Can I have tax free income?

There are a surprising number of kinds of income that are not subject to tax under the Income Tax Act.  Here are some examples:

Strike pay from a union. (Supreme Court of Canada, 1990 decision in Fries) A union’s cash gift to a member is also usually tax-free.

Damages or compensation for personal injury, including structured settlements and awards from a provincial Criminal Injuries Compensation Board. (Interpretation Bulletin IT-365R2)

Compensation for mental or emotional damage at the workplace, such as harassment of an employee, or for human rights violations. (Several court cases, including Forest (FCA, 2007) and Rae (TCC, 2010))

Lottery or other gambling winnings, unless the taxpayer is so organized and active in gambling that it constitutes a “business” from which the taxpayer could deduct losses if he or she lost money. (Interpretation Bulletin IT-213R, and several court decisions)

Television game show prizes, even where the taxpayer trained to develop expertise in the subject matter. (Tax Court of Canada, 1998 decision in Turcotte)

Gifts (provided they are not disguised employment income or business income).

Income earned in a Tax-Free Savings Account, whether or not it is taken out and spent.

Capital gains on your principal residence, subject to various rules that ensure that the family claims only one “principal residence” at a time. However, if you build a home intending to sell it, but move in first, this exemption will not be available because that gain will be business profit, not capital gain. (ITA paragraph 40(2)(b))

Income of a “status Indian” earned on a reserve. See www.cra.gc.ca/brgnls for details, and extensive case law including the Williams, Bastien, and Dubé decisions of the Supreme Court of Canada. (Indian Act section 87, and ITA paragraph 81(1)(a)) [Trivia point: “brgnls” is “aboriginals” with the vowels removed in order that the URL be unintelligible in both official languages, rather than being intelligible in only English.]

Most payments for foster care and similar in-home care that the taxpayer provides, provided the care does not cross the line into being a “business”. (ITA paragraph 81(1)(h))

Welfare and similar social assistance payments. These must be reported as income, but an offsetting deduction is available when calculating taxable income. (ITA 56(1)(u) and 110(1)(f))

Workers’ compensation benefits. Again these must be reported as income, but an offsetting deduction is available when calculating taxable income. (ITA 56(1)(v) and 110(1)(f)(ii))

Many grants under government programs, unless the program is specifically listed as taxable (e.g., ITA 56(1)(n.1), 56(1)(s), Reg. 5500-5503), or the grant relates to your business. (Tax Court of Canada, 1995 decision in Layton; and the general principle that because specific government programs are listed as taxable, others should not be [note that the application of this rule is not entirely certain])

Reimbursements of expenses to volunteers, and reimbursements to parents for the cost of transporting students to school when a school board discontinued bus service. (CRA interpretation letter, noting there is no “source” of income)

Damages for breach of an employment contract before it began. (Supreme Court of Canada, 1996 decision in Schwartz)

Compensation for damage to business operations in some circumstances. (Tax Court of Canada, 1998 decision in Frank Beban Logging and 2014 decision in Henco Inc.; Federal Court of Appeal, 2002 decision in Toronto Refiners & Smelters)

Certain employment benefits (see CRA guide T4130, available on www.cra-arc.gc.ca). A few examples are: — Employer contributions to a registered pension plan, private health services plan, or various other plans. (ITA 6(1)(a)(i)) — An employer can give an employee up to $500 in non-cash gifts and awards per year, such as for a birthday or Christmas. As well, a separate non-cash “long service” or “anniversary” award of up to $500 can be non-taxable; it must be for at least five years of service or five years since the last such award. (See www.cra-arc.gc.ca/gifts) April 2015 Tax Newsletter 3 — Board and lodging at, and transportation to, a “special work site” where the employee works temporarily, or a “remote work site” that is remote from any established community. — Transportation to the job, if provided directly by the employer. — Uniforms, special clothing, or safety footwear that the employee needs for their job.

Principles for a Payment to be Tax-Free The factors to be considered for a payment to be tax-free (a non-taxable “windfall”) are:

  •  Was there an enforceable claim to the payment?
  •  Was there an organized effort to receive it?
  •  Was the receipt sought after or solicited in any manner?
  •  Was the payment expected?
  •  Was there any foreseeable element of recurrence?
  •  Was this a customary source of income to the taxpayer?
  •  Was this in recognition of anything provided or to be provided by the taxpayer?

 

 

Originally published as part of CPA Canada Public Practice Manual April 2015 Newsletter, written by: David Sherman, LLB, LLM.  Some content removed.