Chapter 5 TAX PAYABLE

Objectives:

After completing this chapter, you will be able to:

Calculate Federal Tax Payable;

Calculate Provincial Non-Refundable Credits
Calculate Provincial Tax Payable;
Calculate Provincial Tax Reduction; and

Introduction

In the previous chapters, you have learned about different types of deductions and federal credits.
This chapter will explain how to calculate tax on taxable income. This chapter is mechanical in
nature and deals with numerous numbers and calculations. The first step in performing detailed
tax calculation is to understand the different steps involved in preparing tax returns. Let us go back
few steps to look at some of the important parts of a tax return.

Step 1 – Identification and other information

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Step 2: Total Income (Line 15000)

Income from all the sources has to be reported on a tax return. Line
15000 gives you total amount of income received during a taxation
year. Add all the income from various sources to determine Line
15000. Total income includes Lines from 10100 to 14700.

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Step 3: Net Income (Line 23600)

The Income Tax Act contemplates a two-stage income calculation. Certain deductions and losses
are applied in arriving at “Net Income”, which may generally be regarded as all actual earnings
net of related expenses and current year deductible losses. The taxpayer is allowed to deduct certain
deduction from total income. Thus, Net income is used to calculate various tax credits such as,
GST Credit, Child Tax Benefit, Spousal amount, Provincial tax credits, Medical expenses
threshold and Age credit. The following are the various allowable deductions:
RRSP contributions; Support Payments;
RPP contributions; Business Investment Losses;
Elected split-pension amount; Disability supports deduction;
Union dues; Employment expenses;
Universal child care benefit repayment Legal fees in certain circumstances;
Child care deduction; Certain unused RRSP contribution
Moving expenses; refunded; and
Carrying charges; Social benefit repayment

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Step 4: Taxable Income (Line 26000)

Before beginning the calculation of tax payable, the tax filer must determine taxable income for
the year. Taxable income is calculated in step 4 of the Income Tax and Benefit Return.

Taxable income is the number on which income tax is calculated. Following are some deductions,
which are allowed in calculating taxable income.

Employee home relocation loan (from T4 Slip).

Stock option deduction (from T4 Slip).
Other Payment deduction, which includes worker’s compensation, social assistance and net
federal supplement.
Limited Partnership losses of other years.
Non-Capital Losses of other years.
Net Capital Losses of other years.
Capital gains deduction.
Northern Resident Deduction.
Additional deductions.

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Step 7: Refund or Balance Owing

For purpose of calculating Refund or Balance Owing, the two important topics which we will be
discussing in this chapter, are:
Net Federal Tax
Provincial Tax, which for the purposes of this chapter is Ontario Tax.

Net Federal Tax

Federal tax is based on taxable income. Part A Federal non-refundable tax credits are used to
determine federal income tax. Take the amount for taxable income from Line 26000 of the return
and enter it on Line 35 of Part A Federal non-refundable tax credits. Depending upon your taxable
income, complete only one of the 4 columns. The tax is applied at rate of 15%, 20.5%, 26%, 29%
and 33%.

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The next step in calculating federal tax is the calculation of federal non-refundable tax credits.

Step 5 – Federal tax (formerly Schedule 1)

Part A – Federal non-refundable tax credits

Federal Non-Refundable tax credits reduce the amount

of federal tax payable, but only to the extent of tax
owed. If the total amount of non-refundable tax credit
exceeds the amount tax owing, the difference is not
refunded to the taxpayer.

The following are some of the available non-refundable tax credits.

Basic Personal Amount (for all the taxpayer’s resident in Canada).

Age Amount (If born 1954 or earlier).
Spousal Amount ($12,069 minus spouse’s net income on line 23600)
Amount for an eligible dependant ($12,069 minus dependant’s net income on line 23600)
Canada caregiver credit for infirm dependants 18 or older.
Canada caregiver credit for children under 18 years of age ($2,230 per child)
Volunteer firefighter’s amount
Canada employment amount (max.$1,222)
CPP or QPP contributions (box 16 or 17 on T4 Slips).
CPP on Self Employment Earnings (business statement).
EI Premium (box 18 on T4 Slips).
Home buyer’s amount $5000.
Adoption Expenses
Pension Income amount (max. $2,000)
Disability Amount ($8,416).
Disability amount transferred from dependant.
Tuition and education amounts (Schedule 11).
Tuition fees and education amount transferred from a child (maximum federal transfer
$5,000).
Charitable Donations Credit.

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Example 1: Michelle is a single mother. She has a four-year-old daughter who is disabled. Canada
Revenue Agency has approved T2201 on file for her daughter. She received the following T4. She
wants to claim disability amount for her daughter and amount for an eligible dependant. She has
tuition fees of $1,000 and donations of $250. She doesn’t have any other income or deductions.
What would you advise her? Complete Part A Federal non-refundable tax credits, Federal tax
calculations and ON428, provincial tax calculations.

