Frequently Asked Questions on Personal Income Tax

If you have a question, you may find your answer here in our FAQ section. Click on the topics (listed in alphabetic order) below to view the subtopics (if any), questions and answers. Post-publication changes in legislation, government policies, or the interpretation of the law could affect the validity of the information contained herein. Answers provided are current as of the date in which they are added.

Answers to these questions are not an exhaustive treatment or analysis of such subject(s) and related law. Accordingly, information herein is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Use of information is at your own risk.

1. Child Care Expenses
1. I have a 3-year-old child in my custody. What is the maximum amount of child care expenses that I or my spouse can claim?

   The maximum allowable claim for eligible child care expenses is the lesser of: $7,000 total child care expense paid two-thirds of your earned income The maximum dollar amount is reduced from $7,000 to $4,000 for children between the ages of seven and sixteen. It is increased to $10,000 if the child of any age is disabled. Separated or divorced parents may claim the deduction for childcare expenses based on the percentage of time the child(ren) resides with that parent. For example, in a 50-50 shared custody situation where each parent pays for 1/2 of the childcare costs, each parent can claim 50% of the child care expenses deduction. [This answer was added on 9 April 2009, last revised on 5 April, 2012]

2. I work full time. My spouse is a homemaker and has no income. Can I claim any child care expense?

   No. Except in some special circumstances, only the lower income spouse can claim child care expenses. If you try a creative scheme like paying her a fee for looking after your child, this is not allowed either. [This answer was added on April 9, 2009.]

2. Children's Fitness Tax Credit
1. What is Children's Fitness Tax Credit?

Effective in 2007, a non-refundable Children's Fitness Tax Credit (up to $500 per year for each child under 16 years of age, or, if eligible for the disability tax credit, under the age of 18, at the beginning of the year in which the expenses are paid) for eligible fitness expenses in a prescribed program of physical activity is allowed. Tax incentive is provided to reduce child obesity. [This answer was added on April 9, 2009.]

2. What programs qualify for this credit?

   An eligible fitness expense is the cost of registration or membership of an eligible child in a prescribed program of physical activity. Generally, such a program must: be ongoing (either a minimum of eight consecutive weeks long or, for children's camps, five consecutive days long); be supervised; be suitable for children; and include a significant amount of physical activity that contributes to cardio-respiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility, or balance. Under the Income Tax Regulations, the definition of physical activity includes: horseback riding; and if the child is eligible for the disability tax credit, activities that result in movement and in an observable use of energy in a recreational context. An activity for which a child rides on, or in, a motorized vehicle as an essential part of the activity does not qualify for the children’s fitness tax credit. Expenses paid for piano, language lessons do not qualify. [This answer was added on April 9, 2009.]

3. General Tax Questions
1. Are there any income not taxable in Canada?

Surprisingly yes. The following types of income are not taxed in Canada (the list below is not exhaustive): capital gain from disposition of principal residence; child support from ex-spouse required by agreement signed after April 30, 1997; gifts and inheritances; rewards from Crime Stoppers to informants whose tips led to conviction; lottery winnings; winnings from betting or gambling for simple recreation or enjoyment; strike pay; compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident; certain civil and military service pensions; income from certain international organizations of which Canada is a member, such as the United Nations and its agencies; war disability pensions; RCMP pensions or compensation paid in respect of injury, disability, or death; income of First Nations if situated on a reserve; capital gain on the sale of a taxpayer’s principal residence; provincial child tax credits or benefits and Québec family allowances; working income tax benefit; the Goods and Services Tax or Harmonized Sales Tax credit (GST/HST credit) or Quebec Sales Tax credit; and the Canada Child Tax Benefit. The method by which these types of income are not taxed varies significantly, which may have tax and other implications. Some forms of income need not be declared, while others are required to declare and then immediately deducted in full. Income which is declared and then deducted, for instance, creates room for future Registered Retirement Savings Plan deductions. [This answer was added on May 6, 2009.]

