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.
Appeals Branch Personal and General Mr. Denis Lefebvre Section A/Assistant Deputy Minister
Attention: Alex Lowe
Employees of Social Service Agencies Providing Care for Foster Children
We are replying to your memorandum of September 1, 1993 concerning the income received by employees of social service agencies such as the XXXXXXXXXX for the care of foster children.
As stated in the April 13, 1993 memorandum to all District Offices and Taxation Centres from Client Assistance, paragraph 81(1)(h) of the Income Tax Act (the Act) does not exempt from income salary or wages received by a caregiver for duties performed in respect of a foster child or handicapped adult. XXXXXXXXXX has made representation that paragraph 81(1)(h) of the Act does apply to such payments and that since paragraph 81(1)(h) is more specific than subsection 5(1) of the Act, the employment income received by these caregivers should be excluded from income. You have asked for our comments in light of their representation.
While we did not review any of the contracts between the XXXXXXXXXX and the individuals receiving payments from them, we did review a sample contract between XXXXXXXXXX and its employees. After examining that contract, we were satisfied that the relationship between XXXXXXXXXX and the caregivers receiving payments from them was that of employer and employee. Where the terms and conditions of a contract indicate that an employer-employee relationship exists between the payer and the caregiver for the purpose of the Income Tax Act, the Unemployment Insurance Act and the Canada Pension Plan, the amount received by the employee for services rendered is considered employment income.
In their letter dated July 8, 1993, XXXXXXXXXX states that the only phrase in dispute is whether the payments in question are for the benefit of the individual (the foster child) otherwise entitled to the social assistance payment. We disagree. The exemption in paragraph 81(1)(h) of the Act applies to a "social assistance payment ... ordinarily made on the basis of a means, needs or income test under a program provided for by an Act of Parliament or a law of a province, to the extent that it is received directly or indirectly by the taxpayer for the benefit of another individual". Employment income is clearly not made on the basis of a means, needs or income test under a program provided for by an Act of Parliament or the law of a province. While XXXXXXXXXX makes the argument that the caregiver typically uses such remuneration to provide a better environment for the cared-for person and in particular, the children under their care, there is no obligation to do so. Once an employee has provided the services for which the remuneration was paid, the employee is free to use such remuneration in whatever manner he or she chooses.
One of the difficulties in resolving this issue arises from a misunderstanding of the differences between an employee and an independent contractor. For example, the fourth last paragraph of XXXXXXXXXX letter states that it is inequitable and nonsensical to tax an individual on Monday and not on Tuesday where the individual is paid as an employee from an agency on Monday and as an independent contractor from the province in respect of the same service on Tuesday.
The distinction between a contract of service and a contract for services rests on more than the source of the payment. While we recognize that the distinction may become blurred when the employee and the independent contractor perform the same basic services (care for child or handicapped adult), an employee typically does not have the same degree of responsibility and control over how the care is to be provided as does an independent contractor. One of the factors used to distinguish a "contract of service" from a "contract for services" is the degree of control retained by the payer on how the service is to be provided. While the CPP & UI Programs section of Source Deductions Division may be able to provide further insight into the distinction between employees and independent contractors caring for individuals in their own homes, our comments are based on the presumption that the individuals who are the subject of this enquiry are in fact employees of the XXXXXXXXXX and that the individuals who receive payments directly from the province are not employees of the province.
We have recently had the opportunity to review the structure under which the province of XXXXXXXXXX makes payments directly to an individual who cares for a child or handicapped adult in his or her home.
XXXXXXXXXX
Where the non-profit organization uses those funds to hire employees to provide care for the individuals in need, the remuneration paid to those employees cannot be said to be social assistance paid under a program provided for by legislation.
On the other hand, it is our view that any payment made by the non- profit organization to its employees for the room and board for the cared-for person is not included in the employee's income. This is because the specific payment is determined with reference to the cared- for person's needs (for room and board) and does not form part of the payment of salary which is intended to compensate the caregiver for the services provided.
We have also reviewed the two letters from Don Mazankowski, former Minister of Finance, in respect of social assistance payments made to foster parents. There is nothing in those letters which suggest to us that the Department of Finance intended salary or wages earned in respect of a foster child or disabled adult to be exempt under paragraph 81(1)(h) of the Act.
C. B. DarlingngActing Director GeneralRulings DirectorateLegislative and Intergovernmental Affairs Branch
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