Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Income tax treatment of assistance received by victims of the 1998 ice storm.
Position: The treatment differs depending on whether it is received for business or personal losses.
Reasons: The income tax treatment of assistance is based on specific rules in the Act. However, assistance received for personal losses are generally without tax consequences. Assistance received for business losses are generally without tax consequence where the taxpayer spends an equal amount on repairs or replacements. However, in some instances amounts must be included in income, for example, under paragraph 12(1)(x) or subsection 13(1)
0-990746 XXXXXXXXXX J. Gibbons (613) 957-2135 Attention: XXXXXXXXXX
March 30, 1999
Dear XXXXXXXXXX:
Re: Federal Tax Relief for 1998 Ice Storm Victims
On March 11, 1999, the Honourable Herb Dhaliwal, Minister of National Revenue, issued a “News Release” and “Fact Sheet,” copies attached, outlining in a very general way the income tax treatment of assistance received by individuals and businesses as a result of the 1998 ice storm. XXXXXXXXXX.
The income tax treatment of government assistance is based on specific rules in the Income Tax Act (the Act). The treatment differs depending on whether the government assistance was received in respect of business or personal losses.
Government assistance paid to individuals to cover personal losses incurred as a result of the ice storm, including payments for temporary housing and meals during the disaster, have no income tax consequences. Further, reasonable assistance paid by employers to help employees recover from the 1998 ice storm disaster also has no income tax consequences. Although these latter amounts are normally considered taxable employee benefits, a remission order was granted to eliminate any federal income tax consequences on such amounts paid in 1988 by an employer to an employee.
Government assistance may have been received by some victims to help offset some of the additional business expenses incurred as a result of the ice storm. For example, a farmer may have received government assistance for the cost of renting a generator during the 1998 ice storm. Another example would be assistance received for the cost of repairing damage to a barn caused by the ice storm. Although these amounts are generally taxable (under paragraph 12(1)(x) of the Act), the assistance is offset by related costs incurred in the same year as the assistance is received.
In situations where an outlay or expense (except an outlay or expense in respect of the cost of property) will not be incurred until the year following the year in which the assistance is received, there is relief under the Act (subsection 12(2.2)), which allows a taxpayer to elect to offset the government assistance by applicable costs incurred in the following year. In these situations, the taxpayer would include the amount of government assistance that is not initially offset by related costs as income in the year the assistance is received. Once an election is filed, the Department would reassess this taxation year to take into account the additional costs incurred. In this regard, an election must be filed before the due date of the return for that following year.
In some instances, government assistance was received by victims to compensate them for damaged business inventory. For example, we understand that the Ontario government compensated farmers for items such as spoiled milk, destroyed evergreens being raised for Christmas trees, and maples used for their sap. These amounts are considered income for income tax purposes. However, to the extent that the amount of the assistance is offset by related costs, there are no tax consequences.
In some cases, government assistance was received by ice storm victims to help pay for the cost of replacing depreciable property that was damaged. Generally, the amount of assistance received in these situations is considered “proceeds of disposition” for purposes of calculating the “undepreciated capital cost” (defined in subsection 13(21) of the Act) or “recaptured depreciation” (subsection 13(1) of the Act). Since the cost of the new depreciable property acquired will typically offset the amount of government assistance received, there are generally no income tax consequences in such cases.
If you have any questions in this matter, please contact Jim Gibbons at (613) 957-2135.
Yours truly,
J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
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