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 Issues:
Tax treatment under paragraph 81(1)(h) of the Act of payments under six scenarios:
(a) Can paragraph 81(1)(h) exempt business or rental income?
(b) Do the social assistance cheques need to be issued directly in the name of the caregiver?
(c) In the case of partnerships, is the application of paragraph 81(1)(h) determined at the partnership level or at the level of the partners?
(d) Can the application of paragraph 81(1)(h) result in one member of a partnership earning exempt income and another member earning taxable income?
(e) Can paragraph 81(1)(h) apply to a joint venture?
(f) Can the caregiver's principal place of residence be considered the place where the caregiver spends the majority of the day even if the caregiver sleeps somewhere?
Position TAKEN:
(a) Yes.
(b) No.
(c) No.
(d) No.
(e) No.
(f) Probably not.
Reasons:
(a) Preamble of section 81 reads: "There shall not be included in computing the income of a taxpayer for a taxation year, ...". Consistent with previous positions.
(b) Paragraph 81(1)(h) states in part: "... received directly or indirectly by the taxpayer..."
(c) Concerns with the application of paragraph 81(1)(h) to a partnership. Application of 81(1)(h) could also result in negative adjusted cost base of partnership interest.
(d) See (c) above.
(e) Since a joint venture is normally associated with a profit-making activity, we fail to see its relevance to social assistance payments that are not included in income under paragraph 81(1)(h) of the Act.
(f) It is unlikely that an individual's place of residence could be considered a place where the individual does not normally sleep.
XXXXXXXXXX 2001-007542
T. Young, CA
June 13, 2001
Dear XXXXXXXXXX:
Re: Exemption under paragraph 81(1)(h) of the Income Tax Act (the "Act")
This is in reply to your letter dated March 16, 2001, requesting our opinion as to whether paragraph 81(1)(h) of the Act would apply in a number of situations. We also acknowledge our telephone conversation (XXXXXXXXXX/Young) of April 17, 2001.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, as in your situation, the enquiry should be addressed to the relevant Tax Services Office. Also, it would be necessary to review all relevant documentation before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.
Paragraph 81(1)(h) of the Act only applies to individuals (the "caregiver(s)") (other than trusts) in receipt of a social assistance payment (the "payment"). In order for the payment to a caregiver to be exempt under paragraph 81(1)(h) of the Act, the following conditions must be met:
1. The payment must be ordinarily made on the basis of a means, needs, or income test.
2. The payment must be made under a program provided for by federal or provincial law.
3. The payment must be received directly or indirectly by the caregiver for the benefit of the cared-for individual.
4. The cared-for individual cannot be the caregiver's spouse or related to the caregiver or the caregiver 's spouse.
5. No family allowance under the Family Allowances Act or any similar allowance provided for by provincial law can be payable in respect of the cared-for individual for the period for which the social assistance payment is made.
6. The cared-for individual must live in the caregiver's principal place of residence; or the caregiver's principal place of residence must be maintained for use as the cared-for individual's residence during the period for which the payments are made.
The specific questions that you asked us to address along with our views are as follows:
(a) The taxpayer is in the business of renting rooms in the taxpayer's house to disabled individuals on social assistance. Assuming that the conditions of paragraph 81(1)(h) of the Act are met, would the paragraph exempt the taxpayer's business or rental income?
If the payment meets the above conditions, then the income will be excluded from the computation of a taxpayer's income for a taxation year. Paragraph 81(1)(h) deems that the payment would not be included in income so that the question of whether the payment is business or rental income is irrelevant.
It should be noted that paragraph 18(1)(c) of the Act prohibits the deduction of any outlays or expenses incurred to earn exempt income (as defined in subsection 248(1) of the Act). Exempt income includes amounts excluded from income by virtue of paragraph 81(1)(h).
(b) The social assistance payments are being issued in joint names. The first name is the name of the tenant, and the second name is the name of the landlord. You have asked if this is sufficient to qualify as being "received directly or indirectly by the caregiver for the benefit of another individual".
If the cheque was not in joint names, but was in the sole name of the tenant, would it ever be possible to satisfy the "received directly or indirectly" condition? For example, if the tenant signed the back of the cheque and the landlord deposited the cheque in the landlord's bank account, could it be argued that the amount was received indirectly by the taxpayer for the benefit of another individual?
In our view, the condition that the payment be "received directly or indirectly by the caregiver" means that the social assistance payment may be made directly to the caregiver, to the caregiver through an agency, or to the cared-for individual who, in turn, is required to pay the caregiver.
(c) Can paragraph 81(1)(h) of the Act exempt income earned in a partnership if the partnership is composed of individuals who would otherwise meet the tests set out in 81(1)(h) of the Act had they been sole proprietors? For purposes of this question, you have asked us to assume that half of the cheques were in joint names of Partner A and certain tenants and the other half were in joint names in the name of Partner B and certain tenant. All cheques were deposited in the partnership account with profits divided equally.
We have difficulty envisioning how paragraph 81(1)(h) could apply to payments of this nature being made to a partnership. Also, in general, distributions from a partnership to partners result in a reduction in the adjusted cost base of the partners' interests in the partnership. This could result in a potentially large capital gain when the partners dispose of their partnership interests.
(d) Assuming the same facts as in the previous paragraph, would paragraph 81(1)(h) of the Act apply to exempt the income if only one of the partners resided in the home? Can the income be exempt for one partner and not the other?
Please note our views above regarding the application of paragraph 81(1)(h) of the Act in the case of a partnership.
(e) Would paragraph 81(1)(h) of the Act apply to a joint venture arrangement assuming the same facts as in (c) except that the entity was a joint venture instead of a partnership?
Since a joint venture is normally associated with a profit-making activity, we fail to see its relevance to social assistance payments that are not included in income under paragraph 81(1)(h) of the Act.
(f) What is meant by taxpayer's principal place of residence in the definition? Does it mean the place where the taxpayer sleeps? Could a residence be a taxpayer's principal place of residence under the definition if the taxpayer spent the majority of the day at the residence but slept elsewhere?
A taxpayer's principal place of residence is the place where the taxpayer regularly, normally or customarily lives. In our view, the place where the taxpayer normally sleeps is a significant factor as well as where most of the taxpayer's belongings are kept and where the taxpayer receives his or her mail.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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