In Canada, taxable income includes various sources of earnings and benefits that individuals receive throughout the tax year. Individuals and corporations are taxed on their total income after subtracting allowable deductions. Different rules apply to each type of income, which therefore affect the amount of tax you will have to pay. To file a tax return and claim deductions, you will need to know what type of income you earned. Personal and business tax issues are vast and complicated. To get help, take on board a professional accountant.
Reporting different types of income in Canada involves specific forms and procedures. Here's a general guide on different types of income and how to report various types of income:
1. Employment income
Employment income is usually a person’s wages or salary paid by an employer. It can also include any vacations, gifts, or added perks that you receive from your employer as part of your employment. Generally, few expenses can be deducted from employment income, although there are exceptions for people in sales.
Reporting requirements
- Most employers provide a T4 slip, which summarizes your employment income, deductions, and taxes withheld. You'll need to enter information from your T4 slip onto your tax return, typically on line 101 of the T1 General form (federal tax return).
- If you have multiple T4 slips from different employers, add up the amounts from each slip.
- Keep records of any employment expenses you're claiming deductions for.
2. Business Income and Self-Employment Income
The law makes a distinction between employment income and business income. Business income can be earned by a sole proprietorship, a partnership, or a corporation, and includes any money you earn from a profession, trade, or any other business where you expect to make a profit. This includes income earned by freelancers, contractors, consultants, and small business owners. Some, types of rental income may also be considered business income. For example, if the landlord offers uncommon services such as laundry or housecleaning, or if the landlord runs an office with employees who manage the rental properties. This type of income generally allows for deductions of business expenses.
Reporting requirements
- If you're self-employed or have a business, you'll need to report your income and expenses on the T2125 form (Statement of Business or Professional Activities).
- Keep detailed records of all business-related income and expenses.
- Report your net income (income minus expenses) on line 135 of your tax return.
- You may also need to pay into the Canada Pension Plan (CPP) if your net income exceeds a certain threshold.
- For corporations, a T2 Corporate Tax Return is filed.
3. Investment Income
Income earned from investments is generally taxable. This includes interest earned on savings accounts, GICs (Guaranteed Investment Certificates), and bonds; dividends received from Canadian and foreign corporations; and capital gains realized from the sale of stocks, bonds, real estate, or other capital assets.
Reporting requirements
- Investment income includes interest, dividends, and capital gains from investments such as stocks, bonds, mutual funds, and savings accounts.
- Financial institutions provide various tax slips for different types of investment income, such as T3, T5, and T5008.
- Report this income on the appropriate lines of your tax return, such as line 121 for interest income, line 120 for dividends, and Schedule 3 for capital gains.
- Keep track of your adjusted cost base (ACB) for capital gains calculations.
4. Rental Income
Income generated from renting out real estate properties, such as houses, apartments, or commercial buildings, is taxable. The law also requires a taxpayer to pay tax on income from property, which includes interest from investments, and loans, and may include rent from investment properties. Generally, expenses cannot be deducted from this type of income unless they are directly related to earning the income. A common deduction from property income is interest on a loan that was taken out to purchase the property. There are also rules specific to property income that prevent you from transferring property income to a spouse or child for the sole purpose of reducing the amount of tax you have to pay.
Reporting requirements
- If you earn rental income from properties you own, you'll need to report it on the T776 form (Statement of Real Estate Rentals).
- Report your net rental income (income minus expenses) on line 126 of your tax return.
5. Pension Income
Pension income received from employer pension plans, government pensions (e.g., Canada Pension Plan, Quebec Pension Plan, Old Age Security), annuities, and Registered Retirement Income Funds (RRIFs) is subject to taxation.
Reporting requirements
- These amounts are reported on various tax slips, such as T4A, T4RSP, or T4RIF.
6. Government Benefits
While some government benefits, such as the Canada Child Benefit (CCB) and Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, are non-taxable, others, like Employment Insurance (EI) benefits and most social assistance payments, are taxable and must be reported as income.
Reporting requirements
- If you get a grant or subsidy from a government or government agency, you'll have to report it as income or as a reduction of an expense.
7. Other Income
Other types of income that may be taxable include scholarships, bursaries, fellowships, alimony, royalties, and certain prizes and awards.
Reporting requirements
- Other types of income, such as pension income, social assistance payments, scholarships, or alimony, have specific reporting requirements.
- Different tax slips may be issued for these types of income, such as T4A, T4A(P), T4RSP, or T4RIF.
- Report these amounts on the appropriate lines of your tax return.
How Does the Canada Revenue Agency Find Unreported Income?
The CRA searches financial records, real estate records, social media, and any other information they can gather looking for unreported income.
The typical way for them to find unreported income is to conduct an audit where they will review a taxpayer’s books and records to determine if any income is not being reported.
What Happens if I Failed to Report My Income?
If the CRA assesses you for undisclosed income, it would likely result in more than just a tax bill.
You would be subject to interest on the amounts owing. The CRA charges a 5% interest rate compounded daily on overdue income taxes and penalties. The CRA’s interest rates are notorious for compounding tax arrears over the years, especially when the reassessment may not be issued until many years after the debt was originally due.
You may also be hit with various penalties such as if you knowingly, or under circumstances amounting to gross negligence, made a false statement or omission on your tax return. The penalty for this is the greater of $100 or 50% of the understated tax and/or the overstated credits related to the false statement or omission.
What Should I Do If I Have Undisclosed Income?
If you report the undisclosed income before the CRA catches on, then you may seek interest and penalty relief through the Voluntary Disclosures Program. The Voluntary Disclosure Program provides taxpayers with an opportunity to proactively fix errors and omissions in their tax filings before the CRA knows or contacts them about it.
If the individual has already been notified by the CRA regarding the undisclosed income, then an audit will ensue and you will be forced to deal with a CRA auditor.
We Can Help
Remember to keep all relevant documentation, including tax slips, receipts, and records of income and expenses, in case the Canada Revenue Agency (CRA) requests them for verification.
It's important to note that not all income is taxable; some types of income may be exempt or partially exempt from taxation under specific circumstances. Additionally, certain deductions, credits, and tax shelters may reduce taxable income, ultimately lowering the amount of tax owed. If you want help navigating the complexities of determining taxable income and optimizing your tax situation or you're unsure about how to report specific types of income, consider seeking advice from a tax professional.
Our experienced and professional team at Filing Taxes is here to set you on the right path considering your personal business situation. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.