12 June 1997 Internal T.I. 9713647 - MANITOBA FLOOD-RESTART COMPONENT

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 Department.

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

Principal Issues:

Tax consequences of accountable cash advances to be received under the ReStart Component of the Red River Valley Jobs and Economic Restoration Initiative (following the 1997 flooding in the Red River Valley).

Position TAKEN:

Generally, such amounts will not result in a taxable event (although, in certain instances, they may).

Reasons FOR POSITION TAKEN:

Generally, compensation for current business expenses is included in business income, while the expenses are deductible. If the compensation relates to destroyed depreciable property, generally, no capital gain or recapture will result if replacement property is acquired and section 44 and subsection 13(4) apply.

 	 	                        		June 12, 1997

Mr. B. Cook	                HEADQUARTERS
	Director	                    M. Azzi
	Winnipeg Tax Services	    957-8953
			                              5-971364

1997 Flood - Red River Valley Jobs and Economic Restoration Initiative, ReStart Component

For your information, we are forwarding a copy of the documentation which we received from the Department of Western Economic Diversification, regarding the ReStart Component of the Red River Valley Jobs and Economic Restoration Initiative. We have also enclosed a copy of our analysis of the tax consequences of this component, which may be of assistance in replying to related enquiries.

As indicated in the enclosed documentation, under the Restart Component, eligible recipients will be given accountable cash advances of up to $5,000 each to assist with immediate financial needs, following the 1997 flooding in the Red River Valley. Generally, it is anticipated that there will be no major income tax consequences under this component.

This is the first formal enquiry that we have received which deals with payments to Manitoba flood victims. Since we expect that we will be receiving additional information and enquiries regarding relief for victims of the flood, it is important that we be able to readily liaise with your office on all related matters. Therefore, we would appreciate it if you would provide us with the name of a contact person at the tax services office who will be responsible for any income tax issues relating to the flood.

Bryan W. Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c Mr. W. Reich

Director
Winnipeg Tax Centre

Mr. B. Desormeaux

Client Services

Ms. C. Pérusse

Communications

Tax Consequences of the
Red River Valley Jobs and
Economic Restoration Initiative -
ReStart Component

The objective of the Red River Valley Jobs and Economic Restoration Initiative (the "Initiative") is to restore economic activity in the Red River Valley to pre-flood levels and to prevent permanent job loss in the areas affected by the 1997 flooding. Under the ReStart Component of the Initiative, eligible recipients will be given an accountable cash advance of up to $5,000 each, to assist with immediate financial needs. Eligible recipients will be small and medium-sized businesses, on-farm or off-farm, and not-for-profit organizations affected by the 1997 flooding in the Red River Valley. The "eligible costs" towards which this initial assistance may be applied, and the corresponding tax consequences are as follows (it is assumed that all of the assistance received will in fact be expended on "eligible costs", as the assistance is in the form of accountable advances):

    Eligible Costs						     Tax Consequences

1.Evacuation/relocation costs •If this assistance is for the evacuation/relocation of the business owners, it will not be taxable and the costs will not be deductible (i.e., personal losses and expenses).

•If this assistance relates to the evacuation and temporary relocation of business assets, it will be included in business income and the costs will be deductible (section 9 and GAAP; alternatively paragraph 12(1)(x)).

2.Replacement of destroyed
  (lost)						•Assistance will be "proceeds
  buildings or equipment				of disposition" under
								paragraph (c) of the 								definition in section 54.
	(i.e., depreciable prop.)
							•Proceeds to be allocated to the different CCA classes.
							•Generally no capital gain or recapture if replacement property acquired and section 44 and subsection 13(4) apply (IT-259R2).
							•Possibility of terminal loss; however, terminal loss on building may be reduced by virtue of subsection 13(21.1) (IT-220R2).  Draft subsection 13(21.2) will not apply.

3.Repair of damaged buildings•Assistance will be included in

or equipmentincome under paragraph 12(1)(f) and expenses to repair will be deductible.

4.Clean-up costs (assuming such•Assistance will be included in income and costs will 	costs are current in nature		be deductible.
	and do not fall under
	2 or 3 above)

5.Spoiled (destroyed) inventory •Income inclusion for assistance and deduction for destroyed inventory.

6.Ongoing fixed expenses while	•	Assistance will be included in income and costs will
	operations had ceased (rent,		be deductible.  However, it should be noted that, in 	loan payments, utilities)		the case of loan payments, the capital portion of the payment is not deductible.

7.Extraordinary start-up costs •Details required as to the nature of these costs (current, capital or eligible capital?) in order to establish the tax consequences. Generally, this type of government assistance is included in income under paragraph 12(1)(x), unless it falls under one of the exceptions contained therein. The general result is that assistance in respect of current expenses is included in income and the expenses are deductible, while assistance in respect of the acquisition of property is not included in income and reduces the cost or capital cost of the property (subsection 13(7.1), 13(7.4) or 14(10), or paragraph 53(2)(k) or 53(2)(s)).

Other

The above-described accountable advances will not, in and by themselves, affect the exempt status (under paragraph 149(1)(l)) of a non-profit organization. If the assistance described in 2 above would otherwise result in taxable capital gains which would be taxable to a non-profit organization by virtue of subparagraph 149(5)(e)(ii) (IT-83R3), the recognition of such gains will be deferred if replacement property is acquired as described in section 44.