Answer: Basic credit amount for an eligible dependant, disability credit, CPP & EI, employment
amount, are non-refundable tax credits, which only reduce tax payable (Federal tax Line 42000
and Provincial tax line 42800 of Income Tax and Benefit Return) to zero. CRA will refund the
income tax deducted of $500.00

Michelle will not be getting additional tax refund from non-refundable credits. Any excess amounts
of non-refundable tax credits over the tax payable are not refundable. She can carry forward
donations and tuition fees to future years. She will be entitled to CWB and Ontario Credits.

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Example 2: Ian who is twenty-five years old has the following T4. He only has basic personal
exemption for his non-refundable tax credit. What would be Ian’s federal tax payable on line 420
of Income Tax and Benefit Return? Calculate his Federal tax payable.

Answer: Ian’s tax payable on line 42000 of Income Tax and Benefit Return would be zero as his
non-refundable credit would be more than his income. He will not be getting any additional tax
refund from non-refundable credits. Any excess amounts of non-refundable tax credits over the tax
payable are not refundable. CRA will refund income tax deducted of $250. He may be eligible for
other credits such as CWB, GSTC and OTB.

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Federal Foreign Tax Credit- Line 40500

This credit is for foreign income or profits taxes you paid on income received
from outside of Canada and reported on Income Tax and Benefit Return.
Certain tax treaties with other countries may affect as to whether a taxpayer
is eligible for this credit. Foreign tax credit claimed is always lower of:
a) foreign income tax actually paid; or
b) total amount of tax due to Canada on net income from that country.

Supporting documents: If you are filing electronically, keep all your documents in case CRA
asks to see them at a later date. If you are filing a paper return, attach your completed Form T2209,
Federal Foreign Tax Credits and documents that show the foreign taxes you paid. If you paid taxes
to the United States, attach your W-2 information slip, U.S. 1040 return, and any other supporting
documents that apply. In case of an audit, CRA may require transcript from IRS.

Completing your tax return: Complete Form T2209, Federal Foreign Tax Credits and enter the
amount from line 12 on line 40500 of your Part A Federal non-refundable tax credits. Complete
the tax and credit form for your province or territory of residence as the provincial or territorial
credit is calculated separately.

Note: You may have deducted an amount on line 25600 for income that is not taxable in Canada
under a tax treaty. In that case, do not include that income, or any tax withheld from it, in your
foreign tax credit calculation.

Federal Dividend Tax Credit for Canadian Corporations -Line 40425

This credit is available to taxpayers who report dividends from taxable Canadian corporations on
Line 12000 of the T1 return.
The dividend tax credit amounts are usually shown on the following slips:
T5, Statement of Investment Income
T4PS, Statement of Employee Profit-Sharing Plan Allocations and Payments
T3, Statement of Trust Income Allocations and Designations
T5013, Statement of Partnership Income
T5013A, Statement of Partnership Income For Tax Shelters and Renounced Resource
Expenses

If you did not receive a dividend information slip and you received:
eligible dividends, the federal dividend tax credit will be 15.0198% of your taxable
amount of eligible dividends included on line 12000 of your return.
other than eligible dividends, the federal dividend tax credit is 9.0301% of your taxable
amount of dividends reported on line 12010 of your return.

Foreign dividends - Foreign dividends do not qualify for the federal dividend tax credit.

Completing your tax return: Enter on line 40425 of Part A Federal non-refundable tax credits,
the amount of your federal dividend tax credit. Complete the tax and credit form for your province
or territory of residence, as the provincial or territorial credit is calculated separately.

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Provincial Taxes

Provincial tax rates vary from

province to province. The Federal
government collects provincial tax
on behalf of all provinces except
Quebec.

TONI is a method of calculating

provincial personal income tax
that started with the year 2000. It
basically parallels the federal
calculation with taxable income as the starting point. TONI is an acronym that stands for Tax on
Income. "Income" refers to taxable income. TONI provides participating provinces and territories
with greater flexibility in tailoring their tax systems to meet their needs and priorities.

Under the previous "tax-on-tax" system used in all provinces and territories except Quebec,
provincial personal income tax was calculated as a percentage of basic federal tax.

Under TONI, participating provinces and territories are able to set their own tax brackets and tax
rates. They are able to add supplements to existing non-refundable tax credits such as personal or
spousal amounts, and introduce new non-refundable tax credits.

We will discuss the Ontario rates for the purpose of this course. Other provinces have similar rules
to Ontario with the exception that the amounts change for various exemptions and credits. The tax
rates and tax brackets are different for each province. Please visit the Softron website or CRA
website for the most recent amounts for the provinces.

Note: The most recent provincial forms will be included in the electronic version of the course on
moodle

Residents of Ontario can use Form ON428 to determine Ontario tax, Ontario tax reduction, and
Ontario labour sponsored investment fund (LSIF) tax credits.

Other provinces: The tax calculations are discussed in Chapter 8

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-
return/tax-return/completing-a-tax-return/provincial-territorial-tax-credits-individuals.html

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Part A – Ontario Non-Refundable Tax Credits

The rules for calculating Ontario non-refundable tax credits are similar to Federal non-refundable
tax credits. However, the values and calculations for Ontario non-refundable credits are different
from the corresponding federal credits.

