Unexpected money? Here’s what Canada taxes – and what it doesn’t

With the April 30 tax filing deadline fast approaching, you could be wondering: How much will I owe on all this? The answer might be nothing, in accordance with tax experts.

Inheritance and windfall are two examples of money flows on which individuals in Canada typically don’t pay taxes. Experts say it is vital to lift awareness of those and other common tax-free sources of income, especially provided that in the course of tax filing season, it may well be difficult to navigate all the small print of the system.

What is taken into account taxable income – and what shouldn’t be

H&R Block Canada tax expert Yannick Lemay said these exemptions can lead to significant savings. “There are a lot of nuances to taxes,” he said. “We need to make sure we know exactly what amounts are involved and how they need to be reported on your tax return, because if you don’t declare all of your income you could face severe penalties.”

Lemay said it is vital to contemplate how certain money was earned to find out whether it’s taxable. For example, while lottery and gambling winnings are typically not taxed for the common person in Canada – which is commonly misunderstood as a result of different rules within the United States – this shouldn’t be the case for an expert poker player.

“For example, if you just go to the casino occasionally and make some money during the year, that money is actually tax-free,” he said. “But for someone else, casino winnings may be their main source of income.”

For the latter, someone who is probably going to take a position additional time and training within the trade, any profits can be classified as business income and due to this fact taxable. “So, same source of money, same payer, but different treatment depending on who gets it,” Lemay said.

The secret’s whether you are attempting to generate “recurring” income, said Gerry Vittoratos, tax specialist at UFile. This comes into play for individuals who work within the gig economy or have a side hustle – like running an Etsy shop or delivering Uber Eats orders. “All of that is typically considered business income and the key is that it is recurring,” he said. “They regularly try to make money from it.”

Dealing with gifts, inheritances and scholarships

Lemay pointed to other sources of cash that usually are not taxable, akin to gifts. Gifts of money that you simply receive usually are not taxable, whatever the amount, but any income from this sum of money is.

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Likewise, inherited money or assets usually are not considered taxable income. However, any income you earn after receipt, akin to: B. Interest or rental income, taxable.

Other sources of tax-free income could include child support payments, most life insurance payouts, and certain government payouts akin to the GST credit or Canada Child Benefit.

Lemay cautioned that some non-taxable amounts should be reported even when no taxes are literally paid on them, as this may occasionally impact eligibility for such credits and advantages.

For young adults enrolled in academic programs, scholarships and fellowships are a standard source of cash that will not be taxed. This is the case for full-time students who’re enrolled in the present, previous or next 12 months, said Vittoratos. However, part-time students must report amounts that exceed certain thresholds.

“If you’re a full-time student … you don’t even report it on the tax return. It’s income that you just pocket straight away,” he said. “However, if you are a part-time student and have not been a full-time student in any of those three years, you will only receive an exemption of $500. Anything above that will be taxable and must be reported on the tax return.”

Report unusual income: If doubtful, state this

Other sources of income that usually are not typically taxed include union strike funds to cover living expenses, compensation for private injury or wrongful death, and staff’ compensation advantages.

When doubtful, Vittoratos said it’s higher to report income than to omit information and potentially suffer the implications. However, he noted that it is feasible to amend your tax return later. “The biggest mistake people make in their returns is omissions,” he said. “It’s always like, ‘Oh, I found this receipt three months later,’ and then I have to correct the return.”

Vittoratos added that it is vital to keep in mind that while January through April is mostly considered tax season, it should never be “just a four-month process” for filing. The more time you are taking to plan before the submission deadline, the less likely you’re to make mistakes like this. “In the months of January through April, you actually file your tax return, but your tax return is for the year that just passed,” he said.