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 CCRA.

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

Principal Issues:

What is the tax treatment of various payments under the PEI Disability Support Program?

Position TAKEN:

"Social assistance payments" are taxable pursuant to paragraph 56(1)(u) unless exempt pursuant to paragraph 81(1)(h). "Financial assistance" payments are taxable pursuant to subparagraph 56(1)(r)(i).

Reasons:

Payments are social assistance made on the basis of a means, needs, or income test. If requirements of paragraph 81(1)(h) are met, the payments would be exempt. However, some of the payments may be earnings supplements, which would be taxable pursuant to subparagraph 56(1)(r)(i).

							September 9, 2002

	John Oatway					HEADQUARTERS
	V&E Division 				Terry Young, CA
	Charlottetown Tax Services Office	952-1506

							2002-014893

PEI Disability Support Program (the "Program")

We are writing in reply to your letter dated June 19, 2002, and the accompanying information regarding the Program, including the "Canada-Prince Edward Island Agreement on Employability Assistance for People with Disabilities", which you sent to us July 12. We also acknowledge our various telephone conversations (Oatway/Young).

Background

Section 1.4.1 of the Program policy document effective October 1, 2001 (the "Program Policy"), describes the three components of the Program, and their objectives, as follows:

a) Child Disability Supports - To provide a range of disability related supports and services to families who have children with qualifying disabilities, according to their individual needs, to assist with extraordinary child-rearing support needs directly related to their disability.

b) Adult Disability Supports - To provide a range of disability related supports and services to people with qualifying disabilities according to their individual needs and requirements to help them achieve their desired level of independence.

c) Employment and Vocational Supports - To provide a flexible range of measures that include counselling, assessment, training, skills development and pre-employment in an individually-focussed program which will result in competitive, long-term employment, or supported employment, if appropriate.

Issue

The Program is designed to provide assistance to individuals with a qualifying disability. You have requested our views with respect to the income tax treatment of payments made pursuant to the Program.

Analysis

Paragraph 56(1)(u) of the Income Tax Act (the "Act") includes in income "a social assistance payment made on the basis of a means, needs, or income test and received in the year...". Payments included in income under paragraph 56(l)(u) of the Act are deductible in computing taxable income in accordance with paragraph 110(1)(f) of the Act.

The first requirement in paragraph 56(1)(u) of the Act is that the amount must be "social assistance". The term "social assistance" is not defined in the Act. One must therefore look to the meaning of this expression as it is ordinarily defined and understood. Part V (CANADA HEALTH AND SOCIAL TRANSFER) of the Federal-Provincial Fiscal Arrangements Act defines "social assistance" to mean, "aid in any form to or in respect of a person in need". As Part V of this act deals with, among other things, the funding of social programs, it is our view that this is an appropriate definition of "social assistance".

The second requirement in paragraph 56(1)(u) of the Act is that the payment must be "made on the basis of a means, needs or income test". In early 1994, the Social Policy Branch of Human Resources Development Canada (HRDC) prepared an unpublished manuscript titled "Social Assistance in Canada, 1994". It was prepared in the context of a study of social assistance in the 24 member countries of the Organization for Economic Cooperation and Development. The Notes to this report describe "means, needs or income test" as follows:

There are three main types of financial eligibility tests used in Canadian financial assistance programs. They are:

? the needs test: takes into account assets, income, and needs, as defined in provincial legislation (i.e., social assistance programs);

? the income test: based solely on the income of each applicant; benefit levels set by legislation, but not based on specific needs (e.g., federal Guaranteed Income Supplement for needy seniors); and

? the means test: same as income tested program, but also includes an asset test.

Subject to paragraph 81(1)(h) of the Act, where these two requirements are met, paragraph 56(1(u) of the Act will apply to any payments of social assistance received in the year, regardless of who the payer is.

The supports provided under the Program are dependent on the particular circumstances of each individual. A person must not have the financial ability to cover the costs independently. Sections 1.5.4 and 5.5.1 of the Program Policy state that assistance under the program is provided based on the needs of the individual and / or family and that there must be a specific unmet need that can be supported by the Program. Section 10 of the Program Policy outlines the individual's / family's ability to cover costs independently and includes an income test. Subject to the exceptions discussed below, these provisions in the Program Policy would support the conclusion that the payments under the Program would be social assistance payments made on the basis of a means, needs, or income test.

Where all of the conditions set out in paragraph 81(1)(h) of the Act are met, a social assistance payment ordinarily made on the basis of a means, needs, or income test will be excluded from income. A payment will be excluded from income where:

1. The payment is made under a program provided for by federal or provincial law;

2. The payment is received directly or indirectly by a caregiver for the benefit of the cared-for individual;

3. The cared-for individual cannot be the caregiver's spouse or common-law partner or related to the caregiver or the caregiver's spouse or common-law partner;

4. 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.

5. 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 payment is made.

The wage subsidies portion of employment and vocational supports, described in paragraph e) of section 8.9.2 of the Program Policy, would not be considered "social assistance". However, since such payments would be made pursuant to a project sponsored by a government or government agency in Canada to encourage individuals to obtain or keep employment, they must be included in the recipient's income pursuant to subparagraph 56(1)(r)(i) of the Act.

Conclusion

1. Payments that satisfy paragraph 81(1)(h) of the Act are not included in computing the income of the recipient.

2. The payment of employment and vocational supports as wage subsidies, to an employee by an employer, would form part of the employee's remuneration and would be taxable as employment income pursuant to subsection 5(1) of the Act. The payment of employment and vocational supports as wage subsidies, paid directly to an individual by a government or government agency, will be taxable pursuant to subparagraph 56(1)(r)(i) of the Act. These amounts will be subject to withholding and must be reported on a T4 or T4A slip, respectively.

3. With the exception of amounts excluded by paragraph 81(1)(h) of the Act and the employment and vocational supports that are wage subsidies, it is our view that payments made under the Program are "social assistance" payments that are "made on the basis of a means, needs or income test". Such amounts would, therefore, be included in computing the income of the recipient in the taxation year they are received, pursuant to paragraph 56(1)(u) of the Act. The recipient would also be entitled to a deduction for such amounts in computing taxable income pursuant to paragraph 110(1)(f) of the Act.

4. Pursuant to subsection 233(1) of the Income Tax Regulations (the "Regulations"), every person who makes a payment described in paragraph 56(1)(u) of the Act shall make an information return in prescribed form in respect of the payment. Social assistance payments are reported on the T5007 slip. Subsection 233(2) of the Regulations describes those payments that are not subject to the application of subsection 233(1) of the Regulations.

5. Pursuant to paragraph 200(2)(c) of the Regulations, every person who makes a payment described in paragraph 56(1)(r) of the Act is required to report the amounts on a T4A slip. Pursuant to section 100 of the Regulations, these payments are subject to withholding.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

We trust our comments will be of assistance to you.

Art Seidel, CMA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate