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.
Dear Sirs:
Re: XXX - Fire and Hazard Fund
This is in reply to your letter dated July 19, 1991 wherein you requested that we confirm that any payment received by a taxpayer from the XXX - Fire and Hazard Fund (the "Fund") would not be taxable.
Interpretation Bulletin IT-182, Compensation for Loss of Business Income, or of Property Used in a Business, explains the Department's position on property losses caused by disaster as follows:
- 3. "Amounts paid to a taxpayer out of a disaster relief fund established to provide aid to victims of some disaster (such as a flood, frost, or explosion) are generally voluntary payments by the fund to which the taxpayer has no legal right. Such receipts by taxpayers (whether or not in business) are not income or proceeds of disposition of property.
- 4. However, where a taxpayer has a right to compensation for a property or income loss because of contract, statute law, order-in-council, etc., compensation paid for loss or destruction of capital property is considered to be proceeds received on the disposition of the property, and compensation for loss or destruction of inventory or for loss of profits is considered to be income from the carrying on of the taxpayer's business."
In general, payments made to victims of a disaster in respect of personal losses, as opposed to business losses would not be included in the recipient's income for income tax purposes. However, if the disaster victims are legally entitled to assistance from the Fund, any amounts paid to businesses, including self-employed individuals and farmers, would, to the extent that they represent reimbursements of business expenses or costs incurred as a result of the disaster, either be included in the recipient's income or treated as proceeds of disposition depending on whether the expenditure being reimbursed was of a current or capital nature. Such treatment is comparable to the tax treatment accorded to insurance proceeds relating to items which are insurable.
Whether the victims of the disaster have a right to compensation under the Fund is a question of fact and this would in turn determine the taxability of any payment received from the fund.
We trust these comments will be of assistance.
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© His Majesty the King in Right of Canada, 1991
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© Sa Majesté le Roi du Chef du Canada, 1991
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