2. Is inheritance taxable in Canada?

No, unlike in the United States, there is no inheritance tax in Canada. However, there is probate fee ranging from 0.5% to 1.5% of the estate's assets, depending on the size of the estate and the province in which the probate takes place. In British Columbia, where the gross value of all real and personal property subject to probate does not exceed $25,000, there is no probate fee.  Where the gross value exceeds $25,000, probate fees are: for the portion of the gross value over $25,000 up to $50,000  $6 per $1,000 or portion (0.6%) for the portion of the gross value over $50,000    $14 per $1,000 or portion (1.4%) There is also an administration fee of $208 for estates with a gross value exceeding $25,000. Probate fees are calculated on assets, not net worth (or equity). In addition, if these same assets are transferred to your spouse, probate fees would be due again the second time around when the assets were transferred through your spouse's will. There may be increased fees if a lawyer is retained to cross-examine the asset list or if the executor charges a percentage of the assets to do the work. Properties that pass outside of a will through joint tenancy or a living trust is not subject to probate. Probate is time consuming, expensive and can be avoided by: pay-on-death designations, ie. when you die, the property is transferred to the person you named, free of probate (you retain complete control of your property when you are alive, and you can change the beneficiary if you choose); joint tenancy on real properties; a living trust or inter vivos trust (the trust is created by executing a trust deed or document and transferring property into the name of the trust, without giving up any control over the trust property; when you die, the trust property can be distributed directly to the beneficiaries you named in the trust document, without the approval of probate court); gifts (assets you give away during your life doesn't have to go through probate). Note that avoiding probate fee is not illegal. [This answer was added on May 26, 2009.]

3. I have no taxable income. Should I file income tax?

Even if you have no taxable income and are certain that you owe no income tax, it may still be to your best interests to file your income tax return for the following reasons: You want to receive a tax refund (be mindful that there is refundable sale tax credit in most provinces). You want to apply for the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit. You may qualify for non-tax related benefits such as Medical Service Plan premium assistance and you need to file your income tax return for verification purposes. You or your spouse or common-law partner want to begin or continue receiving Canada Child Tax Benefit. You may have incurred a non-capital loss and you want to be able to apply in other years. You want to carry forward or transfer the unused part of your tuition, education or textbook amounts to another eligible person. You want to carry forward the unused investment tax credit. Interested parties (such as potential creditors, government agencies like Immigration Canada) may require previous year income tax returns to prove your residency in the future. [This answer was added on May 28, 2009.]

4. How long do I have to keep my business records for tax purposes?

Any taxpayer (including a individual, a corporation, a trust, a registered charity, a registered Canadian amateur athletic association, and a non-profit organization) must keep business records relating to a taxation year for a minimum of six years after the issue date of the corresponding notice of assessment. If you have filed a tax objection or appeal, you should keep your records until the issue is settled, and until the time limit for filing any further appeal has expired (which may mean keeping records for a particular fiscal year longer than six years). These records include source documents such as sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form. Note that records in electronic format (such as microfilm) of the original source documents are acceptable provided that they are readable, reliable and authentic. If you want to destroy your business records before the six year minimum period is over, you need to get written permission from the director of your tax services office. The form to use for this is T137 Request For Destruction of Books and Records. This is not advisable as it will likely draw attention for the tax authority. Reference: IC78-10R5 Books and Records Retention/Destruction [This answer was added on 18 December 2010.]

5. What are the restrictions in using NETFILE?
6. I received death benefit under the Canada Pension Plan to take care of the funeral arrangement of a deceased friend. Are the funeral expenses deductible in my income tax return?

No. This may appear counter-intuitive. Funeral expenses are not deductible against death benefit paid by Canada Pension Plan. This means a taxpayer who choose to do the good deed of looking after the funeral of a deceased person must bear the tax consequences of the death benefit paid in box 18 of the T4A(P) issued by Canada Pension Plan. [This answer was added on 28 April 2015.]

4. Immigrating to Canada
1. I immigrated to Canada in the middle of a year. Will my income earned before landing be taxed on my first Canadian income tax return?

   Generally, only worldwide income earned after you established residential ties in Canada will be taxed. However, if your income prior to landing are Canadian-source employment income, business income or scholarship income, or capital gains from the disposition of taxable Canadian properties (including real estate in Canada, excluding publicly traded shares), it will be taxed as well. [This answer was added on April 10, 2009.]

2. Before immigrating to Canada, is there anything one can do to reduce tax in his first Canadian income tax return?

   If you receive lump-sum payments (for example, a retirement allowance or severance from your employer), you should receive them before you establish residential ties in Canada to avoid being taxed. You may also want to transfer some of your investments to relatives and to a non-resident trust before you leave your home country. As long as the income is retained in the trust, it will not be taxable in Canada until you have been here for five years. [This answer was added on April 10, 2009.]

