6 Describe the ITA Section 3 ordering rules formula. How does this tie into Net Income for Tax Purposes (also known as ‘Division B’ income)?

Amra Bayasgalan

Division B income (Net Income for Tax Purposes) is determined by using the ordering rules found in Section 3 of ITA. Under the ordering rules formula, a person’s net income for tax purposes would be calculated as follows:

Step 1, ITA 3(a) – Determining income (revenues net of expenses) from employment, business, property and other sources for the year.

Example:   Net employment income       $40,000

                   Net property income                $5,000           $45,000

                                                                                                          $45,000

Step 2, ITA 3(b) – Net taxable capital gains arise when taxable capital gains for the year exceed allowable capital losses for the same year. If allowable capital losses are greater than the current year’s taxable capital gains, the net taxable capital gains for the year will be $0, and the difference will become a Net Capital Loss that can be applied against net taxable capital gains in other taxation years.

Example:       Taxable Capital Gains           $15,000

Allowable Capital Losses      ($20,000)              Nil      

                                                                          $45,000

Note: Taxable Capital Gains = 50% of a Capital Gain.  Allowable Capital Losses = 50% of a Capital Loss.

Step 3, ITA 3(c) – At this point, other deductions found in ITA Subdivision e (such as spousal support payments made or moving expenses incurred) are deducted from the subtotal of the amounts in Step 1 and Step 2. If the other deductions exceed the amounts determined in Step1 and Step 2, then the subtotal is $0. It is important to note that many Subdivision e deductions are only deductible in the current year so, if you don’t use them in the current year, they disappear.

Example:       RRSP deduction                     ($7,000)             ($7,000)

                                                                                                   $38,000

Step 4, ITA 3 (d) – We then deduct losses incurred in the year (typically from business or property income). Losses are created when expenses exceed revenues for any given source of income. These losses are then deducted from the Step 3 subtotal. If the total amount is negative, then Net income for Tax Purposes (Division B income) is $0, and the difference becomes a non-capital loss that can be deducted from net income for tax purposes in other taxation years.

       Example:       Business loss                           ($12,000)            ($12,000)

Net income for tax purposes (Division B income):                   $26,000

Note losses are recorded in 3(D) rather than offsetting income in 3(A) so you are able to maximize your 3(C) deductions in the year. Remember that many of the 3(C) deductions expire if they are not used in the year.   Therefore by maximizing the income in 3(A) (by leaving losses in 3(D)) you may be able to increase the amount of 3(C) deductions you can use in the year.

Interactive content (Author: Amanjot Gill, June 2019)

Interactive content (Author: Barinder Atwal, January 2020)

References and Resources :

  • ITA- Section 3
  • Competency map: 6.3.2

January 2019

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Introductory Canadian Tax by Amra Bayasgalan is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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