While Canada’s tax system requires residents to report and pay tax on their worldwide income, there are several types of income that are exempt from taxation. Understanding which incomes are tax-exempt helps taxpayers comply with CRA rules and avoid unnecessary reporting. This detailed guide explores the main categories of income that are exempt from tax in Canada, the conditions under which they are exempt, and important considerations for taxpayers.
1. Gifts and Inheritances
Amounts received as gifts or inheritances are generally not taxable in Canada. This means:
- Cash gifts or transfers of property received as a gift are not included as income.
- Inheritance proceeds received from a deceased person’s estate are also not taxable.
- However, any income generated from gifted or inherited property (such as rent or interest) must be reported.
- Capital gains triggered by the disposition of inherited property may be taxable depending on circumstances.
2. Lottery and Gambling Winnings
In Canada, lottery winnings, casino jackpots, and gambling winnings are not considered taxable income. This means:
- You do not pay tax on the principal amount you win from government-run lotteries or casinos.
- However, if you are in the business of gambling or it is your primary source of income, winnings could be taxable.
- Any interest earned by investing lottery winnings is taxable.
3. Life Insurance Proceeds
Proceeds received from a life insurance policy upon the death of the insured are generally exempt from income tax. Important points include:
- The beneficiary receives the payout tax-free.
- If the policy has accumulated cash value and you withdraw it during your lifetime, those amounts may be taxable.
- Interest or investment income earned on the proceeds after receipt is taxable.
4. Child Support Payments
Child support payments received are not taxable income to the recipient, nor are they deductible by the payer. Key points include:
- Payments made under a court order or written agreement are exempt.
- Spousal support payments, on the other hand, may be taxable or deductible depending on the circumstances.
5. Workers’ Compensation Benefits
Workers’ compensation benefits received as compensation for workplace injury or illness are generally exempt from taxation. This includes:
- Payments from provincial workers’ compensation boards.
- Benefits for lost wages or medical expenses related to workplace injury.
- However, if the benefits are taxable in another jurisdiction, special rules may apply.
6. Registered Plan Income and Withdrawals (Under Certain Conditions)
Certain registered plans provide tax-exempt income or tax-deferred withdrawals:
- Tax-Free Savings Account (TFSA): Investment income and withdrawals from a TFSA are completely tax-exempt.
- Registered Education Savings Plan (RESP): Contributions are not taxed, but earnings and government grants are taxed when withdrawn by the beneficiary, typically at lower student rates.
- Registered Disability Savings Plan (RDSP): Similar tax treatment to RESPs, with government grants and bonds.
- Registered Retirement Savings Plan (RRSP): Contributions are tax-deferred; withdrawals are taxable except under specific programs like the Home Buyers’ Plan.
7. Certain Social Benefits and Allowances
Some government benefits are non-taxable, including:
- Canada Child Benefit (CCB)
- GST/HST Credit
- Social assistance payments in most provinces
- Disability benefits in certain cases
Always confirm with CRA or provincial authorities if you are unsure about a benefit’s tax status.
8. Scholarships, Bursaries, and Awards (Under Specific Conditions)
Scholarships, fellowships, bursaries, and awards are generally non-taxable if:
- You received them in connection with enrolment in a qualifying educational program.
- The amounts are used for tuition or related education expenses.
- If amounts exceed qualifying expenses, the excess may become taxable.
Important Considerations
While the above income types are generally exempt, consider:
- Investment income earned on exempt funds is usually taxable.
- Some income may be exempt federally but taxable provincially or vice versa.
- Foreign income and property may have different rules.
- Non-compliance or failure to report properly can trigger penalties.
Conclusion
Knowing which types of income are exempt from tax in Canada helps you comply accurately with CRA requirements and avoid unnecessary reporting. Gifts, inheritances, lottery winnings, certain government benefits, and specific registered plan withdrawals are some common exempt income types. However, it is important to understand the specific conditions and exceptions associated with each category. When in doubt, consult a tax professional or refer to CRA guidelines to ensure your tax return is complete and correct.
