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: Will a disaster relief payment made by an employer to an employee be subject to tax?
Position: It depends
Reasons: Where certain conditions are met the disaster relief payment will generally be considered to have been received qua individual.
July 12, 2013
Re: Disaster relief payment to employees
We are writing in response to your email dated July 5, 2013, concerning an employer's emergency assistance fund. More specifically, you asked whether employees impacted by the floods in Calgary would be taxed on financial assistance received from their employer.
In the situation you described, an employer has several employees that were impacted by the floods in Calgary. The employer is organizing financial assistance to these employees by collecting money from employees on a voluntary basis. The employer will match all money collected in order to create a relief fund (hereinafter referred to as the Fund). The Fund will be directed to employees to assist them in their recovery efforts. The criteria for giving money will be based entirely on need and the extent of damage to the respective employee's property. XXXXXXXXXX.
It is the position of the Canada Revenue Agency (CRA) that any disaster relief payment (Payment) received by an individual from his or her employer is subject to tax as employment income where the Payment was received in his or her capacity as an employee. However, where it is determined that the individual received the Payment in his or her capacity as an individual, as opposed to his or her capacity as an employee, the Payment would not be subject to income tax. The determination of whether an individual received the Payment in his or her capacity as an employee or individual is a question of fact which must be determined on a case by case basis.
It is the CRA's view that if the following conditions are met, the Payment would generally be considered to be received by the individual in his or her capacity as an individual and would not be subject to income tax:
- The individual was affected by a disaster (for criteria on disaster, please go to http://www.publicsafety.gc.ca/prg/em/cdd/index-eng.aspx);
- The Payment is philanthropic in purpose to compensate individuals for personal losses or damage they suffered during a disaster;
- The Payment is made within a reasonable period of time following a disaster;
- The Payment is voluntary, reasonable, and bona fide;
- The Payment is made to an individual dealing with the company at arm's length (e.g., the individual does not control the company; the individual is not related to a person who controls the company). Refer to Interpretation Bulletin IT-419R2, Meaning of Arm's Length, for information on the meaning of arm's length;
- The Payment is not made to a shareholder, a connected person (e.g., related to a shareholder; shareholder of a related corporation), or a person of influence (e.g., executives with power to control company decisions);
- The Payment is not based on employment factors such as performance, position, or years of service, etc.;
- The Payment is not made in exchange for past or future employment services or to compensate for loss of income;
- The Payment is not in respect of regular salary paid to an individual who is unable to report to work because of a disaster; and
- The employer has not taken a business expense deduction in respect of the Payment.
Where the Payment is received by a shareholder, connected person, or a person of influence, the facts of each case must be examined to determine whether the Payment was received in his or her capacity as an individual (i.e., not as an employee or shareholder) and is therefore not subject to income tax. Where the facts demonstrate that the individual received the Payment on the same basis as other individuals dealing at arm's length with the employer, the Payment would likely be considered to have been received in his or her capacity as an individual, assuming all other conditions above are met.
It should be noted that the employer will not be entitled to a charitable deduction under section 110.1 of the Act since the Payment is not a gift made to a registered charity.
We trust these comments will be of assistance.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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