2 February 2007 External T.I. 2006-0180281E5 - Individual Development Accounts

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.

Principal Issues: The income tax treatment of amounts paid from "individual development accounts," which are used by some charities, NPOs and governments to assist needy individuals in acquiring basic needs, such as housing, health care and education, by promoting savings.

Position: Generally, amounts paid in respect of housing and health care would be social assistance payments that, because they are paid as lump-sums, would be excluded from income by virtue of subsection 233(2) of the Regulations. The amounts paid for education would generally be considered scholarships or bursaries and included in income under paragraph 56(1)(n).

Reasons: Based on the facts provided and our previous comments on similar payments.

XXXXXXXXXX 								2006-018028
J. Gibbons, CGA
February 2, 2007

Dear XXXXXXXXXX:

Re: Individual Development Accounts ("IDAs")

This is in response to your letter dated September 21, 2006, concerning the income tax treatment of IDAs as administered by your client, a charitable organization (the "Charity"). Our general understanding of IDA programs, which is consistent with the description in your letter, is that they are typically run by charities or non-profit organizations to promote savings by low-income individuals for acquiring basic needs, such as health care, education, housing, employment and self-employment.

IDA Programs encourage personal savings through a savings program whereby individuals are entitled to receive grants ("Grants") in proportion to the amounts saved by them, usually in a ratio of 3:1. Generally, eligibility for Grants is based on individuals having income below a certain threshold, usually a specified percentage of Statistics Canada's "Low Income Cut-Off," as well as meeting other established criteria, such as having minimal assets and a manageable debt load. In the case of the Charity's IDA Program, Grants are not issued directly to an individual, but rather, once the individual has used his or her savings towards an approved purchase, the Charity will issue a lump-sum payment in the amount of the Grant to the vendor on account of the individual's remaining balance.

Our Comments

Social Assistance - General

It is a question of fact, to be determined from a review of all of the information pertaining to a particular charitable program, including the program rules and policies, documentation, etc., whether a payment from the particular program is, for income tax purposes, a non-taxable social assistance payment ("SAP") or something else. Nonetheless, based on our understanding of the IDA Program run by the Charity, as outlined above, we have provided our general views below. However, it should be recognized that if there are other significant features attached to this IDA program, in addition to the ones discussed above, the tax treatment outlined below might not necessarily apply.

The term "social assistance" generally means a system whereby financial assistance is extended to those individuals whose income is inadequate or non-existent owing to disability, unemployment, old age, etc., and may be provided under the auspices of private organizations, as well as governments. Income included under paragraph 56(1)(u) of the Income Tax Act (the "Act"), is offset by a matching deduction under paragraph 110(1)(f) of the Act, such that there are no accompanying income tax implications related to this income inclusion other than a possible effect on income-tested programs.

Notwithstanding the foregoing, since subsection 233(2) of the Income Tax Regulations (the "Regulations") excludes certain SAPs from the general reporting requirements under subsection 233(1) of the Regulations for such payments, it is the policy of the Canada Revenue Agency (the "CRA") to allow recipients to exclude the following amounts, which are described in subsection 233(2) of the Regulations, from income:

(i) SAPs in respect of medical expenses incurred by or on behalf of the recipient;

(ii) SAPs in respect of child care expenses incurred by or on behalf of the payee or a person related to the recipient (see IT-495R3, Child Care Expenses, for the meaning of child care expenses);

(iii) SAPs in respect of job training or counselling of the recipient or a person related to the recipient;

(iv) a SAP paid in a particular year as part of a series of payments whose total does not exceed $500;

(v) a SAP which is not part of a series of payments.

With the exception of the above-noted exclusions, any person who makes a payment described in paragraph 56(1)(u) of the Act is required to report such payment on form T5007. Please refer to T4115, T5007 guide - return of benefits, for more information. Also, it should be noted that there is no statutory requirement to deduct income tax from payments described under paragraph 56(1)(u) of the Act.

Assistance to Buy or Renovate a Home and/or to Purchase Home Furnishings

Such a Grant would be considered a SAP but, on the basis that it is paid as a lump sum (i.e., not part of a series of payments), would not have to be reported in income.

Assistance for Health Care Needs

Such a Grant would be considered a SAP but, on the basis that it is paid in respect of medical expenses, would not have to be reported in income. For purposes of the medical expense tax credit, an individual could not take into account any portion of the cost of medical expenses that were paid on the individual's behalf by the Charity.

Assistance for Acquiring Work Tools

Such a Grant would be considered a SAP but, on the basis that it is paid as a lump sum (i.e., not part of a series of payments), would not have to be reported in income. Please note, however, that for purposes of the "apprentice mechanics' tool costs deduction," an individual could not take into account any portion of the cost of an "eligible tool" that was paid on the individual's behalf by the Charity. This deduction, as well as the term "eligible tool," is described in Chapter 6 of Guide T4044, Employment Expenses.

Education Assistance

A Grant that is paid to assist an individual in pursuing his or her own education would be considered an amount received on account of a "scholarship, fellowship, or bursary" and would be included in income under paragraph 56(1)(n) of the Act. Pursuant to subsection 56(3) of the Act, this income is reduced by a scholarship exemption of $500 or, where an amount is received in connection with an educational program that is eligible for the education tax credit under section 118.6 of the Act, $3,000. The education tax credit is described in detail in Interpretation Bulletin IT-515R2, Education Tax Credit. Under amendments proposed in the 2006 Federal Budget, the $3,000 exemption for qualifying amounts would be increased to a full exemption for amounts received in 2006 and subsequent taxation years.

Under paragraph 200(2)(a) of the Regulations, every payer of a research grant, scholarship, fellowship, bursary or prize (other than a prescribed prize) must file a T4A Summary and related T4A Supplementaries to report such amounts. Nonetheless, under CRA's administrative position, a payer is only required to issue a T4A slip when the total of such payments exceeds $500 or when income taxes are withheld from such payments. In this regard, it should be noted that there is no statutory requirement to withhold income taxes on the payment of amounts described in paragraph 56(1)(n) of the Act, and also the scholarship exemption does not affect the requirement to file T4A slips, i.e., T4A slips are required even when the scholarship exemption exceeds the amount of the education grant. You can obtain more information on the T4A reporting requirements in Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary Form - 2001.

In the case where a Grant is paid to an individual for the purpose of assisting the individual's child in pursuing an education, the Grant would be considered a SAP but, on the basis that it is paid as a lump sum (i.e., not part of a series of payments), would not have to be reported in income.

Assistance for a Business Start-Up

Generally, inducements, reimbursements, contributions, allowances, grants, and assistance received by a taxpayer in the course of earning income from a business or property are required to be included in the income of the taxpayer under paragraph 12(1)(x) of the Act, unless otherwise included in income or deducted from the cost of an outlay or expense, the cost of depreciable property, the amount of eligible capital expenditures, or the adjusted cost base of capital property. Accordingly, Grants paid to individuals to assist them in starting their own businesses would likely be included in income under paragraph 12(1)(x) of the Act. There are no withholding or reporting requirements in respect of such income. Reference may be made to Interpretation Bulletin IT-273R2, Government Assistance - general comments, for more information.

We trust that the above information is helpful. Please note that publications referred to above can be found on the CRA's website at www.cra.gc.ca.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch