Tax Tips & Pits – Sources of tax free income

"Is there such a thing? I mean, without lying about it or carrying on an illicit business, are there really sources of tax free income?"

Is there such a thing?  I mean, without lying about it or carrying on an illicit business, are there really sources of tax free income?

You bet there are and you likely know of some.

Things like strike pay, workers’ comp benefits, welfare and social service assistance (reported but with an off-setting deduction) are tax free.

Others are sexier like lottery and gambling winnings, game show prizes, and of course cash gifts from family and friends.

Government grants mostly are tax free but not all, especially business grants, so when it comes to tax preparation, research the taxable status of any grant received.

Perhaps the greatest opportunity for tax fee income often overlooked by the vast majority of people is the capital gain realized upon the sale of a principal residence … a truly Canadian feature.

This has proven very lucrative so much so that Canada Revenue Agency (CRA) has clearly defined what constitutes a principal residence and established rules surrounding the buy/sell of it.

Along the same line is the $750,000 lifetime capital gains exemption designed to encourage Canadians to invest in Canada. This is a topic in and of itself but suffice it to say, it’s a huge source of tax free income.

Compensation for personal injury, workplace emotional damages or human rights violations typically flow tax free to the recipient.  An award from a former employer for breach of employment contract before it began is classified as non-taxable income.

In the case of a successful wrongful dismissal suit, if the settlement is structured in such a way as to identify an amount for personal pain and suffering, that portion will flow tax free.

The remainder is taxable as it represents earned income that was foregone due to the dismissal.

On this note, a word of caution about employer-employee settlements whether privately negotiated or court imposed, CRA may chose to review the settlement to determine its accounting of the fair amount beyond reimbursement for lost wages.

Other sources of tax free income may not be so well understood.

Often simply referred to as “benefits”, these tangible items and services are nonetheless tax free income flows.

In terms of work, an employer cannot give cash gifts to an employee but can reward with non-cash gifts to a maximum of $500 per year.  Also, an employer can pay for uniforms, special clothing and safety footwear.

An employer can supply transportation to, and room and board for, a temporary or remote work site, and even provide transportation to a regular work place if the employer is not using a third party to deliver that service.

Perhaps two of the most attractive tax free income flows occur when an employer contributes to an employee’s registered pension plan or health services plan.

With this in mind, if it’s of no cost difference to an employer, it may be beneficial for an employee to receive some of the aforementioned “benefits” from an employer instead of, say, a company vehicle.

Without getting into the specifics of the taxable benefits associated with a company car, if there are other non-taxable benefits that an employee may find valuable, it would be worth having a conversation with an employer.

Even the use of a personal car with a mileage reimbursement following CRA rules may be more tax “free” than possessing a company car.

And you thought there was no free lunch.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.  Email him or see all previous columns at ron.clarke@JBSbiz.ca

Just Posted

Area A Director Ali Grieve (right), Village of Fruitvale Mayor Steve Morissette (front), and Village of Montrose Mayor Mike Walsh (left) held a congratulatory ceremony for Beaver Valley students who are part of the Class of 2021 graduates of J. L. Crowe Secondary at Beaver Creek Park on Thursday. Photo: Jim Bailey
Beaver Valley Grads of 2021

Beaver Valley mayors, RDKB Area A director celebrate their 2021 graduates with gift ceremony

Adrian Moyls is the Selkirk College Class of 2021 valedictorian and graduate of the School of Health and Human Services. Photo: Submitted
Selkirk College valedictorian proves mettle in accomplishment

Adrian Moyls is a graduate of the School of Health and Human Services

A volunteer delivers food to families as part of a West Kootenay EcoSociety program. Photo: Submitted
Farms to Friends delivers 2,500th bag of food to families in need

The program services communities in the Nelson, Trail and Castlegar areas

Selkirk College has begun its search in earnest for a leader to replace president Angus Graeme who is set to retire from his position in May 2022. Photo: Submitted
Selkirk College seeks community input for president search

Current president Angus Graeme retires next year

A report shows nine West Kootenay communities are have more low-income persons than the provincial average. File photo
Study casts new light on poverty in the West Kootenay

Nine communities in region have more low-income residents than provincial average

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

Emily Steele holds up a collage of her son, 16-year-old Elijah-Iain Beauregard who was stabbed and killed in June 2019, outside of Kelowna Law Courts on June 18. (Aaron Hemens/Capital News)
Kelowna woman who fatally stabbed teen facing up to 1.5 years of jail time

Her jail sentence would be followed by an additional one to 1.5 years of supervision

Cpl. Scott MacLeod and Police Service Dog Jago. Jago was killed in the line of duty on Thursday, June 17. (RCMP)
Abbotsford police, RCMP grieve 4-year-old service dog killed in line of duty

Jago killed by armed suspect during ‘high-risk’ incident in Alberta

The George Road wildfire near Lytton, B.C., has grown to 250 hectares. (BC Wildfire Service)
B.C. drone sighting halts helicopters fighting 250 hectares of wildfire

‘If a drone collides with firefighting aircraft the consequences could be deadly,’ says BC Wildfire Service

A dose of the Pfizer-BioNTech COVID-19 vaccine is pictured at a vaccination site in Vancouver Thursday, March 11, 2021. THE CANADIAN PRESS/Jonathan Hayward
NACI advice to mix vaccines gets varied reaction from AstraZeneca double-dosers

NACI recommends an mRNA vaccine for all Canadians receiving a second dose of a COVID-19 vaccine

A aerial view shows the debris going into Quesnel Lake caused by a tailings pond breach near the town of Likely, B.C., Tuesday, Aug. 5, 2014. THE CANADIAN PRESS/Jonathan Hayward
Updated tailings code after Mount Polley an improvement: B.C. mines auditor

British Columbia’s chief auditor of mines has found changes to the province’s requirements for tailings storage facilities

A North Vancouver man was arrested Friday and three police officers were injured after a 10-person broke out at English Bay on June 19, 2021. (Youtube/Screen grab)
Man arrested, 3 police injured during 10-person brawl at Vancouver beach

The arrest was captured on video by bystanders, many of whom heckled the officers as they struggled with the handcuffed man

Patrick O’Brien, a 75-year-old fisherman, went missing near Port Angeles Thursday evening. (Courtesy of U.S. Coast Guard)
Search for lost fisherman near Victoria suspended, U.S. Coast Guard says

The 75-year-old man was reported missing Thursday evening

Most Read