17 July 1989 Income Tax Severed Letter AC58166 - Tax Treatment of Suspended Benefits

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.

Health and Welfare Canada
Income Security Programs
Policy and Legislation Directorate           J.A. Szeszycki
Brooke Claxton Building                      957-2130
Tunney's Pasture
Ottawa, Ontario
K1A 0L4

Attention: Lois Steeves

Dear Madam:

Re: Tax Treatment of Suspended Benefits

We are responding to your correspondence dated May 31, 1989, and your subsequent telephone conversation (Steeves/Szeszycki) of June 16, 1989, in which you requested our views as to whether or not income security program benefits that have been temporarily or indefinitely suspended are considered to be "received" for tax purposes only in the taxation year that they are actually paid to the recipient.

The specific case that has prompted the enquiry is that of an individual who is 24(1)

Our understanding of the rules, as explained in your telephone conversations, governing the payment of benefits is as follows:

Entitlement

1)        An individual's entitlement to a benefit is determined
          only upon receipt of an application for such benefits.

2)        Once approved as having met the criteria for
          entitlement, the individual's retroactive period of
          entitlement is determined.

3)        C.P.P. legislation provides that an individual who is
          otherwise entitled, amy receive benefits retroactively
          up to one year prior to the date of the application.

4)        The retroactive period for old Age Security benefits
          extends to five years prior to the date of application.

5)        The initial payment of benefits includes an amount in
          respect of a retroactive entitlement, and subsequent
          payments reflect his normal monthly entitlement.

Cancellation

6)        Cessation of benefit payments is normally triggered by
          receipt of notification of the death of the recipient.

7)        Occasionally, H & W will receive a request for
          cancellation of benefit payments for other reasons, in
          which event the individual's entitlement to further
          benefits ceases immediately,

Suspension

8)        Although there is no legislation which either
          authorizes or prohibits suspension of benefits payments
          at the request of the recipient it is your Department's
          policy to accede to such a request.

9)        Normally, such requests are motivated by a concern
          that, in a case for example, where an individual
          temporarily resides in another part of the world where
          postal service is not reliable, benefit payments may be
          lost.

10)       Where payments have been suspended, the individual's
          regular monthly entitlement is diverted to an account
          bearing the individual's name.

11)       The individual's regular monthly entitlement
          accumulates in his "account" without interest, until
          such time as he requests the release of the account and
          the payment of accrued benefits.

Tax Treatment

12)       At the present time, annual information slips for tax
          purposes reflect the amount of benefit payments
          actually made in the taxation year i.e. cheques issued.

13)       In the case of the requested release of a suspended
          account the amount of the lump sum payment is being
          reflected on the information slip for the year in which
          the cheque is issued regardless of the period to which
          the payment relates.

Our Comments

Individuals in receipt of pension or other benefits are required to report those amounts for tax purposes on a cash basis. The cash basis of income reporting means that income is reported in the taxation year in which it is received. An amount may be considered received by a taxpayer under circumstances other than when he has it physically in hand. For instance, an amount may be considered constructively received where instead of being paid directly to the payee the amount is used to offset an amount owing to the payor or where the amount is transferred to a third party at the direction of the payee. It is also considered to be constructively received where the amount is credited to an account, on the taxpayer's behalf, to which he has relatively unrestricted access.

In the case at hand, benefit payments are normally payable on a monthly basis to individuals who have been determined as being entitled to such benefits. When H & W suspends payment for benefits, upon written request by the payee, the amount to which he is entitled is credited to an "account" which accumulates the benefits during the period of suspension. When the suspension is terminated, at the request of the payee, the accumulated benefits in the account are released to him along with the next scheduled delivery of monthly benefits. It is our view, therefore, a request for suspension of benefits does not alter the individual's entitlement to continued benefits but rather the actual delivery system. The amount appears to be credited to an account to which he has reasonably unrestricted access. Consequently, the amounts should be reported in the taxation year in which the benefits are paid directly to the individual or credited to and account to which he may have access. Steps should be taken to ensure that information slips accurately reflect amounts so paid or credited.

In contrast, an individual who is otherwise eligible to apply for benefits may defer making application for Old Age Security benefits, for up to five years under current legislation, without jeopardizing the collection of amounts in respect of prior years, since there is provision for the payment of retroactive benefits.

However, since the individual's entitlement to current or prior year benefits is not determined until the application is received and approved no amount can be considered received in those prior years.

We hope we have been able to clarify this Department's position on the matter.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch