stating the amount of interest you have earned.
- Dividends (line 12000) 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 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 a T5 or other information slip stating the amount of dividends you have earned.
- Rental income (line 12600) is income you make by renting out property as a business. 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 add it to your T1 tax return.
- Profits from the sale of property (line 12700) 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, the transfer will be treated as a sale, and the capital gain will then have to be calculated and paid.
Pension and other income
Pension income (lines 11300 to 11600) must be reported like other income under Canada's income tax system. However, a special age or disability exemption may protect a portion of the pension income from tax, and you may be permitted to split pension income with a spouse. Your pension manager will send you a pension income slip, such as a T4A, 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 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, 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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