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);
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(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);
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(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
