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