As the tax season rolls around each year, Canadians find themselves immersed in the complexities of the Canadian taxation system. Properly reporting income is crucial to avoid penalties and the accumulation of outstanding balances with the Canada Revenue Agency (CRA). While taxable income forms the bulk of one's earnings, there are certain sources of income that the CRA and Income Tax Act have deemed non-taxable income in Canada. In this article, we will explore the various types of non-taxable income in Canada, shedding light on the exemptions and regulations associated with each category.
One of the primary categories of non-taxable income in Canada is certain payments received from the provincial and federal governments. These types of government benefits do not need to be reported on a personal tax return. These payments include:
However, even though certain types of income are not taxed, they must be recorded on the tax return and included in the taxable income for tax purposes before being deducted later. Because of this, these amounts may affect some tax credits, income-tested benefits, and clawbacks. The types of income include the following:
In general, gifts and inheritances are considered non-taxable income in Canada. There are, however, some exceptions to this rule. One of the exceptions is when the gift is received from your employer in your capacity of being an employee. In those cases, the gifts will likely be considered a taxable benefit to the employee.
Another exception is when you receive gifts that are capital property (e.g. real estate, investments). In such cases. the person who has given the gift will be deemed to have sold the capital property at fair market value (FMV). As a result, they will have to pay tax on any resulting capital gain, despite having transferred the beneficial interest in the asset to another party.
In addition to the above, gifts received in the form of cash or other property from someone who is in debt to CRA will not be tax-exempt. In this situation, the recipient of the cash or other property can be held responsible for paying any outstanding tax liabilities of the transferor up to the FMV of the property transferred, less the FMV of anything that was given in return.
This could apply, for example, if one spouse transfers his or her stake in the family home to the other. It might also be relevant if a private company pays dividends while there is still an outstanding tax obligation. In the case of death, all tax debt owed to the government at the time of the testator's death must be paid before any property can be distributed to the beneficiaries.
Also, most amounts received by the beneficiary of a life insurance policy are also considered non-taxable income in Canada.
The tax-free savings program began in 2009. The purpose of the program is to encourage Canadians to save money by providing them with a tax-sheltered account to invest. The TFSA is available to any Canadian resident aged 18 and over. All investment income (including capital gains and dividends) earned in a TFSA is tax-free. Withdrawals from a TFSA are also not subject to taxation while contributions are not tax deductible.
The registered retirement savings plan is a long-term saving program that offers tax benefits to encourage Canadians to save for their retirement. Investment income earned in an RRSP is not taxed until it is withdrawn. However, any contributions that you have made to these accounts may be deducted from your taxable income.
There are annual limits on the amount that you can contribute to your TFSA and RRSP. The annual RRSP and TFSA contribution limit can be found on the CRA's website.
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There are also other types of payments that are considered non-taxable income in Canada. These include:
Understanding the various sources of non-taxable income in Canada is essential for accurately reporting your earnings and maximizing your tax benefits. From government payments to TFSAs, RRSPs, lottery winnings, gifts, and inheritances, these non-taxable income sources provide individuals with opportunities to grow their wealth without incurring additional tax liabilities. If you’re concerned about unreported income or want to know whether a source is taxable or considered non-taxable income in Canada, speak to a professional tax accountant or contact us, so we can help answer all your questions.
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The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.