What is Taxable Income?
In Canada, regular taxpayers are taxed by both the federal government and the province or territory in which they reside on December 31st of the tax year. The federal and provincial taxes are combined so that taxpayers only file one tax return (except for Quebec) and pay the combined tax total which the governments then divide. The amount of tax that taxpayers are required to pay will depend on the amount of income they have earned during the year and the deductions and credits claimed.
Taxable income means the value of what you have received is included in your income for the year, and you must pay tax on this amount. We previously wrote about what is considered taxable income in Canada. This blog expands on the previous one.
A common question for many Canadian taxpayers filing their tax returns each April is whether certain sources of income received in a given year should be included in their taxable income. Most of the time, economic advantages accrued in a given taxation year will fall under one of the traditional categories of taxable income, but there are a few notable exceptions to the rule.
For more information on the federal and provincial tax rates in Canada, click here.
Common Categories of Taxable Income in Canada
The most common source of taxable income in Canada is employment income. Employment income encompasses all wages earned by employees that are parties to an employer-employee relationship.
Where an employee also receives non-wage compensation, depending on the type of benefit, it may also be included in a taxpayer’s taxable income. These non-wage compensations can include car allowances, paid personal days, gym memberships, and insurance benefits.
Usually, these economic benefits received from their employer can be measured with monetary value, and if that individual is the primary beneficiary of the economic advantage, the benefit will be taxable. The value of the benefit for tax purposes is typically the fair market value of the economic advantage. For more information about taxable benefits, click here.
Income from property is earned through the ownership of tangible or intangible property, such as rental income, royalties and licensing fees are fully included in income under Canada’s taxation regime.
Where income is extracted from the corporation in the form of a taxable dividend, the amount of the taxable dividend is fully included in the income of a taxpayer. The same tax treatment applies to stock dividends, where corporations distribute dividends in the form of additional stock to their shareholders.
Withdrawing from Registered Accounts
Extractions from Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) differ in terms of tax consequences to the taxpayer’s taxable income.
Investment income earned in a TFSA is entirely sheltered so long as the contribution limit is not exceeded by the taxpayer. Funds withdrawn from TFSAs are also not taxable upon extraction.
Deposits into RRSPs result in deductions from taxable income, withdrawals from RRSPs are fully included in the taxable income of the taxpayer for the calendar year in which they are pulled out. For more information on RRSPs and TFSAs, click here.
In most circumstances, half of the income received from profit returned on the sale of appreciated assets qualifies as a taxable income inclusion under the Income Tax Act. However, for those who work in the construction or real estate industry, the profit returned may be fully included in income.
Small business shares and qualified farm and fishing properties may also be eligible for lifetime capital gains exemptions if the property meets the eligibility requirements of the CRA.
For a complete list of types of income to include in your taxable income calculations, click here.
Uncommon Categories of Taxable Income in Canada
Single or one-off transactions that resemble business ventures may also be subject to income tax if they would be characterized as an adventure or concern in the nature of trade. For example, if a taxpayer were to buy a tonne of lumber that they knew they could resell at a profit. The earnings resulted from the venture would be taxable, even if the trade had nothing to do with the taxpayer’s normal line of work.
“Other Income” is a broad category of sources of income that don’t fit neatly into other categories. Some examples of “Other Income” include money from scholarships and bursaries, retiring allowances or lump-sum payments from pensions and deferred profit-sharing plans.
Even amounts obtained through illegal means are considered taxable income in Canada. In addition to criminal sanctions, if funds are deemed to have been earned from an illegal venture, the CRA will expect that you report these amounts as income and pay taxes on them. If you do not, there is a very good possibility that you will be audited.
Amounts that May or May Not be Considered Taxable Income in Canada
Lawsuit compensation or damages may fall into the category of taxable income if they are for substantially the same purpose as taxable earnings would have been. For example, if the damages being won by the claimant were awarded to cover lost wages, this may be taxable income, as the damages would serve substantially the same purpose as the wages would have for the taxpayer.
Amounts that are not Taxable Income in Canada
Financial windfalls that do not qualify as taxable income are much rarer. Good examples of things that would not be included in taxable income are earnings from gambling (where the gambler is not highly organized and in the business of gambling), most income received from gifts or inheritance, and lawsuit compensation or damages that are more analogous to windfalls.
While most lottery winnings are not taxable in Canada, any interest accrued on lottery earnings would be subject to taxation as Investment or Interest Income.
Scholarships to elementary or secondary school and strike pay are also amounts that are not taxed under the income tax act.
Do you have questions about whether the amount you have received is taxable? Call us today! We can help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.