As a Canadian taxpayer, you’ve most likely come across the term, ‘net income’.
This is because the Canada Revenue Agency (CRA) uses your net income to make tax decisions such as the tax rate they levy on you personally or your business, government benefits you are eligible for, tax credits and tax deductions you can claim and more.
Typically, your net income is determined after all applicable deductions have been made on your total earnings.
The net income definition varies for individuals and businesses.
Individuals who are required to file income tax in Canada would generally have received income from sources such as employment, capital gains, government benefits, employment benefits, self-employment income and/or rental income.
When filing your tax return, your net income comes between your total income and your taxable income.
This simply means that after summing up your total income for the year, you will then account for certain deductions to calculate your net income.
It is your net income that is then used to calculate your taxable income.
For businesses, total income is earned from activities that are carried out for profit with evidence to support the business intention.
Other sources of business income can include money received from government grants and subsidies, rental income, barter transactions, property sale, etc.
Businesses calculate net income by deducting allowable business expenses from total business income.
However, it is important to note that the net income that you report for your business generally differs from the net income that the CRA requires for tax purposes as certain income and expenses are not used in calculating net income for tax purposes.
For this reason, you would need to reconcile your business net income with the net income required for tax purposes using the schedule 1 form.
How to Calculate Net Income
Your net income is shown on line 23600 of your income tax and benefit return.
To get your net income, first, you need to calculate your total income on line 15000.
Your total income includes income from sources such as:
- Employment income
- Wage-loss replacement contributions
- Taxable benefit for premiums paid to cover you under a group term life insurance plan
- Employee profit-sharing plan
- Veterans’ benefits
- Medical premium benefits, Wage Earner Protection Program, etc.
- Old age security (OAS) pension
- CPP or QPP benefits
- Other pensions and superannuation such as payments from annuities, pooled registered pension plans (PRPP) and registered retirement income funds (RRIF), including life income funds, and pensions from a foreign country
- Universal child care benefit (UCCB)
- Employment insurance and other benefits
- Interest and other investment income
- Net partnership income: limited or non-active partners only
- Registered disability savings plan (RDSP) income
- Rental income
- Capital gains
- Self-employment income
- Workers’ compensation benefits
- Social assistance payments
- Net federal supplements
The CRA provides a comprehensive list of all income types to report for tax purposes.
After determining your total income, you will then need to deduct allowable expenses and tax credits from your total income to determine your net income.
Common allowable deductions include the following:
- Eligible child care expenses
- Annual union, professional, or like dues
- Universal child care benefit (UCCB) repayment
- Pooled registered pension plan (PRPP) employer contributions
- Registered pension plan (RPP) deduction
- Business investment loss
- Moving expenses
- Carrying charges and interest expenses
- Social benefits repayment
- Clergy residence deduction
You can also leverage income splitting strategies mainly with your spouse or common-law partner to further reduce your taxable income.
The net income for an incorporated business is usually calculated by deducting the allowable business expenses from the business’s gross income.
You will need to provide your business income and expense information using the Schedule 125 form for Income Statement Information.
Revenue income will include earnings from common sources such as:
- Sales of goods and services
- Rental revenue
- Realized gains/losses on disposal of assets
- Realized gains/losses on the sale of investments
After the cost of sales has been deducted to determine gross profit, you will need to calculate the net income by deducting operating expenses such as:
- Advertising and promotion
- Meals and entertainment
- Depreciation and Amortization
- Bad debt expense
- Insurance expenses
- Interest and bank charges
- Office expenses and supplies
- Professional fees
- General and administration expenses
- Repairs and maintenance
- Salaries, wages, and benefits
- Travel and vehicle expenses
- Utilities, telephone, and communications
- Vehicle expenses
For incorporated businesses that need to file their business income tax using the T2 Corporation Income Tax Return form, you will need to calculate your reconciled net income for tax purposes using Schedule 1, your financial statements, or General Index of Financial Information (GIFI), and input this amount on line 300 of your T2 return.
Gross vs. Net Income
The difference between your gross income and net income is that your gross income is the income you have earned before any credits, expenses, or taxes have been deducted.
On the other hand, your net income is your gross income less applicable deductions before tax.
Frequently Asked Questions
- Is net income after tax or before?
A net income figure is obtained after allowable deductions and credits have been made to total income earned. Your net income is used to determine the taxable income for tax purposes. It is therefore calculated before tax.
- Does T4 show net or gross income?
Your T4 slip is a statement of remuneration paid by an employer for the applicable tax year. The T4 slip shows your gross income in Box 14. Your income tax deducted is shown separately in Box 22, and other benefits or deductions are shown in different boxes.