Description Federal Ontario

Basic Personal amount: $12,069 $10,582
Spousal/amount for an eligible dependant: $12,069 $8,985
Age Credit: $7,494 $5,166
Disability amount: $8,416 $8,549
Disability amount supplement for children with severe disabilities: $4,909 $4,987
Canada Caregiver amount for other infirm dependants age 18 or older: $7,140 $4,987
Canada Caregiver amount for infirm children under 18 years of age: $2,230
Tuition & Education amounts transferred: $5,000
Pension Income $2,000 $1,463
Adoption $16,255 $12,910

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Part B – Ontario Tax on Taxable Income

The basic Ontario tax is based on the following four tax brackets.

Income Ontario Tax Rate

$43,906 or less 5.05%
$43,906 - $87,813 9.15%
$87,813 - $150,000 11.16%
$150,000 – 220,000 12.16%
$220,000 and more 13.16%

Part C – Ontario Tax

Calculate Ontario Tax on taxable income in Part B and enter on Line 36 of Ontario tax calculation
form (ON428). Now deduct the Ontario non-refundable tax credits calculated in Part A, Ontario
dividend tax credit and Ontario minimum tax carry over. Enter the difference on line 48.

To this, the taxpayer would also have to add Ontario additional tax for minimum tax purposes.

This is only for more complicated returns, which are out of the scope of this course.

Ontario Dividend Tax Credit

This credit is available to taxpayers who report dividends from taxable Canadian corporations on
Line 12000 of the T1 return. 10% (Eligible dividends) and 3.2863% (Other than Eligible
dividends) reported is a credit that will reduce the basic Ontario tax.

Ontario Surtax

If basic Ontario tax is more than $4,740, a taxpayer must pay an additional surtax of 20%, plus
36% if Ontario tax is more than $6,067.

Ontario Tax Reduction

A taxpayer may be able to reduce or eliminate Ontario tax by claiming an Ontario tax reduction.
The basic Ontario tax reduction is $244. There is an additional tax reduction of $452 for each
dependent child and disabled or infirm dependant. If child is disabled or infirm, a taxpayer can
claim an additional $452 for a total of $904. For married or common-law couples, the spouse with
higher net income must make this additional claim. Ontario tax reduction can also be claimed on
deceased person’s return.

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Ontario Foreign Tax Credit

If the taxpayer’s federal foreign tax credit on non-business income is less than the related tax paid
to a foreign country, the taxpayer may be eligible to claim an Ontario foreign tax credit.

Ontario Health Premium

If the taxpayer is a resident of Ontario at the end of the year, and the taxable income is more than
$20,000, the taxpayer is required to pay the Ontario Health Premium (OHP). The OHP is based on
taxpayer’s taxable income.

Example 3: Marci is twenty-five years old has taxable income of $8,800. She has her personal
exemption and CPP /EI as her non-refundable tax credit. How much is provincial tax payable for
Marci.

Answer: Her provincial tax payable will be zero since the is below the Basic Personal amount.
Remember that basic personal exemption amounts are different for provinces.

Example 4: What if (refer to example 3) Marci, had taxable income of $38,400 and has personal
exemption CPP $1,779.90 and EI $622.08 as non-refundable tax credit. What is the provincial tax
payable for Ontario?

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Example 5: Stewart Jackson was born on December 09, 1960 has a net income of $58,240.
Stewart's T4 shows CPP $2,748.90, EI $860.22, Union Dues $540.00 and tax deducted $6,950.
His SIN is 500-500-232. His current mailing address is 4250 Finch Ave. Toronto, ON M4P 1S5.
He is married to Natalie. She doesn't have any income for the year. Natalie took full time course
from Jan-April and paid $2,930 in tuition fee. She has a T2202 from school. Complete Stewart's
tax return.

Answer: See the attached schedules. Stewart can claim federal tuition fee transfer on line 32600
for $2,930.

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Approximate Tax Calculations

As a tax professional, you should be able to calculate an approximate

refund or balance owing by just looking at the slips. The following
exercises will kick start your thought process.

Example 6: Cindy is single. She has investment income of $8,000. She

has no other credits to claim. Calculate her tax refund or tax payable?

Answer:
Taxable Income $8,000
Less: Non-Refundable Tax Credits:
Personal Credit $12,069
Tax Payable-approximate 0
She will also be eligible for Ontario Trillium benefit and GST credit.

Example 7: Refer to example 6. If everything is same except Cindy’s interest income is $19,300
and her federal tuition amount is $8,380. Calculate her Federal and provincial tax payable.

Answer: Taxable Income $19,300

Federal tax $19,300 @ 15% $ 2,895
Less: Federal Non-refundable Tax credits

Personal Amount: $12,069

Tuition & Education amount 8,380
20,449
Multiply this amount by 15% 3,067.35
Federal Tax Payable 0.00
Provincial Tax Payable 0.00
Total Payable 0.00

Complete this chapter’s exercises online before proceeding to the next Chapter.
After completing the exercises check your answers.
Also watch the Videos Available Online to complete your learning

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