Tax Tips - Personal Tax Returns: Income
EMPLOYMENT INCOME & EXPENSES
Income included on a T4 general includes income from an office or employment. The amounts include payments received as salary, wages, commissions, director's fees, bonuses, tips, gratuities, honorariums, and GST rebates claimed on your previous years tax return. These amounts are to be included on your T4 or T4A slip on a cash basis. There are limited amounts of expenses that can be deducted against employment income, however upon signing a declaration of employment conditions, certain amounts expended for auto expenses, supplies, in-home offices, and other reasonable expenses may by deducted.
INCOME FROM TIPS & GRATUITIES
Individuals who receive tips or gratuities from customers or clients are required to include those in their income. The tips and gratuities are included on line 104 of your income tax return.
INCOME FROM FOREIGN SOURCES
If you are receiving income in foreign currencies, you must convert the foreign currencies to Canadian dollars for your income tax return. You are allowed to use the actual rate that you converted to Canadian dollars, the average monthly rate, or the average annual rate. Canada Revenue generally also allows you to use either the Bank of Canada rate or the rate published by Canada Revenue for the year. You should obtain the different rates and use the rate that is most advantageous to reduce your income on conversion.
NON-TAXABLE INCOME RECEIPTS
The following incomes are not taxable: Child Tax Benefit, Guaranteed Income Supplement, Lottery Winnings, Spouse's Allowance, Veteran's Disability and Dependent Pensioner's payment, War Veteran's Allowance, Welfare payments, Worker Compensation and other Government Grants, although most of them are reported to calculate total income for the purpose of determining GST, Child Tax Benefits and Old Age Pension clawback.
SCHOLARSHIP & BURSARY RECEIPTS
Scholarships and bursaries or similar awards are subject to a $3,000 annual exemption if the student can claim the education amount; other students can claim a $500 exemption. One exemption only applies to the total of all scholarships and bursaries received. The excess amount will be included in taxable income. The tax on the taxable income will be reduced by the tuition fee credit and the education deduction. If the allowable credits are in excess of the tuition fee that excess can be transferred to a parent or a grandparent.
Maintenance payments for the benefit of children paid to a spouse are non-deductible to the payer and non-taxable to the receiver. Maintenance payments paid to a spouse for the benefit of the spouse are taxable to the spouse and deductible to the payer. Maintenance agreements completed prior to May, 1997 and not varied since for the benefit of children remain deductible to the payer and taxable to the receiving spouse.
INVESTMENT RATES OF RETURN
Different types of investment income are taxed in different manners. 100% of interest income is included on your tax return and is taxed at your marginal rate. Dividend income is grossed up by 25% and a federal dividend tax credit of 12.3% of the dividend paid is allowed as a deduction from your federal income tax payable. Capital gains are included in income at 50% of the gain earned in the year the investment is sold. In order to maximise your benefit from earning various types of investment income, it is important to calculate your after-tax return on investment, taking into consideration the different applications of income tax.