Taxable Income vs. Nontaxable Income: What to Know

Taxable income in Canada

Taxable income includes most types of earnings, like that from employment, freelancing, side gigs, capital gains, or pension income.

Each type of income has its own specific T-slip, such as a T4 for employment income, a T5 for investment income, and a T3 for income from trusts. These slips are provided by employers, financial institutions, or other payers, and must be used when filing your tax return to ensure all income is properly reported to the Canada Revenue Agency (CRA).

Canadian taxpayers do not have to pay taxes on all earned income. This is where the basic personal amount comes in.

The basic personal amount is a non-refundable tax credit that represents a set amount of income that individuals can earn each year without paying federal income tax. For the 2024 tax year, the basic personal amount is $15,705, meaning Canadians can earn up to this amount before paying any federal income tax. This amount is adjusted annually for inflation.

Here's how different types of taxable income break down.

Employment income

Employment income is what you receive from your salary, wages, tips, and bonuses. Self-employment income is earnings from your own business or side hustle.

As an employee, certain benefits from your employer also increase your taxable income. Taxable benefits in Canada can include:

• Health and dental insurance. Employer paid premiums could be taxable.

• Company car. Personal use of a company car is taxable.

• Housing and lodging. Employer provided housing or lodging is taxable.

If you receive additional perks and benefits from your employer or business, you may have taxable employee benefits as well. These include:

• Stock options. The difference between market and exercise price is taxable when you sell shares.

• Parking. Free or subsidized parking from your employer is taxable.

• Gifts and awards. Noncash gifts over a certain value can be taxable.

• Investment income. Interest, dividends, and rental income are all taxable.

Note: Not all types of investment income are taxable. TFSA withdrawals are not taxed since contributions were made with after-tax dollars and the account grows tax free. But RRSP withdrawals are taxed as income because the contributions were tax deductible.

Taxable capital gains

Selling investments like stocks or real estate for more than you paid results in capital gains. In Canada, currently capital gains is taxed at the standard rate of 50%.

For example, if your total capital gains are $300,000, $150,000 would be taxed according to your total income. This may increase in 2026.

Pension income

Payments from retirement plans like the Canada Pension Plan (CPP) are taxable income. Taxes are normally not deducted from these payments, however, you can request to have them deducted for easier filing at the end of the year.

Nontaxable income in Canada

While sometimes it may seem like everything is taxed, that's not the case. Many types of income are not subject to taxation. First, let's look closer at what nontaxable income means.

Nontaxable income refers to earnings or gains that are not subject to federal or provincial income tax. This means you do not need to report these amounts on your tax returns or pay taxes on them. Nontaxable income can come from various sources and typically includes certain benefits, allowances, and specific types of payments.

Here are some common examples of nontaxable income:

• Government benefits. Nontaxable government benefits in Canada include the Canada Grooceries and Essentials Benefit (formerly the GST/HST credit), the Canada Child Benefit (CCB), the Canada Workers Benefit (CWB), the Canada Carbon Rebate (CCR), and the Guaranteed Income Supplement (GIS).

• Gifts and inheritances. Money or property you receive as a gift or inheritance is generally not taxed. However, any income generated from these gifts or inheritances—such as interest or rental income—is taxable.

• Lottery winnings. Prizes you win from lotteries and other forms of gambling are not taxable in Canada. However, if you regularly engage in gambling as a business, any earnings from such activities could be considered taxable income.

• Child support payments. Child support payments you receive are not taxable for you and not deductible for the payer.

• Life insurance proceeds. The death benefit from a life insurance policy you receive is usually not taxable. However, if the policy is cashed in before death, any amount you receive above the policy's cost could be taxable.

• Certain scholarships and bursaries. Scholarships, fellowships, and bursaries you receive for post-secondary education are typically nontaxable, provided they are used for educational purposes, and you are enrolled in a qualifying program.

Common questions about nontaxable income in Canada

What is a taxable benefit?

A taxable benefit is any benefit that an employer provides to you that is considered income and is thus subject to taxation. This can include company cars, housing allowances, and other noncash benefits. The value of these benefits is added to your income and taxed accordingly.

Is CPP taxable?

Yes, Canada Pension Plan (CPP) benefits are considered taxable income. You will receive a T-slip and you must report these benefits on your tax returns. This income is subject to both federal and provincial tax rates.

Is OAS taxable?

Old Age Security (OAS) payments are also taxable and are reported each year on a T4(OAS) tax slip. You must include these payments in your taxable income when filing your tax returns. High income earners may also be subject to an OAS clawback, where part of the OAS benefit must be repaid.

Is inheritance taxable in Canada?

Inheritance itself is not taxable in Canada. However, if an inherited property generates income—such as rental income or interest—that income is taxable. Also, the estate of the deceased may be subject to taxes before the inheritance is distributed.

Is EI taxable?

Employment Insurance (EI) benefits are considered taxable income, and you will receive a T-slip for them. You must report EI benefits on your tax returns, and the amount received is subject to both federal and provincial taxes.

Is life insurance taxable in Canada?

The death benefit from a life insurance policy you receive is generally not taxable. However, if the policy is surrendered or cashed out before death, any proceeds that exceed the policy's adjusted cost base could be considered taxable income.

Tax calculations and implications

Taxable income determines your tax liability. Canada’s tax system is progressive, meaning higher income results in higher tax rates. For example, if you earn more, portions of your income are taxed at incrementally higher rates.

The type of income may affect your tax liability, though. Dividends from Canadian corporations, for example, are taxable but benefit from a dividend tax credit, lowering the effective tax rate. Likewise, capital gains are only 50%, meaning only half of any capital gains are included in your taxable income.

Nontaxable income, however, does not affect your taxable income or push you into higher tax brackets. This helps keep your overall tax rate lower, which is beneficial if you are near the threshold of a higher tax bracket.

Real world examples

Imagine you earn $60,000 from your job and sell an investment for a $5,000 capital gain. Your total income is $65,000, but you only pay taxes on half of the capital gains.

Here's how that looks:

• employment income: $60,000

• taxable portion of investment sale ($5,000 - 0.5) = $2,500

• total taxable income: $60,000 + $2,500 = $62,500

The first $55,867 is taxed at 15%: ($55,867 x 0.15 = $8,380.05)

The remaining amount ($62,500 - $55,867 = $6,633) is taxed at 20.5%: ($6,633 x 0.205 = $1,359.77)

• Federal tax on $55,867 = $8,380.05

• Federal tax on $6,633 = $1,359.77

• Total federal tax: ($8,380.05 + $1,359.77 = $9,739.82)

Now, consider you earn the same $60,000 from your job but instead receive a $5,000 gift from a family member. Your total taxable income remains $60,000 because the gift is nontaxable.

If you have mixed income, it might look like this:

• $60,000 in employment income

• $5,000 scholarship for education expenses

• $5,000 from an investment sale

Your total income is $70,000, but only $62,500 is taxable. The $5,000 scholarship is nontaxable, so it doesn’t increase your tax liability. Only half of the capital gains income is taxable.

Understanding taxable vs. nontaxable income for better financial planning

Understanding the distinction between taxable and nontaxable income is essential for effective financial planning and tax management. By knowing how different income types are taxed, you can make more informed decisions that optimize your tax liability and enhance your overall financial strategy. Leveraging this knowledge allows for better investment choices and the strategic use of nontaxable income to minimize your tax burden.

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