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Lesson 9: Ordering of Deductions in Computing Taxable Income
Sometimes you will have so many deductions to claim, you won't need them all to reduce your taxable income to the point where no taxes are owing. If this is the case, ordering of your deductions is key. In fact, the Income Tax Act dictates which deductions must be taken before others! The order is as follows:
- Deductions for employee stock options, employee home relocation loans, non-taxable receipts such as social assistance, workers' compensation, net federal supplements, treaty-exempt income, and vow of perpetual poverty claims. There are also deductions for prospectors' and grubstakers' shares and the disposition of deferred profit-sharing plan shares (there is a one-half deduction allowed so that the disposition of these shares matches the treatment of other types of shares).
- Loss claims, including non-capital losses, net capital losses, restricted farm loss, farm losses, and limited partnership losses.
- Capital gains exemption claim for the year.
- Northern residents' deductions.
If you have more deductions than you need in the year, you must claim deductions in the order specified above. That means you can't claim your northern residence allowances before you apply loss carryovers to your net income.
Always reduce your taxable income to equal your total tax credits for the year. If you reduce your taxable income to zero, you won't owe any taxes, but you might be wasting some deductions. For example, most taxpayers are allowed to claim the basic personal amount of $7,412 — this means the first $7,412 of taxable income is fully offset by this tax credit. Take a look at your non-refundable tax credits and other federal tax credits you have on schedule 1 of your tax return (such as the dividend tax credit, overseas employment tax credit, and alternative minimum tax carryover) to minimize your taxes, and maximize the deductions you can use in future years.
Some deductions can be carried forward to use in future years, while some cannot. So, when given the choice, always try to reduce your "discretionary" deductions, to use up all the deductions and credits that can't be carried forward. Discretionary deductions include some items used to calculate your "net income," such as RRSP deductions and moving expenses. Losses from prior years can also be carried forward (although keep in mind the ordering provisions above), so try to use up other deductions before you dip into these!
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British Columbia 2008
Based on Taxable Income
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| $0 |
- |
$9,600 |
0.00% |
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| $9,601 |
- |
$16,306 |
15.00% |
|
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| $16,307 |
- |
$16,945 |
20.35% |
|
|
| $16,946 |
- |
$28,841 |
23.55% |
|
|
| $28,842 |
- |
$35,016 |
20.35% |
|
|
| $35,017 |
- |
$37,885 |
23.15% |
|
|
| $37,886 |
- |
$70,033 |
30.15% |
|
|
| $70,034 |
- |
$75,769 |
30.15% |
|
|
| $75,770 |
- |
$80,406 |
36.50% |
|
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| $80,407 |
- |
$97,636 |
38.29% |
|
|
| $97,637 |
- |
$123,184 |
40.70% |
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| $123,185 |
- |
up |
43.70% |
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Learn how to prepare your own tax return with our exclusive tax lessons.
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Provided by CDG Books Inc. Authors of "Taxes for Canadians for Dummies" |
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