Principal Issues: [TaxInterpretations translation]
1. Should a separate calculation of each beneficiary's needs be required?
2. Is the condition in subparagraph 81(1)(h)(ii) of the Act met if the building in which the host home is located is connected to the taxpayer's principal residence?
3. The taxpayer's net income from the host home is high; is it possible to argue that paragraph 81(1)(h) of the Act does not apply for this reason?
Position:
1. No.
2. No.
3. No.
Reasons:
1. It must be ensured that the program under which the amounts are paid provides for the payment of those amounts on the basis of a means, needs and income test.
2. The beneficiaries do not live in the taxpayer's principal place of residence. See 9916895.
3. Paragraph 81(1)(h) of the Act applies to gross income. An amount is considered to be received “for the benefit of another individual” even if the taxpayer does not use the entire amount to pay expenses relating to that other individual (food, lodging, outings, etc.). Part of the amount may be received by the taxpayer to compensate him for the care and services provided to the other individual; in our view, this is an amount received for the benefit of the other individual.
July 27, 2000
Shawinigan-Sud Tax Centre Headquarters Review Office - Observation Ghislaine Landry, CGA Section 545-1-1 (613) 957-8953
Attention: Ms. Madeleine Cadotte
2000-003313
Application of paragraph 81(1)(h) of the Act to foster homes
This is in response to your memo of June 19, 2000, in which you asked us various questions regarding the above subject.
You indicated that you received several requests from taxpayers who manage residences for the disabled or the elderly who wish to have their income exempted under paragraph 81(1)(h) of the Income Tax Act (the “Act”). You told us that those residences are governed by Quebec's Act respecting health services and social services (the “AHSSS”).
We will first provide you with some general comments regarding the application of paragraph 81(1)(h), and then we will respond specifically to the questions you have submitted.
OUR COMMENTS
Paragraph 81(1)(h) exempts certain social assistance benefits from income tax. For this exemption to apply, the following five conditions must be satisfied:
1. The benefit must be paid to an individual, other than a trust.
2. The benefit must be a social assistance payment (other than a prescribed payment) ordinarily made on the basis of a means, needs or income test under a program provided for by an Act of Parliament or a law of a province.
3. The benefit must be received directly or indirectly by the taxpayer for the benefit of another individual (other than the taxpayer’s spouse or a person who is related to the taxpayer or to the taxpayer’s spouse).
4. No family allowance under the Family Allowances Act or any similar allowance under a law of a province is payable in respect of the other individual for the period in respect of which the social assistance payment is made.
5. The other individual resides in the taxpayer’s principal place of residence, or the taxpayer’s principal place of residence is maintained for use as the residence of that other individual, throughout the period for which the social assistance benefit is paid.
Question 1
During your audit, you observed that there are two types of contract: group contracts and individual contracts. Group contracts are contracts between the public institution and the owner of the residence, which provide for a global amount for a certain number of beneficiaries listed at the beginning of the contract. Individual contracts are contracts between the public institution and the owner of the residence that provide for an amount for a single beneficiary. You asked us whether you should require a separate calculation of the needs of each beneficiary or whether you can accept group contracts.
Response 1
Paragraph 81(1)(h) states that a social assistance payment is ordinarily made on the basis of a means, needs or income test under a program provided for by an Act of Parliament or a law of a province. It is therefore important first to determine under which program the benefit is paid and then to determine whether that program provides for the payment of benefits on the basis of a means, needs or income test.
In our view, it is not necessary to require a separate calculation of the needs of each beneficiary. Rather, it is important to determine under which program the amounts are paid by the public institution. In the situations you have presented to us, it seems that those amounts are paid under the AHSSS. If this is the case, we are of the view that the condition for the application of paragraph 81(1)(h), according to which the benefit must be paid under a program on the basis of a means, needs or income test, will be satisfied for amounts paid under both group and individual contracts. Sections 303 and 314 of the AHSSS provide that the Minister shall establish a classification of the services offered by family-type resources based on the degree of support or assistance required by users. In addition, sections 512 to 520 of the AHSSS provide for user contributions based on circumstances or needs.
