Who owns the apples that fall into your yard from your neighbour's tree? The answer to that question sheds light on how the CRA treats windfalls. The issue can be complex because the Income Tax Act is light on details. So the interpretations tend to be found in common law and court precedent. Click "Full Article" for the basics on dealing with unplanned income.

What do fruit or nuts falling from your neighbour's tree into your yard have in common with windfall income? Quite a bit: Both are unplanned, unexpected and irregular in nature, and they belong to you, no strings attached.

According to common law, when those apples or walnuts land on your property, your neighbour cannot claim even a percentage. Similarly, when a windfall comes your way, Canada Revenue Agency (CRA) generally cannot claim taxes on it. 

But it's a complicated issue. The Income Tax Act neither defines nor contains guidance on the concept of windfalls, so taxation comes down to common law and court precedents.

Generally speaking, a windfall is a one-time payment that is unrelated to any business, property or employment. In other words, a windfall typically does not result from labour, skill or investment. It also is not paid because of a legal obligation or a commercial relationship.

The CRA's criteria for determining if income is a non-taxable windfall are derived from an old court case that involved a cash payment to a shareholder. A corporation had offered minority shareholders the choice of selling their shares or taking a lump-sum payment as a tactic to prevent them from blocking the sale of a division.

One stockholder who accepted the payment claimed the money was tax-free. The Crown disagreed and argued that the money was tantamount to income from property. The Federal Court of Appeal, however, sided with the taxpayer. In the court's ruling it said it determined the money was a non-taxable windfall because:

• There was no enforceable claim to the payment;
• There was no organized effort to obtain the payment;
• The payment was not solicited;
• There was no expectation that the payment would be made;
• It was not foreseeable that the payment would recur;
• The payer was not a customary income source; and
• The payment was not consideration for property or services provided by the taxpayer (The Queen v. Cranswick).

Because windfalls are not taxable, there can be considerable argument about what they are. For the most part, they include:

Inheritances and most gifts: There is no dollar limit on the amount you can receive tax free. For example, if you're getting married, your wedding gifts, including cash, are fully tax-free regardless of amount.

Lottery jackpots, sports pools, sweepstakes prizes, door prizes and other giveaways or promotions.

Gambling winnings, unless they are from bookmaking or gambling establishments you own, or you are a professional gambler. Whether you qualify as a professional gambler is determined by several criteria, among which are:

• Whether your intention is to gamble for pleasure or to earn a livelihood;
• The extent of your gambling activities, including frequency and number of bets; and
• Whether you have special knowledge or inside information that reduces the element of chance.

Lawsuit awards that are not related to business or property losses. The most common form of non-taxable windfalls from lawsuits are damages for personal injury.

The tax-free status of these awards was set by the Federal Court of Appeal in a lawsuit where the Crown had argued that personal injury damages for loss of earning capacity were taxable income. The court disagreed, ruling that although loss of income was the basis for calculating the damages, the actual payment was capital – and thus a windfall – because its purpose was to replace loss of earning capacity (Cirella v. the Queen).

The issue of windfalls is complex, so if you unexpectedly receive money from an uncommon source, talk to your accountant for help in determining whether or not you have to pay taxes on the income.