Published: January 9, 2025
Introduction: General Rules of Canadian Income Tax – Residence, Source, Obligations to Report, and Taxability
When an individual receives compensation in relation to employment, there are various factors to be considered before determining whether the compensation received is reportable on the individual’s income tax return, and whether the compensation received is taxable under the Canadian tax law.
To begin with, it is important for taxpayers to understand that the Canadian income tax system is a residence-based system; that is, Canadian residents and non-residents, for tax purposes, have different tax and reporting obligations.
Individuals, trusts and corporations who are tax residents of Canada are required to report worldwide income on their Canadian income tax returns. Non-residents, for tax purposes in Canada, are only required to report income from Canadian sources, such as property income earned or employment income paid by a Canadian employer.
Although a taxpayer is required to report all taxable income in Canada, not all income that must be reported is taxable. For example, for members of the Canadian Armed Forces (CAF) and police officers deployed on any international missions after January 1, 2017, or on certain international missions before January 1, 2017, employment income earned during active deployment should be reported but is exempted from Canadian income taxes.
The 2021 Canadian census reported that 97,625 Canadians serving in the CAF as members of the Regular Force or Primary Reserve Force, and counted over 450,000 Canadians as veterans.
The article examines income tax rules that apply to the CAF members and veterans, including circumstances that exempt CAF members’ and veterans’ income from taxes, to provide some guidance for the many Canadians who are serving and used to serve in the Canadian Armed Forces.
Information included in this series of articles focuses on employment-related income. For taxpayers with self-employment income or other types of business income, you can learn more about your tax liability and obligations from the following articles or consult with one of our expert Canadian tax lawyers:
- What Small Businesses Need to Know About Canadian Taxes: A Checklist
- 5 Important Tax Deductions for Every Small Business in Canada
- Consequences of Failure to File Valid Business Limit Allocation Agreement with CRA and Missing Out on the Small Business Deduction
Income Earned During Deployment: Tax Relief for Personnel Deployed on International Operational Missions
Prior to 2017, CAF members and police officers who were deployed on certain moderate-to-high-risk international operational missions were exempt from paying income taxes on employment income received during such deployment.
The tax relief was provided in the form of deductions. Eligible CAF members and police officers were able to claim full deductions against their otherwise taxable employment income, in respect of income earned while deployed on qualified international missions. As a result, no income taxes were payable on the eligible employment income earned by CAF members and police officers.
The Minister of Finance used to regularly update the list of qualified missions. The list also sets a period of time for each mission that was eligible for the tax relief. For example, for Operation CROCODILE, the mission was eligible for tax relief between July 1, 2015, and December 31, 2015. Canada provided support to the United Nations Organization Stabilization Mission in the Democratic Republic of Congo during the mission, Operation CROCODILE.
Some other missions may have longer eligibility periods, such as Operation AFGHAN ASSIST, which was eligible for tax relief between July 1, 2012, and February 24, 2014. Operation AFGHAN ASSIST is part of Operation AEGIS, during which the Canadian Armed Forces assisted with evacuating Afghans with significant and/or enduring relationships with the Government of Canada.
On May 18, 2017, the Government of Canada announced the intent to extend tax relief automatically to all CAF members and police officers for the period over which they are deployed on an international mission. The legislative amendment was subsequently included in Bill C-74, which received Royal Assent on June 21, 2018.
From the 2017 taxation year onwards, regardless of the risk level of an international mission, all CAF members and police officers on active international deployment paid no taxes on the employment income earned during the deployment.
Not All Income Earned By Active CAF Members is Exempt From Income Taxes In Canada
Employment income earned by active CAF members and police officers prior to 2017 from non-eligible missions or during non-eligible periods of a listed mission is subject to the regular income tax rules.
Most employment-related benefits received during a CAF member’s service are also not taxable, such as relocation, travel, and accommodation benefits. Disability benefits for active Canadian Armed Forces members and veterans, including pain and suffering compensation and disability pension, are generally also exempt from taxes.
However, not all income earned by active CAF members and veterans is exempt from income taxes. Employment income earned while active CAF members are stationed in Canada is taxable income. Business income or investment income of an active CAF member or a veteran is also not exempt from income taxes in Canada.
If a veteran obtains employment after retiring from the CAF in civil sectors, the employment income received by the veteran is subject to income taxes. When filing taxes for a CAF member or a veteran, it is therefore important to understand the taxpayer’s tax liability in light of the general and special income-tax rules.
Pro Tips – Differentiate Between Taxability And Reporting Obligations
When you receive an amount of money in relation to employment, services you provide, or other activities, you need to determine whether the proceeds are taxable and whether you are required to report the proceeds on your income tax return.
For CAF members, employment income must always be reported on their income tax returns. Income earned from active deployment for international missions after 2017 and for certain international missions before 2017, however, are exempt from taxes. Other incomes of active CAF members and veterans are subject to various income-tax rules, depending on the nature of the income.
If you suspect that you have made mistakes in relation to your income-tax filings, you should engage with one of our expert Canadian tax lawyers.
Our expert Canadian tax lawyers can provide legal advice, identify any potential issues and areas of concern, and assist you with remedying your prior non-compliance, such as by filing a Voluntary Disclosure Application.
FAQ
I Am An Active CAF Member, And My Tax Slips Show That My Employer Has Always Deducted Taxes For Me. Am I Still Required To File My Income Tax Returns?
Taxpayers with taxable income should generally file their income tax returns on time. However, an individual taxpayer who owes no income taxes is not required to file an income tax return each year, unless the taxpayer would like to claim tax refunds he or she is entitled to, to claim certain types of benefits, or if the Canada Revenue Agency specifically asks the taxpayer to file an income tax return via a demand-to-file letter.
In particular, the CRA is only required to issue a tax refund for a tax year if an income tax return for that tax year is filed within three years from the end of that tax year. Although the CRA has the discretion to allow payment of tax refunds beyond the three-year limitation period, the CRA often chooses not to do so.
Consequently, our top Canadian income tax lawyers recommend that you file an income tax return on time each year, even if your employer always deducts and remits taxes on your behalf. If you have not filed your income tax returns for many years, you should consult with one of our expert Canadian tax lawyers to determine the best approach to handle your tax matters.
Is All Employment Income Received By Canadian Armed Forces Members Exempt From Income Taxes In Canada?
No, not all employment income received by CAF members is exempt from Canadian income taxes. If the employment income was earned during active deployment to qualified international missions, then such income is exempt from taxes. Qualified international missions include certain moderate to high-risk missions prior to 2017, and all international missions after 2017.
However, all employment income received by CAF members should be reported on their income tax returns. If you suspect that you have made a mistake on your previous income-tax returns, our experienced Canadian tax lawyers can conduct due diligence reviews of your tax matters and help you identify the best remedy to correct mistakes on your tax returns.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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