Principal Issues: Should the amounts paid by virtue of the MESS financial assistance of last resort compensation program be included in the calculation of the beneficiaries' income?
Position: No. Where a T5007 return does not have to be issued in respect of a social assistance benefit under subsection 233(2) of the Income Tax Regulations, the CRA's position is not to require the benefit to be included in the calculation of the beneficiary's net income. No deduction at source is required in those cases.
Reasons: Income Tax Act
XXXXXXXXXX 2011-041911
September 2, 2011
Dear Sir,
Subject: Compensation program for recipients of financial assistance of last-resort (the "Program")
This is in response to your email of July 18, 2011 in which you requested our opinion regarding the tax implications of payments made under the Program, particularly whether the recipients of those amounts are to include them in computing their income. You also wish to know if tax slips must be issued and source deductions must be made.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
Specifically, the Program was set up by the Ministère de l'Emploi et de la Solidarité sociale (the "MESS") for the benefit of single people and single-parent families. For 2011, those individuals must be homeless and receiving financial assistance of last-resort as of October 1, 2011, while for 2012, they must meet those conditions as of June 1, 2012. The purpose of the Program is to compensate for the effects resulting to those persons from the transition between the rules applicable to the adjustment of the Québec sales tax to financial assistance of last resort and those to be applied by Revenu Québec to the Solidarity Tax Credit.
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion.
Any social assistance payment made on the basis of a means, needs or income test and received in the year by a person must generally be included in the calculation of that person's net income under paragraph 56(1)(u). In this case, it appears that the amounts paid under the Programs represent social assistance payments.
Where a social assistance payment must be included in computing a person's income pursuant to paragraph 56(1)(u), the person may claim the offsetting deduction under paragraph 110(1)(f) in computing taxable income. The inclusion under paragraph 56(1)(u) is therefore only for purposes of computing net income, which affects various things, including the child tax benefit, the GST / HST credit and the medical expense tax credit.
Where a social assistance payment is made pursuant to paragraph 56(1)(u), subsection 233(1) of the Income Tax Regulations (the "ITR") requires that a T5007 return be filed in respect of the payment. However, ITR subsection 233(2) provides that a T5007 return does not have to be filed in certain circumstances, including where: the payment is paid as a part of a series of payments, the total of which in the particular year does not exceed $500; where the payment is not part of a series of payments but it is made in respect of medical expenses incurred by or on behalf of the payee, or it is made in respect of child care expenses or funeral expenses.
Where a social assistance payment is not required to be reported in a T5007 return by reason of ITR subsection 233(2), the Canada Revenue Agency is of the view that the benefit does not have to be included in computing the recipient’s net income under paragraph 56(1)(u). In this case, it appears that ITR subsection 233(2) applies to amounts paid under the Program. In such a case, no source deduction would be necessary.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate