Canadian Income Tax Act — Simplified

Who has to pay Canadian income tax

Tax payable by persons resident in Canada

Section 2 establishes that every person resident in Canada at any time during a tax year must pay income tax on their taxable income.

How your total income is calculated

Income for tax purposes

Section 3 sets out the order of operations for computing a person's income for a year: employment, business, property, then capital gains, then other sources, minus allowable losse…

Employment income — what counts

Income from employment

Section 5 requires employees to include their salary, wages, and other employment remuneration in income for the year it is received.

Business and investment income

Income from business or property

Section 9 defines income from business or property as profit from that source — revenue minus the expenses incurred to earn it.

What you cannot deduct from business income

General limitations on deductions

Section 18 lists specific expenses that cannot be deducted from business or property income even if they were genuinely incurred — personal expenses, non-business-purpose costs, an…

CCA, interest, and other permitted business deductions

Deductions permitted in computing income from business or property

Section 20 permits specific deductions from business or property income that would otherwise be blocked by s.18's general restrictions — most importantly Capital Cost Allowance (CC…

Capital gains — the 50% inclusion rate explained

Meaning of taxable capital gain and allowable capital loss

Section 38 defines a "taxable capital gain" as one-half of a capital gain, and an "allowable capital loss" as one-half of a capital loss. Only this taxable half flows into income u…

What counts as a capital gain or loss

Meaning of capital gain and capital loss

Section 39 defines a capital gain as the gain from a disposition of any property other than an excluded property (e.g., depreciable property, eligible capital property, inventory).

How to calculate your capital gain or loss

General rules for computing gain or loss

Section 40 provides the formula for computing a capital gain or loss: proceeds of disposition minus adjusted cost base minus outlays and expenses on disposition.

The principal residence exemption

Principal residence — definitions

Section 54 defines a "principal residence" — a housing unit ordinarily inhabited by the taxpayer during the year — which qualifies for the principal residence exemption that elimin…

RRSP withdrawals, pensions, and other income sources

Amounts to be included in income for year

Section 56 includes in income various amounts not covered by employment or business income — RRSP withdrawals, pension payments, alimony received, EI benefits, RESP withdrawals, an…

RRSP contributions and other personal deductions

Other deductions

Section 60 allows individuals to deduct RRSP contributions, spousal support payments, moving expenses (via s.62 reference), and certain repayments from their income.

Dividend gross-up — why dividends look bigger than they are

Dividends received

Section 82 requires you to include a "grossed-up" amount of dividends in your income — more than the cash you received — to reflect the corporate tax already paid on that income.

The Lifetime Capital Gains Exemption (LCGE)

Capital gains exemption

Section 110.6 provides an exemption from tax on up to $1,250,000 (in 2025+) of capital gains on the disposition of qualifying small business corporation shares, qualified farm prop…

Carrying forward and back your tax losses

Losses deductible

Section 111 allows unused losses from prior years to be carried back 3 years or forward 20 years and deducted against income in those years.

Federal income tax rates and brackets

Tax payable under this Part (federal rates)

Section 117 sets the federal income tax rate schedule — the brackets and rates applied to taxable income to compute basic federal tax before credits.

Non-refundable credits — basic personal amount, disability, age, spousal

Personal credits

Section 118 provides non-refundable tax credits for the basic personal amount, spousal/partner amounts, eligible dependants, disability, age (65+), and other personal circumstances…

The dividend tax credit

Deduction for dividends from taxable Canadian corporations

Section 121 provides a federal dividend tax credit that reduces tax on Canadian dividends to account for corporate tax already paid on the income — the core of the dividend integra…

The small business deduction — lower tax rate for CCPCs

Small business deduction

Section 125 provides a deduction from corporate tax for Canadian-controlled private corporations (CCPCs) on the first $500,000 of active business income earned in Canada — resultin…

RRSP rules — contributions, deductions, and withdrawals

Registered retirement savings plans

Section 146 governs Registered Retirement Savings Plans (RRSPs) — the rules for contributions, deduction limits, investment rules, Home Buyers' Plan, and withdrawals.

TFSA rules — contributions, withdrawals, and over-contributions

Tax-free savings accounts

Section 146.2 governs Tax-Free Savings Accounts (TFSAs) — accounts where investment income grows tax-free and withdrawals are never taxed, subject to annual contribution limits.

FHSA rules — the hybrid RRSP/TFSA for first-time home buyers

First home savings accounts

Section 146.6 governs First Home Savings Accounts (FHSAs), introduced in 2023. Contributions are deductible like an RRSP; qualifying withdrawals to buy a first home are tax-free li…

Joint liability on transfers to avoid CRA collections

Tax consequences of property transfers

Section 160 makes the recipient of a non-arm's-length transfer jointly liable for the transferor's tax debt — up to the excess of the property's FMV over the consideration paid.

CRA penalties — false statements, repeated failures, and gross negligence

Penalties

Section 163 imposes financial penalties for failure to report income, repeated omissions, and false statements or omissions made knowingly or under circumstances amounting to gross…

How to dispute a CRA assessment

Objections to assessment

Section 165 gives you the right to formally object to a CRA assessment or reassessment within 90 days of the date of the notice, and establishes the dispute resolution process.

Appealing a CRA decision to the Tax Court of Canada

Appeal

Section 169 gives a taxpayer who has filed a notice of objection and is unsatisfied with CRA's decision the right to appeal to the Tax Court of Canada.

GAAR — the Income Tax Act's catch-all anti-avoidance rule

General anti-avoidance rule

Section 245 gives CRA the power to recharacterize or deny tax benefits from transactions that are technically compliant with the Act but result in a misuse or abuse of its provisio…

Part IV tax — refundable tax on dividends paid between private corporations

Tax on taxable dividends

Part IV imposes a 38.33% refundable tax on dividends received by a private corporation from a connected or non-connected payer, designed to prevent tax deferral through corporate c…

Non-resident withholding tax on Canadian-source income

Tax on income from Canada of non-resident persons

Section 212 imposes a 25% withholding tax (reduced by tax treaty) on amounts paid by Canadian residents to non-residents — dividends, interest, rents, royalties, pensions, and mana…

Transfer pricing — arm's-length pricing for related-party transactions

Transfer pricing

Section 247 requires that transactions between related parties (including a Canadian company and its foreign parent or subsidiary) be priced at arm's length — the price that two un…

Taxable employment benefits — company car, housing, loans

Amounts to be included as income from office or employment

Section 6 expands employment income beyond salary to include the value of most employer-provided benefits: company vehicles, low-interest loans, housing, group life insurance, and…

Stock options — how employee options are taxed

Employee stock options

Section 7 governs the taxation of employee stock options. The employment benefit is generally recognized when the option is exercised (not when granted), and qualifying options on…

Employment deductions — what employees can deduct

Deductions allowed in computing income from office or employment

Section 8 provides an exhaustive list of deductions an employee can claim against employment income. Unlike business owners, employees can only deduct what is specifically listed i…

Shareholder benefits — taxable benefits from your own corporation

Benefit conferred on shareholder

Section 15 taxes shareholders on the value of any benefit conferred on them by the corporation — personal expenses paid by the company, use of corporate property, or loans that are…

Change in use — converting your home to rental (or back)

Change in use

Section 45 deems a disposition whenever property changes from income-producing use to personal use or vice versa, triggering capital gains or loss recognition at fair market value…

Child care deduction — daycare, camp, and babysitter costs

Child care expenses

Section 63 allows a deduction for child care expenses (daycare, after-school care, day camps, babysitters) paid to allow you or your spouse to work, carry on a business, or attend…

Meals and entertainment — the 50% deduction rule

Expenses for food, beverages, and entertainment

Section 67.1 restricts the deduction for food, beverage, and entertainment expenses to 50% of the actual cost, regardless of the business purpose of the expense.

Spousal rollover — transferring property to your spouse tax-free

Inter vivos transfers by individuals to spouse or common-law partner

Section 73 allows an individual to transfer capital property to their spouse or common-law partner at the property's adjusted cost base (instead of FMV), deferring the capital gain…

Attribution rules — income on spousal transfers taxed in your hands

Transfers and loans to spouse or common-law partner

Section 74.1 attributes income (and capital gains on subsequent dispositions) from property transferred or loaned to a spouse back to the transferring spouse, preventing income-spl…

Deemed dividends — corporate distributions taxed as dividends

Deemed dividend

Section 84 deems certain corporate events to be dividends even when no formal dividend is declared — notably when a corporation reduces its paid-up capital (PUC), winds up, or repu…

Surplus stripping anti-avoidance — non-arm's-length share sales

Non-arm's length sale of shares

Section 84.1 prevents shareholders from using non-arm's-length share sales to extract corporate retained earnings as capital gains (which may be sheltered by the LCGE) rather than…

S.85 rollover — transferring business assets to a corporation tax-free

Transfer of property to corporation by shareholders

Section 85 allows individuals and corporations to transfer eligible property to a corporation in exchange for shares at an elected amount rather than fair market value, deferring c…

Inter-corporate dividend deduction — dividends between Canadian corporations

Deduction of taxable dividends received by corporation

Section 112 allows a corporation to deduct dividends received from other taxable Canadian corporations, preventing double taxation as dividends flow through corporate chains.

Non-resident selling Canadian property — tax clearance certificate required

Disposition by non-resident person of taxable Canadian property

Section 116 requires non-residents who sell taxable Canadian property to obtain a clearance certificate from CRA before closing, or the buyer must withhold 25% of the purchase pric…

Charitable donation tax credit — how it works and how to maximize it

Charitable gifts

Section 118.1 provides a two-tier non-refundable tax credit for charitable donations: 15% on the first $200, and 29% (33% for high earners) on amounts above $200, in a given year.

Medical expense tax credit — what qualifies and how to claim it

Medical expense credit

Section 118.2 provides a 15% non-refundable federal tax credit for eligible medical expenses exceeding the lesser of $2,759 (2026) and 3% of net income.

Disability tax credit (DTC) — who qualifies and how to claim

Credit for mental or physical impairment

Section 118.3 provides a significant non-refundable credit for persons with severe and prolonged impairments in physical or mental functions that markedly restrict basic activities…

Investment tax credit (ITC) — SR&ED and other qualifying investments

Logging tax credit and investment tax credit

Section 127 provides investment tax credits (ITCs) for qualifying expenditures — most importantly, scientific research and experimental development (SR&ED), clean technology, and c…

Tax-exempt organizations — who does not pay income tax

Miscellaneous exemptions

Section 149 exempts certain persons from Part I income tax — municipalities, Crown corporations, non-profit organizations, registered charities, and certain other entities.

How CRA assesses your return — timelines and normal reassessment period

Assessment

Section 152 sets out how CRA assesses tax returns, the normal reassessment period (3 years for most individuals, 4 years for CCPCs), and the extended reassessment periods that appl…

Source deductions — how employers withhold income tax, CPP, and EI

Withholding

Section 153 requires employers to withhold income tax (as well as CPP premiums and EI premiums) from employment income and remit it to CRA on behalf of employees.

Books and records — what you must keep and for how long

Books of account and records

Section 230 requires every person who carries on a business, or is required to pay tax, to keep adequate books and records to determine their tax obligations — typically for at lea…

Support payments — spousal support rules

Support

Section 56.1 and related provisions govern the tax treatment of support payments. Periodic spousal support received under a court order or written agreement is taxable income; chil…

Forgiven debt — tax consequences of debt relief

Consequences of debt forgiveness

Section 80 provides rules for when a debt is forgiven or settled for less than its face value. Forgiven amounts generally reduce tax attributes (losses, ACB, CCA) rather than being…

What must be included in business or property income

Income inclusions — amounts to include in income from business or property

Section 12 lists specific amounts that must be included in income from business or property even though they might not appear to be "profit" under normal accounting principles.

CCA recapture and terminal losses when you sell depreciable property

Recaptured depreciation and terminal losses

Section 13 governs what happens when you sell depreciable property — if the proceeds exceed the remaining undepreciated capital cost (UCC), you have recaptured CCA (income); if UCC…

SR&ED tax deductions for research and development

Scientific research and experimental development expenditures

Section 37 allows businesses to deduct expenditures on scientific research and experimental development (SR&ED), and works in conjunction with the Investment Tax Credit (ITC) under…

Replace a property and defer the capital gain

Replacement property — rollover on involuntary and voluntary dispositions

Section 44 allows you to defer a capital gain (and recaptured CCA) when you replace a property that was involuntarily disposed of (stolen, expropriated, destroyed) or voluntarily s…

Deduct moving expenses when you relocate for work or school

Moving expenses

Section 62 allows individuals to deduct eligible moving expenses when they move at least 40 km closer to a new work location or a full-time post-secondary school.

