Area of Law: Tax Law
Answer # 170
What types of income are taxable?Region: Ontario Answer # 170
Taxable sources of income
Individuals and corporations are taxed on their total income after subtracting allowable deductions. There are four general types of income that are taxed:
- Employment earnings, which usually only apply to individuals.
- Profit made from a business activity.
- Investment income from property or investments.
- Capital gains on the sale of capital property.
There are different rules that apply to each type of income, which therefore affect the amount of tax you will have to pay. To file a tax return and claim deductions, you will need to know what type of income you earned.
Employment income is usually a person’s wages or salary paid by an employer. It can also include any vacations, gifts, or added perks that you receive from your employer as part of your employment. Generally, there are few expenses that can be deducted from employment income, although there are exceptions for people in sales.
The law makes a distinction between employment income and business income. Business income can be earned by an individual, a partnership or a corporation, and includes any money you earn from a profession, trade or any other business where you expect to make a profit. Some types of rental income may also be considered business income. For example, if the landlord offers uncommon services such as laundry or housecleaning, or if the landlord runs an office with employees who manage the rental properties. This type of income generally allows for deductions of business expenses.
Income from property
The law also requires a taxpayer to pay tax on income from property, which includes interest from investments, loans, and may include rent from investment properties. Generally, expenses cannot be deducted from this type of income unless they are directly related to earning the income. A common deduction from property income is interest on a loan that was taken out to purchase the property. There are also rules specific to property income that prevent you from transferring property income to a spouse or child for the sole purpose of reducing the amount of tax you have to pay.
The law applies different tax rules to capital gains. Generally, if you sell capital property, such as stocks on the stock market, for more than you paid, the amount of the difference is considered a capital gain. If you sell something for less than you paid, the amount of the loss is considered a capital loss. If you have a capital gain, only 50% of it will be taxed.
What income is not taxable?
As per CRA, there are payments you may receive that you do not have to report as part of your income, and are not taxable. These include:
- GST/HST credits
- Canada Child Tax benefits and benefits from related provincial and territorial programs
- Child assistance payments
- Lottery winnings
- Most gifts and inheritances
- Most amounts received from a life insurance policy after someone’s death
- Most amounts received from a Tax-free savings account (TFSA)
- Most amounts received as compensation for personal injuries
For general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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