By Ron Clarke
Believe it or not, there are sources of income that escape the taxman.
To start with the fun ones - the ones that U.S. citizens envy - in Canada if you win game show prizes, lotteries and at the gambling table, there is no taxation on these types of income.
Caveat though, if the Canada Revenue Agency (CRA) determines that you are highly organized and regularly gamble you will have to report gambling income on your tax return because you will be considered to be in the “business” of gambling.
Principal residence capital gains are not taxed in Canada, again envy south of the border.
There are many rules surrounding the exclusion of this income from taxation that are closely monitored by CRA, as evidenced by the recent requirement to complete Schedule T2091 that reports the sale of your principal residence on your tax return.
There’s typically no tax consequence. It’s more of a tracking mechanism to identify “house flippers”.
Another envied Canadian tax policy is the fact that there is no taxation on inheritance you receive, even if the inheritance comes from a deceased person living abroad. This doesn’t mean the home country of the deceased person won’t tax it before it leaves the home country, but when it arrives here, it’s not taxed by Canada.
If you receive court ordered compensation for personal injury including class action settlements, this is tax free.
Workers’ Compensation and Social Assistance payments are tax free but must be reported on your tax return with an offsetting deduction for the same amount also reported on the tax return, the net effect being tax free income.
Government payments received for providing foster care is tax free and does not have to be reported on your tax return.
Cash gifts are tax free, assuming the gift isn’t hiding employment income!
Speaking of employment, there are many sources of tax free income including reimbursement of expenses, provision of uniforms and safety equipment, transportation and accommodation for special or remote worksites, contributions to a registered pension plan or private health plan, non-cash gifts totaling no more than $500 per year, strike pay, damages for breach of employment contract, compensation for workplace harassment and human rights violations.
Government grants for the myriad of programs that it operates for people and for businesses typically are taxable income.
Having said this, some are not taxable, for example payments for disaster relief are tax free.
On this point, as much as one may argue that COVID-19 is a disaster, almost all federal COVID-19 benefit payments are taxable. Having said this, the top-ups for the GST rebate and Canada Child Benefit are not taxable income and neither are benefits available to the disabled.
At the same time, BC government COVID-19 benefits will not be included as taxable income. Give credit to the BC government for income testing some of the benefits it has offered rather than simply granting the benefit to everyone only to have the benefit clawed back at tax time.
Sticking with COVID-19, on the business front, benefits are all taxable income to the proprietorship or corporation. Importantly, this benefit is considered revenue for the benefit period it is applicable too. In other words, the rent or wage subsidy for the December benefit period and received in January or February 2021, is 2020 not 2021 revenue to report.
The take-away?
Investigate any extraordinary sources of income received before filing your personal or business tax return, especially for 2020 tax returns.
Ron Clarke has his MBA and is owner of JBS Business Services in Trail, providing accounting and tax services.