24 March 2010 External T.I. 2009-0348971E5 - Holocaust Restitution Payments

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: 1. Are Holocaust Restitution Payments received Taxable?
2. Will the Holocaust Restitution Payments impact the Old Age Security benefits?

Position: Question of Fact

Reasons: If amounts received meet the criteria laid out under 81(1)(g) or represent personal injury awards or general damages in respect of human rights violations, then such amounts are excluded from income and taxation thereof. Furthermore, there will be no impact to the OAS benefits.
Should the amounts received not meet the two options above, but can be excluded from Canadian taxation under the Canada-Germany Income Tax Convention ("Treaty"), then there is no income taxation impact, however there will be an impact to OAS benefits.

2009-034897
XXXXXXXXXX Henry Leung
613-957-9232
March 24, 2010

Dear XXXXXXXXXX :

Re: Holocaust Restitution Payments

This is in response to your e-mail of November 24, 2009 inquiring about the taxation of Holocaust restitution payments ("Restitution") paid through an organization called the Claims Conference. You have described a situation in which a Canadian resident (the "Taxpayer") applied to the Claims Conference for Restitution. She has been told she will likely be eligible for either a lump sum amount or monthly payments. You also wish to know whether the Restitution would affect the Taxpayer's benefits under the Old Age Security ("OAS") program.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Our Comments:

We understand that the Claims Conference is an organization created to obtain justice for Jewish victims of Nazi persecution. It has negotiated the payment of over $60 billion from the German and Austrian governments, industry and banks. The Claims Conference administers various compensation programs and distributes payments to Holocaust survivors not only in respect of personal injury and suffering but also in respect of the destruction or confiscation of assets and property.

Paragraph 81(1)(g) of the Income Tax Act (the "Act") provides that in calculating the income of a taxpayer for a taxation year, amounts received as compensation to a victim of National Socialist persecution will not be included. In order for paragraph 81(1)(g) of the Act to apply, certain requirements must be met.

First, the payment must be made by the Federal Republic of Germany ("Germany") or by a public body performing a function of government within Germany. It is the CRA's position that as long as the source of funds in the programs administered by the Claims Conference are provided by the German government, this first criteria will be met.

The second requirement is that the funds received must not be subject to tax under Germany's income tax laws. Insofar as the Claims Conference administers several programs, which may be treated differently for German tax purposes, whether this requirement is met will always be a question of fact. We can, however, advise that it has previously been confirmed to the CRA that funds received out of the Article 2 Fund are not subject to income tax in Germany and therefore qualify for the exemption specified in paragraph 81(1)(g) of the Act.

We note that in the event the criteria outlined in paragraph 81(1)(g) of the Act are not met, the Restitution may still be excluded from income if it can be shown that the funds received represent personal injury awards or general damages in respect of human rights violations. Again, whether this characterization applies to a particular payment of Restitution will be a question of fact to be determined on a case-by-case basis.

In the event that neither of the foregoing treatments applies and the Restitution is determined to be taxable in Canada, consideration should be given to the potential application of the Canada - Germany Income Tax Convention (the "Treaty"). In this regard, of potential relevance to your inquiry is subparagraph 3(b) of Article 18 of the Treaty, which provides that payments received by a Canadian resident from Germany as compensation for an injury or damage sustained as a result of hostilities or past political persecution shall be taxable only in Germany. Should this provision apply to the Restitution, it is important to understand how this treatment is implemented. For Canadian tax purposes, the payment would be included in the recipient's net income, but would be deducted from taxable income by virtue of subparagraph 110(1)(f)(i) of the Act. As a result, the payment would effectively be tax exempt. However, as we will discuss below, this treatment will have an impact on OAS benefits.

OAS benefits are based on the recipient's "net income". In this regard, net income is computed in accordance with the Act. If, for example, the Restitution is tax-exempt pursuant to paragraph 81(1)(g) of the Act, or if it is tax-exempt as damages for human rights violations, the amount is not included in a taxpayer's net income. This means it will have no effect on the OAS benefits. However, keeping in mind the discussion above regarding the Treaty, the Restitution could be an amount that is included in net income with an offsetting deduction from taxable income by virtue of subparagraph 110(1)(f)(i) of the Act. Even though the Restitution itself will be non-taxable, it will have been included in net income and will affect OAS benefits.

We trust the foregoing will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch