In Canada, like most other countries, tax is an inevitable levy every working individual must pay. Unless, of course, your source of income falls under the non-taxable. Most of the income/profits you earn through investments, trading, wages, etc., are taxable by the Canadian government. Taxes are charged both at the federal and state level.
The government of Canada makes the majority of its annual revenue from income taxes. Canada Revenue Agency (CRA) controls everything concerning Taxes in Canada. The federal government collects personal income taxes across the country on behalf of all the provinces and territories in Canada. The same goes for corporate taxes except for Alberta.
Understanding the Canadian Tax System
The Canadian tax system is self-assessment; taxpayers assess their tax obligation by filing a CRA return. You can file your tax return online or offline. You must do this before or on the deadline of the filing. Then, CRA will access your return base on the information received.
CRA retrieves your data from employers, financial companies, etc. and uses it to review your account to ensure all details and data are accurate.
If a taxpayer disagrees with the CRA’s assessment, he/she may appeal in the form of an objection that states reasons for the disagreement. The appeal branches of the CRA will review this appeal afterwards before making their conclusion.
The complaint will either be approved or dismissed by the CRA. If it is confirmed or verified, the taxpayer may decide to appeal to the Tax Court of Canada and the Federal Court of Appeal.
Guide to Non-Taxable Income in Canada
If you are a citizen of Canada or you live in any province in Canada, then most of your income is taxable. However, the federal government makes some exceptions, while some states differ in income in Canada.
Some states do not have an income tax, while some investments are tax-income free, including provincial bonds and holdings in Tax-free saving accounts (TFSA).
Any employee who has a disability, either temporary or permanently, may be eligible for disability pay. Generally, disability wages fall under non-taxable income in Canada.
If the disability payment comes from an insurance policy where the employer pays the premiums, then the money will be taxed by the appropriate body.
Several disability payments are non-taxable in Canada. Some of them include;
- Private disability insurance.
- Any payment from supplemental disability insurance paid for with after-tax money.
- Worker’s compensation.
- Disability aid from a public welfare fund.
- Disability aids gotten from a no-fault car insurance policy for loss of income due to injuries.
Income earned on a First Nations Community
The First Nations in Canada refers to the predominant indigenous people in Canada. They are about 634 First Nations governments spread across Canada. And these nations have the backing of the Canadian government.
Approximately half of them are situated in Ontario and British Columbia. However, this tax exemption only applies if the property belongs to an Indian. They are commonly referred to under the definition in the Indian Act is situated on a reserve.
According to IRS, “…in most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income.”
This fund could be in the form of health insurance provided by your employer via a third party, any coverage and reimbursement for medical care provided via a health reimbursement arrangement (HRA). Also, long-term employer-provided insurance is not taxable.
These are non-taxable in Canada; you don’t have to report the winnings in your returns neither do you have to pay tax on them. There’s also no limit on how much the winnings can be.
However, if your winnings earn interest or profit from investing your winnings, your interests and profits are taxable.
There is also an exception to non-taxable on winnings. If you earn a cash prize from your workplace, you must report it as income, and tax will be deducted from it.
If you sell lottery tickets and earn a commission from winning tickets, you will report your winnings as income. Learn how to file your taxes in Canada here.
Gifts and inheritance
Inheritances and gifts are not considered taxable income in Canada. So, anyone who receives a gift or inheritance of any amount from any source with an employer’s exemption is not liable to pay tax on the present or inheritance.
However, if it is a capital property like real estate given out as a gift, the facility’s giver will have to pay tax on any capital gains as it is believed the property was sold at a fair market value. Note that estates over a certain size may be subject to estate taxes. The estate itself pays estate taxes.
Life Insurance Compensation
In Canada, most amounts received from life insurance payouts are non-taxable. That is, irrespective of the size of your life insurance policy, whoever you have named as the beneficiary will not have to report the payout in the tax return.
However, if your estate is the beneficiary of your policy, then the death benefits may be subject to tax, but the heirs or beneficiaries do not owe any tax. If you choose to surrender your life insurance policy and receive its cash values, you will pay taxes on your investments increased in value.
These investments will arise if you have a permanent insurance policy as there may be an opportunity to accumulate cash value invested. Also, if your beneficiaries receive any interest from the system along with the death benefits, then they are to report such claims as to income from which it will be taxable.
Strike pay received from the union
A union strike occurs when the union representing workers collectively fail to reach an agreement with the management of a company that these workers belong to. A strike can be based on compensations, demand for an increase in salaries, and workers’ general welfare.
During union strikes, employers don’t pay wages. However, the union has a strike fund that goes to workers who actively took part in the strike. This strike pay is non-taxable so long as you meet the necessary criteria.
First of all, you must meet the membership requirements by taking part in the strike. You must also abide by the rules of the union as regards the strike.
Interests, Dividends Or Capital Gains From Tax-Free Savings Account (TFSA)
A tax-free savings account is an account that does not pay tax on contributions, interests, dividends or capital gains. It is categorized under personal account was started in 2009. It is a way for Canada’s citizens and residents to set aside tax-free savings throughout their lifetime.
To be eligible for tax-free savings account in Canada, you must be 18 years old and above. You must be a Canadian citizen or a resident with a valid social insurance number.
For non-Canadian residents who still want to set-up a TFSA, you must have a valid social insurance number. Note that a 1% tax will be deducted from any contributions made into the account each month the contribution stays in the account.
Working Income tax benefits
Also known as the WITB, it is a refundable tax credit that supplements low-income workers’ earnings. It also enhances work incentives for low-income citizens of Canada.
It has was substituted by Canada’s Workers benefits (CWB) in 2019, which is an improved version of it. It is aimed towards those whose earnings are between CA$3000 – CA$24,111 for individuals or CA$36,483 for families. The benefit limit is CA$1355 for individuals and $2335 for families.
To qualify for this benefit, you must be 19 years or older. You must be a resident of Canada for income tax purposes throughout the year. That is, you must be a taxpayer in Canada.
Goods And Service Tax Or Harmonized Sales Tax (GST/HST) Credit
The GST or HST credit is a tax-free payment made quarterly to help individuals and families with low to moderate-income pay off all or part of the HST or GST they pay. You are automatically eligible for this credit when you file your tax return.
If you are single, you can get up to CA$451 yearly, and if you are a married couple or living as a common-law couple, you can earn up to CA$529 annually. You can also earn up to CA$155 yearly if you have a child under the age of 19 as your GST/HST credit.
Canada Child Benefit
The CRA administers this; it is tax-free and aimed towards assisting families with the cost of raising children under the age of 18. To qualify for a child benefit, you must have a child under 18 living with you. You must be primarily responsible for the care and upbringing of the child.
You and your spouse or common-law partner must either be; a Canadian, permanent residents, a protected person, an indigenous person who fits the definition of an Indian under the Indian Act or someone who has lived in Canada for 18 months and still has a valid permit by the 19th month.
Other non-taxable income in Canada include:
- Cell Phone and Internet Services
- Education and Professional Development Costs
- Professional Dues
- Recreational Facilities and Club Dues
- Automobile Allowances
- Counselling Services
- Loyalty Points
- Private Health Services Plan
Regardless of where you fall under, it is always advisable to consult your tax professional or accountant to determine which of your wages is non-taxable.