The Canadian Forces and Police Personnel Deduction

The Canada Revenue Agency offers an income exemption for certain members of the Canadian Forces as well as for members of the Royal Canadian Mounted Police. It’s easy to figure out whether you qualify for this credit, and simple to claim it on your income tax return. Here’s a look at why it exists, and how it may benefit you.

The Canadian Forces and Police Personnel Income Deduction

If you are a member of the Canadian Armed Forces or the Royal Canadian Mounted Police, you may be eligible for a special income deduction. In order to qualify, you must have been deployed out of the country on a high-risk or current moderate-risk operation.

If you qualify, none of your income earned during either high- or medium-risk operations will be subject to income tax.

Changes to the Deduction

Prior to 2004, only military personnel or police officers engaged in high-risk missions were allowed to claim this income deduction. However, in 2004, the Canada Revenue Agency expanded the deduction to all members of the military and police officers, except for those on low-risk missions.

At that time, the CRA eliminated any income and time limits previously associated with this deduction. According to then Prime Minister Paul Martin, the special contributions made by members of the Canadian Forces and the police deserve special recognition. In exchange for risking their lives in the interest of international peace and stability, these heroes should not have to pay income tax on income earned during dangerous missions.

Any qualifying military personnel of any rank may claim this deduction, and they may claim it against all of the income earned while engaged in a medium- or high-risk situation.

This means, according to the Minister of Finance, that service members may avoid paying income tax on up to $6,000 of income per month. However, these numbers are always changing, along with military pay rates.

Determining Your Eligibility

You can determine whether you are eligible for this deduction by looking at your T4 slip. Your employer will note the total income you earned in box 14 of your slip. However, if you earned any income during a qualifying medium- or high-risk mission, that amount will be noted at the bottom of your slip, and marked with code 43.

It’s important to note that the Canadian government periodically releases a list of military missions currently eligible for this tax exemption. If you believe that some of your income should be marked with code 43, you can check the current list and contact your employer regarding any necessary changes to your T4 slip.

Claiming the Tax Deduction

When you file your income tax return, transfer the income amount that appears in box 14 of your T4 slip to line 101 of your income tax return. If you have income from multiple jobs, add together all of the employment income from box 14 on all of your T4 slips, and enter the total on line 101.

Then, if some of your income has been marked with code 43, write that number on line 244 of your income tax return. This amount, along with the amounts claimed on lines 245 to 260, is subtracted from your net income, obtained from line 236. The result, your taxable income, appears on line 260 of your income tax return.

When all of your income is eligible to be tax-exempt, you are reporting the amount first on line 101, and then subtracting it on line 244. The reason for this is that the CRA calculates net and taxable income differently, and uses these numbers for different purposes.

Net Versus Taxable Income

The Canadian Forces personnel and police deduction lowers your taxable income but not your net income.

Your net income is your earned income minus your retirement contributions, employment expenses, child care expenses, and a handful of other deductions. Your net income determines which benefits you qualify for.

Your taxable income, in contrast, is the amount of your income that is actually taxed by the CRA, and it is calculated based on your net income. On the journey from net to taxable income, the CRA deducts the Canadian Forces personnel and police deduction, as well as other deductions, such as net capital losses from other years and capital gains deductions.

For example, if you have $50,000 in income from the armed forces but $20,000 was earned in a high-risk situation, your T4 slip will have $50,000 in box 14. However, it will also have $20,000 marked with code 43 at the bottom of the slip.

When completing your tax return, you report $50,000 as income, which is taken into account to determine your net income. Then, you subtract $20,000 to reach your taxable income of $30,000. Note that this example does not take into account other credits and deductions.