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.
Income tax treatment of financial assistance paid to adoptive applicants to enable them to meet the special needs of a child placed with them for adoptions.
Question of fact. Generally the amounts will be included in net income pursuant to paragraph 56(1)(u).
The payments are social assistance made on the basis of a means, needs, or income test.
XXXXXXXXXX T. Young, CA
April 2, 2003
Re: Adoption Subsidies
We are writing in response to your letter of February 21, 2003, concerning adoption subsidies (the "Subsidies").
As we understand it, the Subsidies are paid by the XXXXXXXXXX (the "Society") to adoptive applicants (the "Parent" or "Parents") to enable them to meet the special needs of a child placed with them for adoption. The Subsidies will be paid in situations where there are not sufficient financial resources from other sources available to the Parents. For purposes of this policy, special needs are defined as: health care, dental care, or other psychological or mental health treatment needs, which are not financially supported by the Parents' employers or provincial benefits and which are required by the child to cure, prevent or alleviate a condition. The Society will not provide Subsidies to enable the Parents to meet the basic care needs of the child.
It is your view that the Subsidies should be treated the same as child support, which is not taxable and does not require reporting to the CCRA. Children who are available for adoption are "crown wards", which means that the Society, on the Government's behalf, is the child's legal parent and is offering to pay child support to another parent.
In order to make a definitive determination of the income tax treatment of the Subsidies, we would need to examine all the relevant program documentation including the signed agreements, because the income tax treatment may be different for different taxpayers. However, we are prepared to provide the following comments, which we believe will be of assistance. These comments are based on our understanding that the Subsidies are not foster care payments because the children are being adopted by the Parents.
Paragraph 56(1)(u) - Social assistance
Paragraph 56(1)(u) of 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... except to the extent that the payment is otherwise required to be included in computing the income for a taxation year of the taxpayer or the taxpayer's spouse or common-law partner". Payments included in income under paragraph 56(l)(u) of the Act are not subject to Part I tax because they 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. Our view is that social assistance means aid in any form to or in respect of a person in need.
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 this regard, there are three main types of financial eligibility tests used in Canadian financial assistance programs. They are:
? the needs test: takes into account the assets, income, and needs, as defined in provincial legislation (i.e., social assistance programs), of the applicant;
? 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 an income-tested program, but also includes an asset test.
Pursuant to paragraph 81(1)(h) of the Act, certain payments of social assistance for foster care are generally excluded from income. However, as stated above, since in each case the Parents are adopting the child, the child will be related to the Parents pursuant to paragraph 251(2)(a) of the Act and the requirements of paragraph 81(1)(h) will not be met.
In general terms, the child support provisions of the Act would not apply to the Subsidies paid by the Society. In particular, the Subsidies do not meet the definition of "support amount" in subsection 56.1(4) of the Act.
Based on the information you provided, it is our view that the Subsidies are likely social assistance that must be included in the income of the Parent who receives the Subsidies pursuant to paragraph 56(1)(u) of the Act. However, if the Parent resides with a spouse or common-law partner at the time the Subsidies are received, the Subsidies would be included in the income of the person (i.e., the Parent or the spouse or common-law partner) with the higher income for the year. As noted above, the person who includes the Subsidies in income is also entitled to a deduction pursuant to paragraph 110(1)(f) of the Act.
Subsection 233(1) of the Income Tax Regulations (the "Regulations") requires every person who makes a payment described in paragraph 56(1)(u) of the Act to file an information return in prescribed form in respect of the payment. Social assistance payments are reported on a T5007 slip. Therefore, the Society will be required to issue T5007 slips in respect of the Subsidies pursuant to subsection 233(1) of the Regulations.
Certain exceptions to this reporting requirement are set out in subsection 233(2) of the Regulations. The payments that are not subject to the application of subsection 233(1) of the Regulations and, therefore, do not have to be reported on a T5007 are as follows:
A payment that
(a) is in respect of medical expenses incurred by or on behalf of the payee;
(b) is in respect of child care expenses, within the meaning assigned by paragraph 63(3)(a) [Note: Now subsection 63(3) "child care expense"] of the Act, incurred by or on behalf of the payee or a person related to the payee;
(c) is in respect of funeral expenses in respect of a person related to the payee;
(d) is in respect of legal expenses incurred by or on behalf of the payee or a person related to the payee;
(e) is in respect of job training or counselling of the payee or a person related to the payee;
(f) is paid in a particular year as a part of a series of payments, the total of which in the particular year does not exceed $500; or
(g) is not a part of a series of payments.
We have reviewed the list of reasons for the payment of Subsidies listed on the blank "Subsidy Agreement - Terms & Conditions" included with your letter and note that payments for many of the items listed would be excluded from reporting on a T5007 because of the exclusions in subsection 233(2) of the Regulations listed above. To assist you in determining which payments are excluded from the reporting requirement pursuant to paragraph 233(2)(a) of the Regulations, please refer to interpretation bulletin IT-519R2 (Consolidated), Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction. This document may be found on our web site at www.ccra.gc.ca.
We trust our comments will be of assistance to you.
John Oulton, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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