What is Considered Non-Taxable Income in Canada?
Every April Canadians and non-resident taxpayers are forced to once again partake in the self-reporting Canadian taxation regime. Penalties for unreported income can be significant and with CRA interest rates on overdue taxes currently set at 5% (and retroactively applicable), what may have originally been a small income tax debt can quickly add up to a life-ruining outstanding balance with the CRA.
Following our previous blog entry on the subject of “What is Considered Taxable Income in Canada?”, this edition will examine those few income sources that the CRA and Income Tax Act have defined as non-taxable sources of income.
The first category of income that does not have to be reported as earnings are certain payments from the provincial and federal governments.
Some benefits and credits paid by the provincial and federal governments are considered tax-exempt and do not have to be declared by one’s income tax filings. These include:
- the GST/HST credit;
- the Canada Child Benefit; and
- in Quebec, child assistance payments.
It is not the case, however, that all benefits received from the provincial and federal governments are non-taxable. Notably, COVID-19 response benefits issued by the federal government to assist Canadians with financial strife stemming from the COVID-19 pandemic are to be reported as taxable income of their recipients.
Another governmental payment that is not taxed are some proceeds of litigation. Where a litigant successfully sues a provincial or territorial government and receives a financial award for criminal acts or motor vehicle accidents, the proceeds are generally, not taxable.
Tax-Free Savings Accounts (TFSAs) and Registered Savings Plans (RSPs)
Where a taxpayer earns dividend income, interest income or earns capital gains using funds held within a TFSA, the proceeds are not taxable or included in income for a given taxation year. There are, however, exceptions to this general rule as taxpayers who use the TFSA for purposes analogous to a securities trader may be deemed to have earned business income from these earnings.
Additionally, income earned from funds or investment vehicles held under some RSPs are not taxable until they are extracted from the account.
For both TFSAs and RSPs, contribution limits and procedural requirements are strictly enforced and could result in significant financial penalties if not appropriately met.
Lottery Winnings, Gifts, and Inheritances
Windfalls such as winnings from the lottery are typically not taxable in Canada unless they are considered to be annuity payments.
In most cases, gifts are not considered to be taxable income in Canada. There are exceptions to this rule, however. For example, where gifts are determined to be capital property, the donor (or gift giver) would have to report any income earned through capital gains on the capital property despite having transferred the donor’s beneficial interest in the asset to another party. Gifts from employers may also be deemed to be taxable where the gift can be construed as a “taxable benefit”.
Similar to gifts, inheritances are usually not taxable in Canada. Unlike the United States, for example, that imposes 18-40% in estate taxes for affluent taxpayers (prior to exemptions), the Canadian taxation regime only features tax consequences for testators who leave capital property to their beneficiaries or who have any tax debt owed to the government at the time of the testator’s death.
Other Non-Taxable Income Sources
The above-referenced non-taxable income sources are not an exhaustive list of non-taxable income sources in Canada. There are several statutory exemptions that apply to exempt certain sources of income from taxation in very tailored and specific circumstances. One such example, stemming from paragraph 81(1)(g.1) of the Income Tax Act which deals with compensation when employees pursue their employers for damages through litigation and identifies one source of non-taxable income as: “income for the year from any property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person.”
However, it is not in all cases that damages from an employer be considered non-taxable, which was recently the subject of the Tax Court of Canada decision in Saunders v. The Queen.
While there are select provisions in the Income Tax Act that carve out specific statutory exceptions to taxable income inclusions, these provisions (like paragraph 81(1)(g.1)) are often very nuanced and applicable in very narrow circumstances.
If you are worried about potential unreported income or would like an opinion as to whether an income source is taxable or non-taxable, contact a tax professional at R&A Tax Law today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.