22 August 1996 Internal T.I. 962706B - FINANCIAL ASSISTANCE - SAGUENAY FLOOD VICTIMS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUE:

Income tax consequences relating to payments received under financial assistance programs for Saguenay flood victims

Position:

Comments

Reasons:

COMMENTS - TAX CONSEQUENCES RELATING TO PAYMENTS RECEIVED UNDER FINANCIAL ASSISTANCE PROGRAMS FOR VICTIMS OF FLOODS CAUSED BY TORRENTIAL RAINS IN VARIOUS AREAS OF QUEBEC

Temporary humanitarian emergency financial assistance and financial assistance for temporary living expenses

- temporary humanitarian emergency financial assistance of $2,500 per household paid to persons who were forced to evacuate their principal residence for an estimated period of more than 14 days;

- financial assistance for temporary living expenses provided for individuals who were forced to evacuate their principal residence in the amount of $10 per day for the first evacuee and $5 per day for each additional evacuee, to a maximum of 100 days.

These amounts are not taxable because they are provided by the Quebec Government and cover personal losses. Costs incurred by individuals in this regard (for example, temporary housing expenses and meal expenses) are personal living expenses and are not deductible in computing taxable income.

Financial assistance for damage to an individual's essential personal property

- Homeowners whose principal residence or housing unit was totally destroyed and tenants who lost all their essential personal property are eligible for financial assistance equal to $15,000 for the first occupant, plus $1,000 for each additional family member who resided in the principal residence on a permanent basis at the time of the flood. Persons whose losses are not total are eligible to receive 100% of the value of the damages for essential personal property up to a maximum of the amounts allowed for individuals who suffered total losses. Roomers qualify for an amount of $1,500.

The financial assistance received for lost or destroyed essential personal property will constitute the proceeds of disposition for personal-use property. The same applies to financial assistance received for essential personal property that was damaged but was not spent to repair the damage.

Since the assistance covers essential personal property, it is unlikely that it would be paid for listed personal property. The rules for the sale of personal-use property and listed personal property will apply. Subsection 46(1) of the Act provides that the adjusted cost base and the proceeds of disposition of personal-use property cannot be less than $1,000, which means that there will probably not be any capital gain, since the financial assistance is provided for numerous items of personal-use property. The details of these rules can be found in Interpretation Bulletin IT-332R and the Capital Gains guide.

Financial assistance received for essential personal property that was damaged and spent to repair the damage within a reasonable period after the damage occurred will not be included in the proceeds of disposition of the property. The amount will reduce the amount of expenses incurred to repair the damage.

Financial assistance for total loss suffered by the owner of a home, rental buildings and buildings used for certain businesses

Assistance

- Under orders issued by the Government of Quebec, a property owner who is entitled to financial assistance for the total loss of his residence or building must assign the land and the residual property in consideration of the financial assistance.

- The owner can receive 100% of the standard municipal assessment (land and building), up to a maximum of $100,000 plus 75% of the excess over and above $100,000 if he has suffered a total loss with respect to the following types of properties:

Principal Residence

- a single-family residence or rental building of three units or less in which the individual resided;

- or the housing unit in a rental building of more than three units where the individual resided (in such situations, the individual may receive for that unit the proportion of the municipal assessment for that housing unit, up to a maximum of the amount mentioned above);

Rental building

- rental spaces in a rental building of more than three housing units where the individual resided (in such situations, the individual may receive for the rental spaces the proportion of the municipal assessment for those spaces, up to a maximum of the amount mentioned above);

- rental building of more than three units not inhabited by the owner;

Building essential to the survival or the continuation of the operations of specific businesses

- buildings covered by Order 973-96 which are not referred to above.

Tax consequences

(a) The amount of financial assistance relating to the destruction or total loss of such buildings will be considered the proceeds of disposition for the land and the building.

(b) When an individual's building or housing unit is his principal residence, the usual rules for calculating gains, designating property as a principal residence, and calculating the principal residence deduction will apply in the same manner as they do for the sale of a principal residence.

Financial assistance may result in a capital gain if the individual did not designate the residence as his or her principal residence for all the years it was owned. (In some situations, an individual may find it more advantageous to make an election under section 44 if he acquired replacement property and he meets the criteria set out in that section, rather than designate the residence as his principal residence. See paragraph (g).)

Special rules may apply if the residence is not used entirely as a principal residence.

Additional information is available in the Capital Gains guide and in Interpretation Bulletin IT-120R4.

(c) In the case of a rental building with three or fewer units in which the individual resides, but occupies only one housing unit, he cannot designate the entire building and the land as his principal residence. He must allocate the financial assistance for a rental building of three housing units or less between the portion which constitutes his principal residence and the rental portion. He must also allocate the adjusted cost base of the building between these two parts. The consequences of the disposition of a principal residence, described in paragraph (b), will apply with regard to the amount calculated for the residence, and the consequences of the disposition of a rental building, described in paragraph (e), will apply to the amount calculated for the rental portion.

(d) In the case of rental buildings of more than three units in which the owner occupies one of the units, specific financial assistance is provided for the housing unit occupied by the individual and another type of assistance is provided for the rental spaces. However, the individual must allocate the adjusted cost base of the building between the two portions. The consequences relating to the disposition of a principal residence, set out in paragraph(b), will apply to the assistance provided for the housing unit occupied by the individual. The consequences relating to the disposition of a rental building, set out in paragraph (e), will apply to the financial assistance provided for the rental spaces.

(e) The normal rules for calculating the tax consequences of the sale of a rental building will apply when the financial assistance relates to a rental building. Subject to the application of the replacement property rules, the disposition of a rental building could give rise to a capital gain or to a recapture of the capital cost allowance if the property is a depreciable property, and the disposition of the land on which the rental building is located could also give rise to a capital gain.

The rules for allocating the proceeds of disposition between the land and the building could apply if the rental building is a depreciable property. A rental property loss could be a terminal loss and a loss on the land belonging to the rental building could give rise to a capital loss. You will find details in the `Capital Gains' and `Rental Income' guides and in interpretation bulletins IT-120R4 and IT-220R2.

(f) For essential business properties, the usual rules apply for computing capital gains, the recapture of capital cost allowances and terminal losses. They will apply in the same manner as when a business property is sold. These rules are similar to those mentioned in paragraph (e).

(g) Since the properties were either destroyed or lost, a review of the rules in sections 13 and 44 would help determine whether the capital gain or recapture of capital cost allowances can be deferred if the property is replaced. An explanation of these rules can be found in interpretation bulletin IT-259R2 and in the relevant special release.

Financial Assistance for damage (not considered a total loss) incurred by the owner of a residence. certain rental buildings and business properties

Assistance

- The owner could receive 100% of the value of the damage to the building, up to $100,000, plus 75% of the amount exceeding $100,000, but not more than 100% of the standard municipal assessment of the building alone, if the owner has suffered damage to the property mentioned in the preceding section, but not a total loss.

- For essential business property or property required for the continuation of business operations, the Quebec government order 973-96 states that the damage to the land (except for cultivated agricultural land) and its landscaping, or to a woodlot, sugarbush or tree plantation are not eligible for financial assistance.

Tax Consequences

(a) Financial assistance for damage to a building that was spent to repair the damage within a reasonable period of time after the damage occurred will not be part of the proceeds of disposition for the building.

(b) Financial assistance received for depreciable property could be included in income in accordance with paragraph 12(1)(f) of the Act and the expenses incurred to repair the damage to a depreciable property could be deducted in computing income. For non-depreciable property, the sum will reduce the amount of the expenses incurred to repair the damage.

Financial assistance for damage to essential business property or property required for the continuation of normal business operations with the exception of buildings

Assistance

- Some businesses can obtain financial assistance if there was damage to their essential business property or to property required for the continuation of normal business operations.

- If essential property, except for buildings, was totally destroyed, a business covered by order 973-96 can receive 100% of the value of other essential property as determined from the most recent financial statement used for tax purposes, up to $25,000, plus 75% of the value exceeding $25,000.

- A business covered by order 973-96 whose essential property was damaged, but not totally destroyed, can receive 100% of the value of the damage to essential property other than buildings, up to $25,000, plus 75% of the value exceeding $25,000. The compensation can not exceed the value of the other essential property as determined from the most recent financial statement used for tax purposes.

Tax consequences

(a) Financial assistance for the loss or destruction of other capital assets will constitute the proceeds of disposition of the capital assets, and financial assistance for the loss or destruction of inventory will be treated as business income for the taxpayer. That tax treatment is comparable to the tax treatment of insurance proceeds received on insured property.

(b) A taxpayer must allocate the financial assistance received among the various types of property. When capital assets are replaced, the rules in sections 13 and 44 could apply.

(c) As for partial losses of capital assets, financial assistance that is spent to repair the damage within a reasonable period after the damage occurred will not be included in the proceeds of disposition of the property. An amount payable on account of depreciable property could be included as income under paragraph 12(1)(f) of the Act and the expenses incurred to repair the damage to the depreciable property could be deducted in computing income.

Financial assistance from certain employers

Some employers want to financially assist their employees who were hit by the flood. This humanitarian aid could help those employees recover some of the losses for which they will not receive any other financial assistance.

A gift (in cash or in kind) to an employee by an employer is generally a benefit obtained in the course of or by virtue of employment and the amount or value of the gift should be included in the employee's income, in accordance with sub-section 5(1) and paragraph 6(1)(a) of the Act.

However, because of the extenuating circumstances of the flood, a remission order will eliminate the tax consequences of a gift made by an employer under an eligible arrangement.

The Remission Order will generally eliminate the tax consequences arising from gifts received by an employee when the assistance provided is reasonable under the circumstances and the assistance is provided because of the employer/employee relationship and not because of shareholdings. The following conditions must also be met:

- the employee has no enforceable claim on the payment;

- the payment made by the employer is voluntary;

- all employees who were victims of the flood and who are eligible for assistance from their employer must be eligible without taking employment factors into account (such as performance, position, years of service);

- the sum is not given in exchange for past or future services;

- the sum is not to compensate the employee for a loss of employment income.

An employer wishing to grant financial assistance to an employee who was hit by the flood should contact Victor Girard, (418) 698-5560, at the Chicoutimi Tax Services Office to ensure eligibility for the Remission Order.

This document deals with financial assistance to individuals for their principal residence, owners of rental properties and certain business owners. The comments take into account any information we received up to August 7, 1996. Other measures may exist which could have additional tax consequences. These are general comments and some specific situations could have different consequences. For further information on the tax consequences of the financial assistance programs, please contact the Income Tax Rulings and Interpretation Directorate at (613) 957-8953.

S. Labarre
7-962706
August 22, 1996