Tax rules when a taxpayer dies

Death of a taxpayer — income and capital property

Section 70 deems a deceased taxpayer to have disposed of all capital property at fair market value immediately before death, triggering capital gains and income. Spousal rollover p…

Payments and amounts that are tax-free

Amounts not included in income

Section 81 lists specific amounts that are not included in a taxpayer's income despite being received — including certain social benefits, war veterans allowances, lottery winnings…

How partnerships are taxed

General rules for computing partnership income

Section 96 establishes the "flow-through" treatment of partnerships — partnerships compute income as if they were a separate person, then allocate each partner's share of income, l…

Deductions that reduce your taxable income below your net income

Deductions permitted in computing taxable income

Section 110 lists deductions allowed in computing taxable income (after net income is calculated under s.3) — including the stock option deduction, the capital gains deduction mech…

Tax on income split with family members

Tax on split income (TOSI)

Section 120.4 applies the top marginal tax rate to "split income" received by adult and minor family members — targeting income-splitting strategies using private corporations, par…

GST/HST credit — quarterly payments for low/middle income

Goods and Services Tax credit

Section 122.5 provides a refundable quarterly credit to low- and middle-income individuals and families to offset the GST/HST they pay on everyday expenses. It is income-tested and…

Canada Child Benefit (CCB)

Canada Child Benefit — definitions

Section 122.6 defines the terms used in the Canada Child Benefit (CCB) provisions. The CCB is a tax-free monthly payment to eligible families with children under 18, replacing the…

Claim a credit for foreign taxes paid

Foreign tax credit

Section 126 provides a credit against Canadian income tax for income or profits taxes paid to a foreign government, preventing double taxation of foreign-source income earned by Ca…

RESP — save for a child's post-secondary education

Registered Education Savings Plans

Section 146.1 establishes the rules for Registered Education Savings Plans (RESPs), allowing parents and grandparents to save for a child's post-secondary education with tax-deferr…

RRIF — convert your RRSP to retirement income

Registered Retirement Income Funds

Section 146.3 establishes the rules for Registered Retirement Income Funds (RRIFs). By the end of the year you turn 71, you must convert your RRSP to a RRIF (or annuity) and begin…

RDSP — long-term savings plan for persons with disabilities

Registered Disability Savings Plans

Section 146.4 establishes the Registered Disability Savings Plan (RDSP), a tax-advantaged long-term savings plan for Canadians eligible for the Disability Tax Credit, with access t…

Who must file a tax return and by when

Filing returns of income

Section 150 requires every resident of Canada to file an annual income tax return if they owe tax or meet certain income thresholds, and sets the filing deadlines — April 30 for mo…

Interest charged by CRA on overdue taxes

Interest on unpaid amounts

Section 161 requires taxpayers to pay compound daily interest on any unpaid income tax, starting from the day after the balance is due (usually May 1). The prescribed interest rate…

Penalties for filing your tax return late

Failure to file return — penalties

Section 162 imposes automatic penalties for failing to file a tax return by the due date or for failing to provide required information. The standard late-filing penalty is 5% of u…

How and when CRA refunds overpaid tax

Refunds

Section 164 requires CRA to refund amounts overpaid by taxpayers and to pay interest on refunds that are delayed beyond certain time limits — generally 45 days from when the return…

Tax rules when two Canadian corporations merge

Amalgamation of Canadian corporations

Section 87 governs "qualifying amalgamations" of Canadian corporations — two or more corporations merge into one "new" corporation. The amalgamation can occur on a tax-deferred ("r…

Dissolving a subsidiary corporation — tax-deferred wind-up

Winding-up of a subsidiary

Section 88 provides rollover treatment when a parent corporation winds up a wholly owned (90%+) Canadian subsidiary — assets transfer to the parent at tax cost, and the subsidiary'…

Section 55 — stop converting income into capital gains through dividends

Deemed proceeds — anti-avoidance for capital gains strips

Section 55 prevents a corporation from using intercorporate dividends to artificially reduce the gain on a share sale. It can recharacterize an intercorporate dividend as a capital…

Tax rules for non-arm's-length transactions below fair market value

Inadequate considerations

Section 69 ensures that transfers of property between non-arm's-length parties (family members, controlled corporations) are treated as occurring at fair market value for tax purpo…

Deduct a bad debt or claim a loss on shares of a bankrupt company

Debts established to be bad debts and shares of bankrupt corporations

Section 50 allows a taxpayer to elect to treat a business or property debt that has gone bad — or shares of a corporation that has become bankrupt or insolvent — as having been dis…