Question 2
Can a taxpayer who owns a nursing home benefit from the exemption provided for in paragraph 81(1)(h) if the taxpayer does not live in the home? Can the taxpayer benefit from the exemption if the residence is connected to the taxpayer’s principal residence?
Response 2
No. Subparagraph 81(1)(h)(ii) specifically provides that this exemption applies only if the beneficiary resides in the taxpayer’s principal place of residence, or the taxpayer’s principal place of residence is maintained for use as the residence of that beneficiary. A taxpayer's “principal place of residence” is the place ordinarily inhabited in the year by the taxpayer. The word “principal” is relevant only if the taxpayer has more than one place of residence. In our view, the fact that the host residence is located in a building that is attached to the taxpayer's principal residence does not meet that condition. You can consult document 9916895 in which we took the position that only one unit of a duplex would be considered a taxpayer's “principal place of residence”. In our view, the fact that the two units of the duplex were connected internally and that the beneficiaries lived in the other unit of the duplex was not sufficient to say that the beneficiaries lived in the taxpayer's principal place of residence. There could, however, be situations where a structure added to the taxpayer's principal residence would be considered an integral part of that residence. In those situations, the beneficiaries could be considered to be living in the taxpayer's principal place of residence if the use of the residence is shared with the beneficiaries.
Question 3
In the group or individual contracts between the public institution and the owner of the residence, there is reference to the payment of fees and not to social assistance benefits. Does paragraph 81(1)(h) still apply?
Response 3
Yes, paragraph 81(1)(h) applies to social assistance benefits. This expression is not defined in the Act, so it must be given its ordinary meaning. In Le Nouveau Petit Robert, the word “prestation” [benefit in English} is defined as follows: [TaxInterpretations translation] “Benefits (social): an allowance granted to a person (insured person) by the authorities or companies to compensate for a loss of income or to enable them to access certain services (allowance, indemnity, etc.). Sickness, maternity, death and invalidity benefits. Family benefits: child benefit, moving allowance, back-to-school allowance, single wage, housing benefit, etc. Old-age benefit”. In our view, this expression has a rather broad meaning and in order to determine whether an amount is a social assistance benefit it is necessary to examine all the circumstances in which an amount is paid and not just the terms of the contract between the parties. We are of the view that an amount paid, called an honorarium, to a foster home under the AHSSS constitutes a social assistance benefit.
Question 4
When examining the income statements submitted by owners of residences, you noted that in certain situations net income is high. Given the surpluses in those situations, you asked whether it is possible to claim that paragraph 81(1)(h) does not apply by assuming that the amounts were not paid on the basis of the needs of the beneficiaries.
Response 4
No. Paragraph 81(1)(h) applies to the gross amount received by a taxpayer without regard to the taxpayer's net income. That paragraph applies if all the conditions set out at the beginning of that paragraph are satisfied, including the condition that the benefit be received by the taxpayer for the benefit of another individual. An amount is considered to be received “for the benefit of another individual” even if the taxpayer does not use the entire amount to pay expenses relating to that other individual (food, lodging, outings, etc.). Part of the amount may be received by the taxpayer to compensate the taxpayer for the care and services provided to the other individual; in our view, this is an amount received for the benefit of the other individual.
Please note that it is possible that a portion of the income of a homeowner may not be exempt under paragraph 81(1)(h), for example, if all of the conditions for the application of that paragraph are not satisfied in respect of a particular beneficiary or in respect of certain income. If this is the case, the taxpayer's net income will be the taxpayer's gross income (other than gross income that is exempt under paragraph 81(1)(h)) less any expenses incurred or made for the purpose of earning that income. However, expenses incurred to earn income exempt under paragraph 81(1)(h) will not be deductible in computing the taxpayer’s income under paragraph 18(1)(c).
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that our comments will help you conclude your file. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Ghislain Martineau
Acting Manager
Individuals and Business Section
Business and Publications Division
Income Tax Rulings Directorate