Canadian Income Tax Act — Divisions A & B Explained (2025 Edition)

If you earn money in—or from—Canada, the first hurdle to filing a correct return is understanding Divisions A and B of the Income Tax Act (ITA). These two divisions determine:

• Who is liable for Canadian tax (Division A, section 2); and
• How much of your income is included in the tax calculation (Division B, sections 3-6).

Misinterpret either rule set and you risk an unexpected CRA reassessment, penalties, or paying more tax than necessary. This article translates statutory text into clear, actionable steps and includes tips that seasoned Canadian tax professionals use daily.

1. Key Terms at a Glance

2. Division A – Liability for Tax (ITA §2)

2.1 The Two Big Residency Rules

1. Full-year residents (§2 (1))
   Tax on worldwide income.
   • You are a resident if you had significant residential ties (home, spouse, dependants, driver’s licence, provincial health coverage) at any time during the year—even if you lived abroad for several months.
2. Non-residents with Canadian-source events (§2 (3))
   Tax on Canadian income only. You must file a Canadian return if, at any time in the year, you:
   • Worked in Canada,
   • Carried on business in Canada (including online sales through Canadian servers or contracts), or
   • Disposed of TCP (e.g., sold a Toronto condo).

TIP – When you leave Canada permanently, file Form NR73 only if CRA asks. Voluntarily filing can trigger a detailed residency audit.

2.2 Dual-Resident Tie-Breaker

If you meet residency definitions in Canada and another treaty country, apply the tie-breaker rules in the tax treaty (center of vital interests, habitual abode, nationality). Attach a treaty-based disclosure to your return (Form T2203).

2.3 Quick Checklist for Newcomers

• Date you entered Canada.
• List of worldwide assets over CAD 100 000 at entry (for future departure-tax tracking).
• Foreign tax paid before arrival (may still qualify for a credit).

3. Division B – Computation of Income (ITA §3-4)

3.1 The Four-Step Formula (Section 3)

1. Add all incomes except capital gains (§3 (a))
   • Salary, self-employment, interest, rent, royalties—worldwide if resident.
2. Add net taxable capital gains(§3 (b))
   • 50 % of gains – allowable capital losses.
3. Subtract Subdivision E deductions(§3 (c))
   • RRSP, moving, childcare, support, union dues.
4. Subtract losses from any source(§3 (d))
   • Business or property losses, allowable business-investment loss (ABIL).

Result > 0 → that is “income” for the year.
Result ≤ 0 → §3 (f) deems income = 0, and you create a non-capital loss that can be carried back 3 years or forward 20 years.

3.2 Example – Freelancer With Capital Gains

3.3 Section 4 – Source & Place Allocation

If your business or employment is split across locations, compute the income as though each place were the only source.

• Business: allocate expenses by activity logs, contract revenue, or gross margin methods.
• Employment: track days worked in each province—critical for provincial tax and payroll remittances.

4. Income From Employment – Sections 5 & 6

4.1 Section 5 – What Counts as Employment Income

• Salaries, hourly wages, tips, overtime.
• Director fees, signing and retention bonuses.
• Retroactive pay (average over previous years with Form T1198 if > CAD 3 000).

4.2 Section 6 – Taxable Benefits & Allowances

General rule: almost every “benefit of any kind whatever” that you receive because of employment is taxable unless a specific ITA exception applies.

4.2.1 Common Employer Benefits – Tax Status 2025

4.2.2 Automobile Stand-By & Operating Charges

PRO TIP – Keep a mileage log. Without it, CRA presumes every kilometre not documented is personal.

4.2.3 Remote & Special Work-Site Relief (Section 6 (6))

Board, lodging and travel costs are tax-free when:

1. Duties are temporary and you keep a full home elsewhere;
2. Work site is remote (≥ 80 km from an established community or fly-in camp);
3. You are away for ≥ 36 hours at a stretch.

Oil-sand, mining and hydro-dam projects often qualify. Obtain Form T2200 from your employer every year.

5. Subdivision E Deductions – Top Items to Optimise

• RRSP contributions (§60) – Deduct up to your RRSP room; consider a spousal RRSP for income splitting.
• Moving expenses (§60 (j.1)) – Must move ≥ 40 km closer to a new job or full-time study. Keep receipts for movers, temporary housing, meals en route, and agent fees on your old home sale.
• Spousal & child support (§60 (b)) – Deduct only if payments are court-ordered and made in cash, not gifts in kind.
• Childcare (§63) – Lower-income spouse usually claims. Daily camp, after-school program and caregiver wages count.

6. Record-Keeping & CRA Compliance

1. Residency evidence – travel logs, lease agreements, utility bills.
2. Benefit valuations – CRA Automobile Benefit Calculator printouts, parking lot invoices, tuition receipts.
3. Mileage – GPS-based apps (MileIQ, TripLog) plus odometer snapshots on 1 January and 31 December.
4. Foreign income & tax – year-end statements, foreign T-slips, and proof of taxes paid for Form T2209.

AUDIT ALERT – CRA actively matches T4 slips with corporate deduction claims. If an auto benefit is missing from an employee’s T4 but the corporation wrote off lease payments, both sides may face reassessment.

7. Cross-Border Considerations

• Treaty 183-day rule – exempts short-term U.S. employment income if you stay under 183 days and costs aren’t borne by a Canadian PE.
• Foreign tax credit (FTC) – limited to the lesser of foreign tax paid or Canadian tax otherwise payable on that income.
• Departure tax – leaving Canada? You may owe capital-gains tax on worldwide assets (certain Canadian property and RRSPs excluded). File Form T1243 and post security if deferring.

8. Frequently Asked Questions

Q1. I spent the first half of 2025 working from Mexico but kept my Alberta condo. Do I still file as a resident?
A1. Yes. Significant residential ties (home, health coverage, spouse) trump physical presence. Report worldwide income, claim FTC for Mexican tax.

Q2. My employer pays a flat CAD 500 cell allowance. Can I avoid tax?
A2. No. Flat allowances are fully taxable unless you provide itemised bills showing business use and receive a reimbursement, not an allowance.

Q3. Are crypto-trading gains capital or business income?
A3. Depends on frequency, volume and intention. Day-trading pattern? CRA treats as business income (100 % taxable). Long-term holding? Likely capital (50 % taxable).

9. Action Checklist Before 31 December

☑ Determine residency or non-resident status early.
☑ Track all sources of income separately—capital gains require special treatment.
☑ Verify that employer benefits are correctly reported on T4/T4A.
☑ Maximise RRSP and other Subdivision E deductions before year-end.
☑ If you used an employer vehicle, download CRA’s calculator results for your records.
☑ For cross-border workers, gather foreign tax slips and treaty documentation.

Conclusion

Divisions A and B of Canada’s Income Tax Act lay the groundwork for every other rule in the Act. Once you know who is taxable and how to compute income, the rest—credits, deductions, provincial surtaxes—falls neatly into place. Keep meticulous records, follow the four-step §3 formula, and review your residency status whenever you cross a border. If you need tailored advice, the tax professionals at BOMCAS Canada are ready to help you minimise tax and stay compliant.