Tax Efficiency Strategy: Earn More Tax Exempt Income

There are many sources of tax exempt income of which most people are unaware. Here's the tax secret...

As a general rule, exempt income sources are not entered on the Canadian tax return at all. If you reported these amounts in error, you may contact the tax department to have them removed.

The most common types of exempt income are the following:

• Capital gains on the sale of a home used as a principal residence
• Capital gains on publicly traded shares donated to a registered charity or private foundation
• TFSA income earnings and withdrawals
• Inheritances
• Income exempt by virtue of statute including the Indian Act
• Canadian Service Pensions, War Veterans Allowance Act Allowances
• Certain employee benefits, like education required by the employer
• Lottery winnings
• Proceeds from accident, disability, sickness, or income maintenance plans where the taxpayer has made all the (non-deductible) premiums
• Refundable provincial or federal tax credits
• Payments for Volunteer Emergency Services — up to $1,000 if the Volunteer Firefighter Tax Credit is not claimed
• Social Assistance Payments received for providing foster care
• Scholarships and Bursaries for students eligible to claim the full-time Tuition, Education and Textbook Amount or that relate to elementary or secondary programs
• RCMP Pension or Compensation received in respect of an injury, disability, or death arising directly out of, or directly connected with, the service of a member in the RCMP
• MLA and Municipal Officers Expense Allowances
• Service Pensions from Other Countries on account of disability or death arising out of war service received from foreign country that was an ally of Canada at the time of the war service

Tax Strategy

Most Canadians can significantly increase their wealth over their lifetimes by earning three tax exempt income sources: gains on the sale or disposition of their principal residence, investments in a TFSA, and the private funding of wage loss replacement plans, which provide a tax exempt income should something happen to your ability to earn a living.

Excerpted from Essential Tax Facts: 2013 Edition. © All rights reserved.