Other Income & Deductions

Overview

This section covers miscellaneous sources of income and deductions under Canadian tax law, focusing on items not classified as employment, business, or property income. It also addresses the limits and rules for claiming various deductions and the treatment of certain income inclusions.

• Other Sources of Income: Income items not listed as employment, business, or property income are generally not taxable (e.g., lottery winnings).

• Other Deductions: Deductions not directly related to business or employment, such as moving expenses and RRSP contributions.

• Related Inclusions and Deductions: Some items have both an income inclusion and a related deduction, which are discussed together.

Other Income

Definition and Scope

Other income includes sources specified in the Income Tax Act (ITA) sections 56 to 59.1. If an item is not listed, it is generally not taxable.

• Example: Lottery winnings are not taxable as they are not listed as a source of income.

Other Deductions

General Limitations

The total amount of other deductions claimed cannot exceed the subtotal of positive non-capital sources of income and net taxable capital gains. Any excess deduction is lost, except for certain items that can be carried forward.

• Formula:

• Exceptions: RRSP contributions and moving expenses may be carried forward if not fully used in the current year.

CPP for Self-Employed Individuals

Self-employed individuals must pay both the employer and employee portions of the Canada Pension Plan (CPP). The employee portion qualifies for a tax credit, while the employer portion is deductible as an 'other deduction'.

• Tax Credit: Employee portion of CPP.

• Deduction: Employer portion of CPP (ITA 60(e)).

Moving Expenses

Moving expenses are deductible under certain conditions, primarily when the move is for work or full-time education and the new residence is at least 40 km closer to the new work or school location.

• Eligibility:

  • New residence is more than 40 km closer to the new work location.

  • Move must be for new work (employee or contractor), with no time limit on when work is obtained.

  • Can be claimed by unemployed taxpayers moving within Canada.

  • Full-time students may claim moving expenses to the extent of income from the college or university or summer employment.

• Deductible Costs:

  • Travel costs, transporting and storing household items, meals and lodging, and other related costs.

  • Cannot be deducted if reimbursed by employer; if reimbursed, it is not a taxable benefit.

  • Simplified method available for vehicle and meal expenses.

• Deduction Application: Must be deducted against income earned from the new location; if insufficient income, can be carried forward.

• Employer Reimbursements:

  • Employers can pay for non-deductible expenses (e.g., pre-visits), which are non-taxable benefits.

  • Up to $650 moving allowance is considered a reimbursement and is not taxable.

  • Loss on sale of old residence: 100% of first $15,000 and 50% of excess over $15,000 can be reimbursed without being a taxable benefit.

Child Care Expenses

Child care expenses are deductible if they enable the taxpayer to work or attend school. Normally, the lower-income spouse claims the deduction, but the higher-income spouse may claim it if the lower-income spouse is unavailable.

• Deduction Limits: The deduction is limited to the least of:

  • Annual amount (ITA 63(3))

  • 2/3 of earned income (gross employment or net business income)

  • Actual costs

• Additional Limit: If the higher-income spouse claims the deduction due to the lower-income spouse's unavailability, a periodic limit applies:

  • Periodic limit × number of weeks/months the lower-income spouse is unavailable

  • Periodic limit is the annual amount divided by 40

• Special Rule for Camps: Maximum actual costs for camps is periodic limit × number of weeks at camp.

Registered Retirement Savings Plan (RRSP)

RRSP contributions can be deducted from income, with the option to deduct in a following year. The maximum deduction is the lesser of the amount contributed (plus undeducted contributions carried forward) and the RRSP contribution/deduction limit.

• Formula:

• Optional Deduction: Taxpayers may choose to deduct contributions in a future year.

Other Inclusions & Deductions

Employment Insurance (EI) and Old Age Security (OAS)

EI and OAS benefits are included in other income. If these benefits are clawed back, the amount repaid is deductible.

• Inclusion: EI and OAS benefits (ITA 56(1)(a)).

• Deduction: Amount repaid if benefits are clawed back (ITA 60(n) and (w)).

Pension Splitting

Pensioners may split up to 50% of eligible pension income with their spouse. The receiving spouse includes the split income, and the transferring spouse deducts the amount included in the spouse's income.

• Eligible Pension Income: Most types of pension income, excluding OAS and CPP benefits.

• Tax Treatment:

  • Receiving spouse includes the income (ITA 56(1)(a.2)).

  • Transferring spouse deducts the amount (ITA 60(c)).

Spousal Support

Spousal support payments are taxable to the recipient and deductible by the payer. Other support payments, such as child support, are neither taxable nor deductible.

• Conditions for Spousal Support:

  • Periodic payments

  • Solely for maintenance of the spouse

  • Spouse has discretionary use of the amounts

  • Spouses are living apart

  • Made as part of a written agreement or tribunal order

Non-Arm's Length Transfers and Transactions

Arm's Length vs. Non-Arm's Length

Arm's length transactions assume fair market value (FMV) for both seller and buyer. Non-arm's length transactions (between related parties) require special rules to prevent tax avoidance.

• Related Parties:

  • Individuals: Related by blood, marriage, common-law partnership, or adoption.

  • Corporations: Complex rules determine relatedness (ITA 251(2)).

• Tax Treatment:

  • If price < FMV: Seller uses FMV for proceeds, buyer uses price for cost.

  • If price > FMV: Seller uses price for proceeds, buyer uses FMV for cost.

  • Highest value used for seller's proceeds, lowest for buyer's cost.

• Double Taxation Risk: Can occur if property is exchanged between non-arm's length individuals (excluding spouses). To avoid, transfers should be at FMV or gifted at FMV.

Spousal Rollover

Transfers between spouses are an exception to non-arm's length rules. Assets are transferred at tax values (Adjusted Cost Base (ACB) and Undepreciated Capital Cost (UCC)), with no gain or loss for the transferring spouse. The rollover is automatic unless spouses elect out.

• Applicability:

  • During marriage or divorce proceedings

  • At death

• Result: Receiving spouse obtains assets at the same tax values as the transferring spouse.

Income Attribution

Spouse

When property is transferred between spouses, future property income and capital gains/losses are attributed back to the transferor spouse, unless the rollover is elected out and FMV consideration is received.

• Example: If bonds are transferred from wife to husband, interest income and future capital gains/losses are reported by the wife.

Related Parties Excluding Spouse

If property is transferred to a minor related child, future property income is attributed back to the transferor, but future capital gains/losses are not, as they are recognized at the time of transfer.

• Example: Bonds transferred from mother to minor son: interest income attributed to mother, capital gains/losses remain with the son.

Business Income

Business income is not attributed back, as it requires active effort by the spouse or child.

Avoiding Income Attribution

To avoid income attribution with a minor child or spouse, the transfer must be a sale at FMV, and the transferor must receive FMV consideration (e.g., cash, assets, or a loan with interest at least equal to the prescribed rate). For spouses, the automatic rollover must be elected out.

• Formula:

Tax on Split Income (TOSI)

Overview

Tax on Split Income (TOSI) rules apply to certain types of income split among family members. Additional info: Details require assigned readings.