Updated Checked by the Tax-Services.ca editorial team How we check
The tax act in Canada is the Income Tax Act, cited as R.S.C. 1985, c. 1 (5th Supp.), and it’s the law that says who pays tax on income and how the amount is worked out. You can read the whole thing free on the Justice Laws website. The version we checked was current to 21 September 2026. Nobody reads it front to back, and you don’t need to, since most of what matters to an ordinary return comes down to a handful of sections that you can read in ten minutes.
What does the Income Tax Act actually say?
Start with section 2(1). It says an income tax shall be paid, as the Act requires, on the taxable income for each taxation year of every person resident in Canada at any time in the year. You can check the wording yourself at the start of the Income Tax Act on Justice Laws. Section 2(2) then defines taxable income as your income for the year plus the additions and minus the deductions allowed by Division C.
That’s the skeleton, and it’s short.
Section 3 explains how income for the year is built. The rest of the Act fills in the rules and exceptions, and we haven’t read those.
How is the Act laid out?
Sections 2 and 3 sit in Part I, headed Income Tax, under Division A, Liability for Tax. Here’s how the first sections fit together.
| Section | What it does |
|---|---|
| 2(1) | Residents pay tax on taxable income for each year |
| 2(2) | Taxable income is income plus additions, minus Division C deductions |
| 3 | Builds income: total from all sources, plus net taxable capital gains, less certain deductions and losses, never below zero |
Section 3 has six paragraphs, (a) to (f), and if you read them in order, slowly, they work like a recipe for the income line that everything else on the return hangs from. Income from sources such as employment, business and property comes first. Net taxable capital gains, less allowable capital losses, come next. Then deductions, then losses from employment, business or property. If the answer is below zero, income is treated as zero.
How do you read a citation like s. 3(a)?
Legal shorthand looks scarier than it is. The number is the section, and each bracket narrows it down. So “3(a)” means paragraph (a) of section 3, and “2(2)” means subsection 2 of section 2. When a CRA letter or a forum post cites a section, type that number into the Justice Laws page and you land on the exact text. Read the one sentence being cited, then the sentence before it, since the Act often builds on the line above.
How does the Act turn into a tax bill?
The Act sets the structure, and the rates and credit amounts each year are published by the CRA. Here’s the section 3 recipe on a real case. An Ontario employee earns $60,000 and sells shares for a $4,000 gain. At the 50% inclusion rate we use, $2,000 of the gain counts. Total income is $62,000, and after the CPP deduction our calculator shows taxable income of $61,435.
Match it to the recipe. The $60,000 of pay is the first step, the $2,000 taxable part of the gain is the second, and the CPP deduction is one of the deductions that come off after. Read section 3 with those three numbers beside you and it stops being abstract.
Estimated tax is $8,913.50 (federal $5,748.30, Ontario $3,165.20). Add a $5,000 RRSP deduction and taxable income falls to $56,435, with tax of $7,566.72. You can rerun both in the income tax calculator, and the gain part is in the capital gains tax calculator.
About that 50%: the plan to raise the inclusion rate to two-thirds was cancelled in a release dated 21 March 2025. The CRA pages we found don’t state the 2026 rate, so we’ve used 50% and you should check.
How do you read the Act without getting lost?
Skip the full text. Use the section pages, since each one has its own address, and jump straight to the number you were sent. Look for the “current to” date at the top, because an Act can be amended. Read the marginal notes down the side, since they say what each section is about.
And don’t stop at the Act if you want to know what to claim. The wording is dense on purpose. The CRA’s guides and forms explain how the rules apply, and our tax credits calculator turns a few of them into numbers.
Where does the Act stop mattering to you?
For most returns, nowhere near a court. You’ll use the Act when a rule sounds odd, when a slip or letter cites a section, or when a rate quoted online disagrees with the CRA page. Then you read that one section, note its date, and check whether a later amendment exists.
What the Act won’t do is give you a rate table or a 2026 deadline. Those come from CRA pages, and we couldn’t find the 2026 filing dates published yet. If you’re staring at a legal sentence that makes no sense, a tax professional can read it with you, and that’s a fair use of an hour.
The sources behind this page
The wording of sections 2 and 3 is from the Justice Laws website, the official source of federal statutes. The estimates use our 2026 Ontario data based on the Canada Revenue Agency tax rates page. They leave out benefits, credits beyond the basics and many claims. No level of government runs or endorses this site.
Frequently asked questions
What is the tax act in Canada?
The Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), the federal law that sets out who pays income tax and how it is worked out.
Where can you read the Income Tax Act?
On the Justice Laws website at laws-lois.justice.gc.ca, where each section has its own page and a current-to date.
Who has to pay tax under section 2?
Every person resident in Canada at any time in the year, on taxable income for that year.
What is taxable income under the Act?
Your income for the year plus additions and minus the deductions permitted by Division C.
Does the Act list the tax rates?
We only checked sections 2 and 3, which don't. The 2026 rates and brackets are on CRA pages.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill