What Is a Windfall and How Does It Apply to Me?

What is a windfall?

According to the CRA, windfalls can encompass various types of unexpected payments. Common examples include:

• Lottery winnings
• Inheritances
• Personal gifts

Additionally, less common forms include:

• Veteran’s Affairs disability or death benefits related to war veterans (excluding federal disability programs)
• Life insurance payouts following a family member’s death
• Certain government benefits, like goods and services tax/harmonized sales tax (GST/HST) credits and Canada child benefit (CCB) payments

Much of the criteria used for defining windfalls is drawn from an old court case regarding a cash payment made to a shareholder. The shareholder argued that the payment was not taxable. The CRA disagreed, and the case was taken before the Federal Court of Appeal.

Ultimately, the court classified the payment as a non-taxable windfall and created a list of criteria defining a windfall for future taxpayers. According to the court, the money was a windfall because the taxpayer made no organized effort to obtain or solicit it, and he had no expectation that it would be made. Additionally, the payment was from a non-customary income source and was a one-time payment with no foreseeable recurrence.

Some items, such as gifts from relatives, are easily defined as windfalls. Others are more subjective and harder to categorize. But recognizing the type of windfall you’ve received is crucial in determining whether it should be taxed.

Is there a windfall tax in Canada?

No, a windfall is not taxed. And taxpayers do not have to report windfalls on their income tax returns.

But, even though the CRA does not tax a windfall itself, you may need to pay taxes on any income that is generated if you invest that money in a non-registered investment account.

For example:

• If you put your lottery prize in a bank, any interest earned on that account will be taxable.
• If you invest some of your inheritance in stocks or mutual funds, any dividends earned on the investments will be taxable—as will any capital gains you may make when you dispose of or sell the investments.

For this reason, if you plan on investing your windfall, you may consider using a Registered Retirement Savings Plan (RRSP)—if you have the available contribution room—or a Tax-Free Savings Account (TFSA).

Common questions about windfalls in Canada

Here are answers to some frequently asked questions about windfalls that can help you address possible tax obligations.

Are lottery winnings taxed in Canada?

The final word here is that lottery winnings are not taxed in Canada unless they’re considered:

• income from employment.
• income from a business or property.
• a prize for an achievement.

Is there a gift tax in Canada?

Gifts are also not taxed in Canada—as long as they are a personal exchange. One scenario to look out for is if a boss gives his employee a gift—because it may be classified as a taxable bonus rather than a non-taxable windfall.

Cash awards or near-cash awards, such as gift cards, are almost always considered taxable employment benefits. This means the award will be considered part of your income and should be reported on your T4—Statement of Remuneration Paid in Box 40. Your employer will deduct income tax, Canada Pension Plan (CPP), and, in some cases, Employment Insurance (EI) premiums on this type of award or prize.

Are Canada’s government tax benefits considered windfalls?

The Canada child benefit (CCB) is often considered a windfall because it is calculated and sent automatically. Some families have no idea they’ll begin receiving CCB payments. The same applies to GST/HST credits. Since these benefits are sent automatically if you qualify, they’re a type of windfall and are not taxed.

There are also other types of government payments—like disability benefits for war veterans—that are considered windfalls and not taxed.

Is there an inheritance tax in Canada?

If you’re wondering whether you have to pay tax on an inheritance, you’ll be happy to know that you don’t. Most inheritances are not taxed.

But is there an inheritance tax on property? Maybe. Property is received—whether as a gift or as an inheritance—at fair market value (FMV) and may be taxable, particularly when that property increases in value and is subsequently sold.

Are there windfall tax exceptions?

Gambling and lottery winnings are considered non-taxable windfalls—unless they are earned by professional gamblers.

In the case of professional gamblers, the winnings are considered to be coming from customary income sources, and, as such, are taxable. Professional gamblers are defined as those who gamble frequently to earn their livelihood, rather than those who gamble infrequently for fun. If you have special knowledge about the game that reduces the element of chance, that may classify you as a professional gambler and you may be required to pay taxes on your winnings.

Professional gamblers may also deduct gambling losses from their winnings. However, they may not claim more losses than winnings to create a non-capital business loss.

Lawsuit awards are also considered non-taxable windfalls, so long as they are unrelated to business or property losses. For example, if you win an award in a personal injury case, you do not have to report it as income or pay tax on it. However, if you win a lawsuit on behalf of your business, it’s not considered a windfall and thus could be taxed.