Canadian registered charities often have to provide assistance to people in disasters. Does an individual or business have to include this amount in their income? CRA recently released a letter discussing this issue.
Here is the text of the document from CRA:
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: Are amounts received from a charity as disaster relief included in income for an individual personally? Would disaster relief constitute social assistance? Are such amounts included in income when received by a business?
Position: Question of fact. Amounts received by individual for personal losses are generally not taxable. An amount received as disaster relief is usually not social assistance. Where disaster relief is received in the course of carrying on business, it is likely included in income under section 9 or paragraph 12(1)(x).
May 8, 2018
XXXXXXXXXX Income Tax Rulings Directorate Tax Relief Policy & Programs Division A. Ryer Appeals Branch 613-970-9038 XXXXXXXXXX 2018-075422
Disaster relief received from a charity
We are writing in response to your e-mail enquiry, dated March 27, 2018, regarding the income tax treatment of financial assistance received from a charity in respect of a natural disaster.
General information on disasters and disaster relief is available on the Government of Canada website at https://www.canada.ca/en/revenue-agency/campaigns/about-canada-revenue-agency-cra/disasters-disaster-relief.html This page also includes information about the taxation of financial assistance payments for disaster relief from an employer to an employee, which is not addressed in this letter.
Specific information about the taxation of financial assistance payments for disaster relief from a government to an individual or to a business can be found at https://www.canada.ca/en/revenue-agency/campaigns/about-canada-revenue-agency-cra/disasters-disaster-relief/financial-assistance-payments-your-government.html Generally, the comments on that webpage about payments to an individual or to a business also apply to a disaster relief payment from a charity, such as the Canadian Red Cross.
Amount Received by an Individual (Personal)
Ultimately, whether an amount received by an individual needs to be included in income depends on the nature of the payment and the facts of the situation. However, a disaster relief payment received by an individual for personal losses and expenses is generally not taxable and is not included in income for income tax purposes.
Amount Received by a Business
Where assistance is received in the course of carrying on business, for example, to compensate a small business for uninsured financial losses, that amount will generally be included in the recipient’s income from business under section 9 of the Income Tax Act (the “Act”), regardless of whether the assistance is received from a government or from another source.
Where assistance is received from a government, municipality, or public authority in the course of earning income from a business or property, it will generally be included in income under paragraph 12(1)(x) of the Act, to the extent that the amount was not already included in income under section 9 of the Act. Paragraph 12(1)(x) applies where assistance is provided directly or indirectly by a government, municipality, or public authority, including, for example, where assistance is provided by a not-for-profit organization (including a charity), that receives its funding from a government. This is explained in paragraph 3 of IT-273R, Government Assistance – General Comments, which is also available on the Canada.ca website.
Where assistance payments related to a natural disaster are received in respect of the operation of a business, the assistance is included in the taxpayer’s income but is usually offset by the additional expenditures incurred. For example, expenditures that are compensated by relief payments will generally be deductible, such that the business will effectively have no net income related to the assistance. Where the assistance received is in respect of the purchase or replacement of capital property the amount of the assistance is not normally included in the taxpayer’s income because specific rules in the Act allow the taxpayer to reduce the capital cost of the property by the amount of the related assistance received.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure.
We trust these comments will be of assistance.
Katie Robinson, CPA, CA
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.