24.2.2 Types Of Income

Overview

Learn about the four types of income and how they are taxed under Canadian tax laws. This chapter will guide you through Employment Income, Business Income, Income from Property, and Capital Gains/Losses.

Employment Income

Employment income includes wages, salary, and benefits. It is taxed on a gross receipt basis, meaning deduction of costs incurred in earning this type of income for tax purposes is limited. However, several employment-related expenses can be deducted, such as:

• Pension contributions
• Union dues
• Childcare expenses

Key Definitions

• Gross Receipt Basis: The method of taxation where gross income is taxed without deducting the expenses incurred to earn it.

Business Income

Business income is any income earned from producing and selling goods or rendering services. This includes self-employment income. Unlike employment income, business income is taxed on a net-income basis, allowing the deduction of business-related expenses such as:

• Rent or mortgage
• Employee payroll
• Cost of supplies and equipment

Note: Taxation of business income is beyond the scope of this course.

Key Definitions

• Net-Income Basis: A taxation method where net income (gross income minus expenses) is taxed.

Income from Property

Income from property includes interest income, dividends, and royalties, derived from assets purchased for investment purposes. Notable examples include stocks, bonds, and mutual funds.

Note: Income from rental properties falls under this category but isn’t covered in this course.

Key Examples

• Interest Income: Income earned on savings accounts, bonds, etc.
• Dividends: Share of profits paid to shareholders of a corporation.
• Royalties: Payments made to the owner of a particular asset for the right to use that asset.

Capital Gains and Losses

A capital gain or loss arises when property is sold. Any increase in value over the purchase price is a capital gain, while any decrease is a capital loss. Capital gains are taxed only when the property is sold.

Formula for Capital Gains

$$Capital Gain = Sale Price - Selling Expenses - Adjusted Cost Base$$

• Sale Price: The price at which the property is sold.
• Selling Expenses: Costs incurred to facilitate the sale (like commission fees).
• Adjusted Cost Base (ACB): Comprised of the purchase price plus commission expenses at the time of purchase.

Frequently Asked Questions (FAQs)

What expenses can be deducted from employment income?

You can deduct pension contributions, union dues, and childcare expenses from your employment income.

How are business incomes taxed?

Business incomes are taxed on a net-income basis, where all the costs incurred to earn the income can be deducted.

What constitutes income from property?

Income from property includes interest income, dividends, and royalties. This income is typically derived from investments like stocks, bonds, and mutual funds.

How are capital gains calculated?

Capital gains are calculated as the sale price minus selling expenses and the adjusted cost base (ACB).

Key Takeaways

• Employment income is taxed on a gross receipt basis and has limited allowable deductions.
• Business income is taxed on a net-income basis, allowing full deductions for business-related expenses.
• Income from property includes interest, dividends, and royalties derived from investment assets.
• Capital gains or losses happen when property is sold, and are taxed only in the year the sale occurs.

Glossary

• Gross Receipt Basis: Taxation method taxing gross income without deductions.
• Net-Income Basis: Tax on net income, allowing expense deductions.
• Capital Gain: Increase in property value over its purchase price, taxed upon sale.
• Adjusted Cost Base (ACB): Initial purchase cost plus any additional expenses such as purchase commissions.

By understanding the various types of income and their respective tax treatments under Canadian laws, you can better navigate your financial and investment landscape with a strategic approach. Write and maintain financial records meticulously to ensure compliance and optimize your tax liabilities efficiently.