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The taxable income formula on a Canadian return is short: total income minus deductions gives net income, and net income minus a second set of deductions gives taxable income. In CRA terms, line 26000 equals line 23600 minus line 25700. Your tax is calculated on that last number, not on what your employer paid you.
Most people only ever hit the first subtraction. The second one applies to a smaller group, and it stays at zero unless you have one of the items listed below.
What are the steps from total income to line 26000?
Everything runs one way. The table shows the chain with the line numbers the CRA uses.
| Step | What you do | Line |
|---|---|---|
| 1 | Add up all your income | 15000 (total income) |
| 2 | Subtract the deductions from lines 20700 to 23500 | 23600 (net income) |
| 3 | Subtract the total of lines 24400 to 25600 | 25700 |
| 4 | What is left is your taxable income | 26000 |
If step 2 comes out negative, you enter zero on line 23600 and keep the negative amount, because it may be a loss you can use in other years. The CRA page for line 23600 explains the loss carryback form.
Why does net income matter if tax uses taxable income?
Because it’s two jobs on two numbers. Taxable income is what the federal and provincial brackets are applied to. Net income is what the CRA uses to size your non-refundable credits, and it also decides the Canada child benefit, the GST/HST credit and similar payments. So a deduction that lowers net income helps twice: less tax and, often, a bigger benefit. A deduction taken only in the second group (lines 24400 to 25600) lowers tax but leaves net income where it was.
That second group holds things like non-capital losses, net capital losses and the northern residents deduction, as the CRA describes it. If you have none of them, you can ignore lines 24400 to 25600.
A worked example on $70,000
Say you live in Ontario, earn $70,000 in employment income and put $3,000 into an RRSP that you deduct. Total income is $70,000. After the RRSP deduction your net income is $67,000. You’ve got nothing on lines 24400 to 25600, so taxable income is also $67,000.
Our engine gives federal tax of $7,628 and Ontario tax of $3,865 on $67,000, so $11,493 together. On the full $70,000 it would be $12,382. The RRSP deduction saved $889, which is 29.65% of $3,000. That’s the federal 20.5% and Ontario 9.15% brackets stacked. These figures use only the basic personal amount. They leave out CPP, EI, the Canada employment amount and other credits, so your real bill won’t match it. To see a full result, use the income tax calculator, and check the rate on your next dollar in the marginal tax rate calculator.
How big should the deduction be? The RRSP calculator shows what a contribution does at your income.
Where the formula trips people up
Mixing up the two totals is the big one, and it happens even to people who file every year, because line 23600 and line 26000 sit a few lines apart and both get called “income”. If you hear “your taxable income is $67,000” and you’re looking at line 23600, one of you is wrong. Another common slip is adding a deduction on the wrong side. A credit doesn’t reduce taxable income at all. It comes off the tax after the brackets are applied, so a credit amount of $1,000 saves you a fraction of that, at the lowest bracket rates. The tax credits calculator shows the difference, though it covers federal credits only.
Watch out for the unusual sources of income too. A taxable capital gain goes into total income at the inclusion rate. We work with 50%, but we couldn’t find the 2026 rate on a CRA page, so check it if you have a large sale.
Where the numbers come from
The line numbers and the formula come from the Canada Revenue Agency pages for lines 23600, 26000 and the T1 general form guidance. The tax amounts in the example come from the 2026 federal and Ontario rates used in our calculators. This site isn’t linked to the CRA, and the calculator ignores credits you may qualify for.
Frequently asked questions
What is the formula for taxable income in Canada?
Line 26000 equals line 23600 (net income) minus line 25700 (the total of lines 24400 to 25600). Net income itself is total income on line 15000 minus deductions on lines 20700 to 23500.
Is taxable income the same as gross income?
No. Gross income before deductions is closer to your total income on line 15000, and taxable income is what remains after the deductions.
Can taxable income be zero?
Yes. If your deductions match or exceed your income, the CRA guidance says you enter zero on line 23600 and keep track of the negative amount.
Do tax credits reduce taxable income?
No. Credits reduce the tax that comes out of the brackets. They don't change line 26000.
Why does the CRA care about net income?
It sets your non-refundable credits and your benefits such as the Canada child benefit and the GST/HST credit.
- 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
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.