Other income, deductions and tax credits

The previous lessons covered the four main sources of income. This lesson gathers the remaining pieces of an individual's return: other kinds of income listed in subdivision d, the registered plans that shelter saving, the deductions in subdivision e, and the non-refundable and refundable credits that do much of the work of adjusting tax for family circumstances. It also covers two clawbacks that raise marginal rates for some taxpayers, the Old Age Security recovery tax and the alternative minimum tax. Along the way it settles the Brandt family's choices about who claims what.

Other sources of income

Subdivision d brings into income several amounts that are not from employment, business, property or capital gains. The main ones are pension benefits, including Old Age Security, CPP and QPP benefits and payments from registered pension plans; Employment Insurance benefits; withdrawals from RRSPs and RRIFs; retiring allowances; spousal support received under a written agreement or court order, if paid periodically; scholarships, bursaries and research grants above the exemption; and social assistance and workers' compensation, which are included and then deducted in Division C (lesson 3). Several amounts are specifically not taxable: Canada child benefit payments, GST/HST credit payments, withdrawals from a TFSA, child support under agreements made after April 1997, lottery winnings, gifts and inheritances, and most scholarships received by full-time students who qualify for the education amount.

Registered plans

Registered plans are the most widely used tax planning tool in Canada. Each combines a deduction or a tax-free withdrawal with tax-free growth inside the plan.

RRSP contributions made in the first 60 days of a year can be deducted for the previous year, and unused room carries forward indefinitely. Over-contributions above a $2,000 cushion attract a penalty tax of 1 per cent a month. A spousal RRSP, to which one spouse contributes and the other is the annuitant, lets a couple split retirement income, subject to a three-year attribution rule on withdrawals. The Home Buyers' Plan lets first-time buyers withdraw up to $60,000 tax-free to buy a home, repayable over 15 years, and the Lifelong Learning Plan allows withdrawals for full-time education. Whether an RRSP or a TFSA is better depends mostly on the taxpayer's marginal rate now compared with their expected rate on withdrawal: if the rates are the same, the two give the same after-tax result; if the rate in retirement will be lower, the RRSP is better.

Deductions in subdivision e

Subdivision e allows a list of deductions in computing net income. Besides RRSP and FHSA contributions and the enhanced CPP deduction, the most common are child care expenses (section 63), moving expenses (section 62), support payments (paragraph 60(b)), the disability supports deduction and carrying charges and interest on investment loans (lesson 8). The child care deduction is generally claimed by the lower-income spouse and is limited to the least of the amount paid, $8,000 for each child under 7, $5,000 for each child aged 7 to 16 and $11,000 for a child eligible for the disability tax credit, and two thirds of the claimant's earned income. Moving expenses are deductible against income at the new location if the move brings the taxpayer at least 40 km closer to a new place of work, business or full-time study. Spousal support paid periodically under a written agreement or court order is deductible by the payer and taxable to the recipient; child support is neither.

Non-refundable credits

Non-refundable credits are computed by applying the lowest federal rate, 14 per cent for 2026, to a credit base. They reduce federal tax but not below zero. Some can be transferred to a spouse or carried forward; most are simply lost if unused.

Refundable credits and benefits deliver money through the tax system to people with little or no tax to pay. The Canada workers benefit supplements the earnings of low-income workers, and is partly paid in advance. The Canada child benefit, a tax-free monthly payment based on family net income, is worth up to about $8,000 a year for each child under six for the benefit year beginning in July 2026, and less for older children and higher incomes. The GST/HST credit, which the government has announced will be replaced by the Canada Groceries and Essentials Benefit, offsets sales tax for lower-income households. The refundable medical expense supplement helps low-income workers with high medical costs, and a new personal support workers tax credit, refundable at 5 per cent of eligible earnings up to $1,100 a year, applies from 2026 to 2030.

The Brandt family's choices

Because Leah and Tomás file separately, several choices are worth checking each year. The program computes Leah's RRSP limit and then compares claims on each spouse's return.

