Tax exemptions to know

By Bruce Sellery on May 9, 2012
Estimated reading time: 2 minutes

Bruce Sellery says Ottawa doesn't want to tax all of your money, it just seems that way.

Question

What types of income are not considered taxable? I understand that “awards for damages” in a human rights settlement are not taxed. Is this correct and are there other things that are not subject to income tax?

Answer

If you think the government is after a piece of every penny you put into your piggy bank, you’re only partly right. Most sources of income are indeed taxable, but there are a few exceptions, including the one you mentioned in your question.

Damages in a human rights settlement are not taxable, according to Cleo Hamel, Senior Tax Analyst at H&R Block Canada. He adds that if the settlement is not taxable, then legal fees associated with it are not tax deductible.

Other types of settlements can be a little more complex. For example, in the case of a wrongful dismissal settlement Hamel says “there may be a portion of the award that represents a severance package or lost income, and that portion would be taxable.”

Different countries have different rules about which types of income are taxable. For example, lottery winnings are not taxable in Canada, but they are in the United States. It is best to assume that all your income is taxable and then see if there is an exception that would apply here at home.

Here are some other examples of income that don’t have to be included on your tax return from the Canada Revenue Agency (you can see the complete list by clicking here).

Gifts
Inheritances
Lottery winnings
Winnings from recreational betting or gambling
Life insurance—amounts received from a life insurance policy following someone’s death
Compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident

There is one other thing to keep in mind though. The Canada Revenue Agency will tax you on the income you earn from that income. For example if you invest your lottery winnings in government bonds, the income that investment spins off is taxable, except for the amount that you smartly put into your Tax-Free Savings Account.