Section 3 Ordering Rules: Net Income for Tax Purposes
Tutorly · Canadian Tax
Section 3 Ordering Rules: Net Income for Tax Purposes
The Section 3 ordering rules income tax students meet first are the recipe for net income for tax purposes under the Income Tax Act. You work paragraphs 3(a) → 3(b) → 3(c) → 3(d) in order: add all sources of income, add net taxable capital gains, subtract “other deductions,” then subtract losses. Two stop-at-zero floors keep the result from going negative.
The four paragraphs, in order
Add income from all sources — employment, business, and property (and other income). This subtotal can’t be negative.
Add net taxable capital gains = taxable capital gains − allowable capital losses. If negative, enter zero (losses don’t reduce other income here).
Subtract subdivision e deductions — RRSP, child-care, moving, support payments and similar.
Subtract losses from employment, business, and property (and ABILs). The final figure is floored at zero.
Worked example
| Step | Item | Amount |
|---|---|---|
| 3(a) | Employment $60,000 + business $10,000 + interest $2,000 | $72,000 |
| 3(b) | Taxable capital gain $4,000 − allowable capital loss $1,000 | $3,000 |
| Subtotal 3(a) + 3(b) | $75,000 | |
| 3(c) | Less: RRSP $5,000 + child-care $3,000 | ($8,000) |
| 3(d) | Less: rental (property) loss | ($4,000) |
| Net income for tax purposes (Division B) | $63,000 |
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Frequently asked questions
What are the Section 3 ordering rules?
They’re the ITA’s four-step order for computing net income for tax purposes: 3(a) add all income sources, 3(b) add net taxable capital gains, 3(c) subtract subdivision e deductions, 3(d) subtract losses.
Why does the order matter?
Because of the floors — capital losses can only offset capital gains within 3(b), and the final total can’t go below zero, so the sequence determines what gets used now versus carried forward.
What’s a subdivision e deduction?
“Other deductions” in computing income — RRSP contributions, child-care expenses, moving expenses, and support payments, among others, subtracted at step 3(c).
Can net income for tax purposes be negative?
No. If losses would push it below zero, the excess becomes a non-capital loss you carry back or forward to other years.
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