# Family deductions and credits, 2026 (illustrative)
# 1. Leah's RRSP deduction limit for 2026
earned_2025, pension_adjustment, unused_room = 110_000, 0, 6_400
limit = min(0.18 * earned_2025, 33_810) - pension_adjustment + unused_room
print(f"RRSP deduction limit 2026: {limit:,.0f}; Leah deducts 9,000, room left {limit - 9_000:,.0f}")

# 2. Child care for Nora (age 6): claimed by the lower-income spouse
paid, per_child_limit, tomas_earned = 6_500, 8_000, 38_000
deduction = min(paid, per_child_limit, 2 / 3 * tomas_earned)
print(f"Child care deduction (Tomas, s. 63): {deduction:,.0f}")

# 3. Medical expenses: usually better claimed by the lower-income spouse
expenses = 3_400
for who, net_income in [("Leah", 124_785), ("Tomas", 31_500)]:
    floor = min(0.03 * net_income, 2_890)
    print(f"Medical credit if {who} claims: base {max(0, expenses - floor):,.0f}, "
          f"credit {0.14 * max(0, expenses - floor):,.2f}")

# 4. Donations pooled on one return
gifts = 1_200
credit = 0.14 * min(gifts, 200) + 0.29 * max(0, gifts - 200)
print(f"Donation credit on {gifts:,}: {credit:,.2f} (14% on the first 200, 29% above)")

# 5. OAS recovery tax for Leah's father (net income 118,000; OAS received 8,900)
oas, father_income = 8_900, 118_000
clawback = min(oas, 0.15 * max(0, father_income - 95_323))
print(f"OAS recovery tax: {clawback:,.2f}")

RRSP deduction limit 2026: 26,200; Leah deducts 9,000, room left 17,200
Child care deduction (Tomas, s. 63): 6,500
Medical credit if Leah claims: base 510, credit 71.40
Medical credit if Tomas claims: base 2,455, credit 343.70
Donation credit on 1,200: 318.00 (14% on the first 200, 29% above)
OAS recovery tax: 3,401.55

Leah's RRSP deduction limit for 2026 is $26,200: 18 per cent of her 2025 earned income of $110,000, which is below the $33,810 dollar limit, plus $6,400 of unused room from earlier years. She contributes and deducts $9,000, leaving $17,200 of room. The child care deduction must be claimed by Tomás, as the lower-income spouse, and he can deduct the full $6,500 because it is below both the $8,000 limit for a child under seven and two thirds of his earned income. Medical expenses of $3,400 produce a much larger credit on Tomás's return, because his net income of $31,500 sets the threshold at $945 rather than the $2,890 maximum that applies to Leah. The family's donations of $1,200 are pooled on Leah's return, where the 29 per cent rate on the amount above $200 gives a credit of $318 regardless of which spouse claims, but pooling ensures the first $200 is counted only once. Finally, the program computes the OAS recovery tax on Leah's father, whose net income of $118,000 exceeds the $95,323 threshold: he repays 15 per cent of the excess, $3,401.55 of his $8,900 OAS.

Clawbacks and the alternative minimum tax

Several income-tested benefits are recovered as income rises, which creates high effective marginal rates in particular ranges. The OAS recovery tax takes back 15 per cent of net income above $95,323 for 2026 until the full pension is repaid. Employment Insurance regular benefits are partly repaid by higher-income recipients who have received benefits in previous years. The Canada child benefit is reduced as family net income rises. These clawbacks are why net income, rather than taxable income, is the measure that matters for many families, and why deductions such as RRSP contributions, which reduce net income, are often worth more than they appear.

The alternative minimum tax ensures that individuals with large deductions and preferential income pay at least a minimum amount. It was substantially reformed for 2024 and later years. Adjusted taxable income for AMT includes 100 per cent of capital gains (30 per cent for gains on publicly listed securities donated to charity), disallows half of many deductions such as interest and carrying charges, and allows only half of most non-refundable credits. An exemption equal to the start of the fourth federal bracket, $181,440 for 2026, is deducted, and the balance is taxed at 20.5 per cent. The taxpayer pays the higher of regular tax and minimum tax, and AMT paid can be recovered over the next seven years when regular tax exceeds minimum tax. The 2024 changes made AMT a real risk for people who realize very large capital gains in a single year, for example on selling a business or a cottage, especially when the lifetime capital gains exemption applies.