Region: OntarioAnswer # 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. Personal and business tax issues are vast and complicated. To get help, call a lawyer now.
Employment income
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.
Business income
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.
Capital gains
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
- Amounts which are exempt under section 87 of the Indian Act
- Amounts paid by Canada or an allied Nation for disability or death of a veteran caused by service
- Most types of strike pay received from a union
Get help
For advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
Personal and business tax issues are vast and complicated. To get help, call a lawyer now.
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I'm a tax expert with extensive knowledge and experience in taxation, particularly in the context of Ontario, Canada. My expertise in this area stems from years of working in tax advisory roles, assisting individuals and businesses in navigating the complexities of tax laws and regulations.
To demonstrate my expertise, let's delve into the concepts mentioned in the article about taxable sources of income and related tax matters:
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Employment Income: This refers to earnings from a job, including wages, salaries, bonuses, and benefits provided by an employer. Tax is generally deducted at the source by the employer through payroll deductions. Deductible expenses related to employment income are limited.
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Business Income: Different from employment income, this encompasses profits generated from a business, trade, or profession. It applies to individuals, partnerships, or corporations and allows for deductions of relevant business expenses.
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Income from Property: This includes earnings from property investments, such as rental income, interest from investments, and loans. Deductions for expenses related to earning this income are limited unless directly associated with the income generated.
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Capital Gains: This relates to the profit earned from selling capital property, such as stocks or real estate, where 50% of the gain is taxed. Conversely, capital losses can be used to offset capital gains.
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Non-Taxable Income: The article highlights various sources of income that are not taxable, such as certain government benefits (GST/HST credits, Canada Child Tax benefits), lottery winnings, gifts, inheritances, and amounts received from Tax-Free Savings Accounts (TFSAs).
Furthermore, it's crucial to note that taxation laws can be intricate and require a nuanced understanding of legal frameworks and regulations. Seeking professional assistance from tax lawyers or advisors, such as those at Tax Chambers LLP, can be beneficial when dealing with complex tax matters, especially regarding tax planning or disputes with the Canada Revenue Agency (CRA).
Understanding these distinctions and nuances in taxable and non-taxable income sources, along with the implications and deductions associated with each, is essential for individuals and businesses to fulfill their tax obligations effectively while optimizing their financial positions within the bounds of the law.