5. RRSP related questions
1. What should I do if I over contribute my RRSP?

   Generally, you made excess contributions to an RRSP under which you or your spouse or common-law partner is the annuitant if your unused contributions [B in your notice of (re)assessment] from prior years + your current calendar year contributions > your RRSP deduction limit (A) in your latest notice of (re)assessment + $2,000 Over contribution is subject to a 1% penalty per month until your RRSP contribution is brought below the penalty threshold. However, if your unused contributions resulted from mandatory group RRSP contributions or from contributions that you made before February 27, 1995, you may not have to pay this 1% tax on all your unused contributions. You may begin by submitting form T3012A Tax Deduction Waiver on the Refund of Your Unused RRSP Contributions to request RRSP withdrawal without tax withheld. Once CRA knows about a potential over contribution case, you probably will be asked to file a T1-OVP Individual Tax Return for RRSP Excess Contributions (for 2008) to calculate the amount of the over contribution and penalty tax. This form must be filed, and the tax remitted, no later than 90 days from the end of the year. You may request a waiver of the penalty if: the excess amount arose as a consequence of an uncontrollable error (for example, your employer gives a bonus in RRSP after you make your RRSP contribution that kicks you over your limit); and you can demonstrate that you are taking reasonable steps to eliminate it. If you have over-contributed, you should withdraw the excess amount without delay to minimize penalty. Alternatively, if you have an outstanding Home Buyers' Plan balance, you may use the excessive RRSP contributed to repay this plan. If your financial institution withholds tax, use Form T746 when you file your tax return to claim the offsetting deduction and a credit for the tax withheld. [This answer was added on April 9, 2009.]

2. What are the tax consequences of contributing to spousal RRSP?

   If you contribute to spousal RRSP, you get the same deduction as if you had contributed to your own subject to your own RRSP limit (not your spouse's). Legally speaking, the RRSP belongs to your spouse, so when the money is withdrawn from the RRSP, your spouse will have to report it, therefore allows income splitting at that time. Withdrawals from a spousal RRSP will be attributed back to the contributor to the extent contributions were made to any spousal RRSP during that year or the immediately preceding two years. In the event of marital breakdown, this is a serious consideration as the contributor will lose the legal ownership of the investments and bear the tax consequences of such withdrawals. [This answer was added on April 9, 2009.]

3. What will happen to my RRSP when I retire?

   At the end of the year in which a RRSP holder turns 71, the RRSP must be cashed or be converted it into a registered retirement income fund (RRIF). RRSP withdrawals are taxed in the year they are withdrawn. Unlike RRSP, RRIF holders must withdraw a minimum prescribed amount each year from RRIF. [This answer was added on April 13, 2009.]

6. Support Payments to Spouse in Marital Breakdown
1. I received child support from my ex-spouse. We have a separation agreement dated 2008 stipulating that payments are solely for child support. Are these payments taxable in my hands?

   No. If your agreement was signed after April 30, 1997, the amounts you received for child support are not taxable to you. Your ex-spouse cannot claim this payment either. [This answer was added on April 13, 2009, revised on April 29, 2009.]

2. I received spousal support from my ex-spouse. Are these payments taxable in my hands?

   Spousal support payments (payments made solely for the support of spouse) are taxable to the recipient and deductible to the payer if the payments are made periodically (as opposed to a lump sum) and pursuant to a court order or agreement. If an order or agreement stipulates a global amount of support to be paid for a spouse or common-law partner and a child living apart, the full amount is considered support for a child. [This answer was added on April 29, 2009.]

3. I pay child support to a woman whose child I fathered. Can I claim this as a deduction?

   If you never lived with the woman, the payments would only be deductible if you paid them pursuant to a court order (not a written agreement) dated before May 1997. [This answer was added on April 13, 2009.]

4. I paid my ex-spouse a lump sum payment as part of our separation agreement. Can I claim this payment?

   No. Lump sum payments are not deductible except when the lump sum payment was made to catch up on arrears payments for regular periodic spousal support amounts. [This answer was added on April 13, 2009.]

5. After marital breakdown, my ex spouse sold the principal residence (our former matrimonial home) which I have an interest. I was given a portion of the sale proceeds. Is the money given taxable in my hand?

   It depends on many factors. A couple can only designate one residence as principal residence. Estranged spouses need to decide how the capital gain exemption will be used when more than one residence are held. The separation or divorce agreement/order should specifically address how the principal residence designations will be claimed on future sales. If the home sold is a designated principal residence, there will be no tax consequence on any capital gain. [This answer was added on April 29, 2009.]

7. Principal Residence
1. Can I change my principal residence to a rental property without having to report capital gains?

   If you don’t buy another real property to live in and rent after leaving your current home, yes. By way of a Subsection 45(2) Election Form, you can claim the rental property as your principal residence and avoid paying capital gains on it for four years after you left that residence. If you buy another property and live in it while claiming your former principal residence (which has subsequently turned into a rental property), capital gain tax will apply on your new home. [This answer was added on 19 Feb., 2018, revised on 19 Feb., 2018.]