With the constantly changing tax laws, I often get asked how to convert taxable income into tax free income and if there is actually any income that is tax free.
On the Canada Revenue Agency (CRA) website and in the General Income tax guide on page 12, the CRA has published a list of items that are not taxable and do not need to be reported on your tax return.
That list is as follows:
• Any GST credit payments or refunds received
• Any government child tax benefit payments received
• Child assistance/support payments received, unless they are received through a third party such as the Family Maintenance Enforcement office
• Compensation awarded by the courts for damages as the result of a criminal act or motor vehicle accident
• Lottery winnings
• Most gifts and inheritances (see CRA’s booklet)
• Funds left over from the disposition of your principal residence
• Funds received as a result of service in the armed forces here in Canada or with one of the allied countries, both disability, pension and survivor amounts
• Life insurance policy payouts when someone dies
• Union strike pay
• Tax free savings account items
You need to be aware that if you invest any of this ‘found’ money, the income you make from your investment will become taxable.
So how to convert something that is now taxable to non-taxable? The closest item is the Tax Free Savings Account.
You need to be aware that you have already paid the tax on the funds that you invest in a tax-free savings account, which is why there is no tax on the income made on the investments in that account.
There are limits to the amount of money that you can contribute to that account. The TFSA began in 2009 when you were allowed to contribute $5,000 per year that would accumulate. If you have not previously contributed to your TFSA for 2015 you would have contribution room of $41,000 available to you.
TFSA or RRSP? If you need a tax write off, then contributing to an RRSP will provide you with a current tax deduction, which must be repaid at a later date.
But if you don’t need the tax deduction, then the TFSA might be the better choice. Consider the rates of return between the twokinds of investments.
Are you getting a better return in funds invested in an RRSP portfolio, or is the return better on the TFSA?
Are the rates better with a large investment firm, or a smaller, hands on firm?