25 May 2001 External T.I. 2001-0081525 - TORNADO RELIEF

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.

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 victim of XXXXXXXXXX .

Position TAKEN:

The income tax treatment differs depending on whether it is received for business or personal reasons. Relief is available under various provisions of the Act.

Reasons:

The income tax treatment of assistance is based on specific rules in the Act. Assistance received for personal losses is generally without tax consequences. Assistance received for business losses is generally without tax consequences 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). Relief available under subsections 12(2.2), 13(7.1) and 13(7.4) of the Act.

XXXXXXXXXX 2001-008152
T. Young, CA
May 25, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter dated April 17, 2001, requesting views on the taxation of payments made under the XXXXXXXXXX.

In your letter, you stated that your client, a farmer, had his entire yard wiped out by XXXXXXXXXX. In the year XXXXXXXXXX government issued a payment of $XXXXXXXXXX to your client for the following:

• Re-establishment grant $XXXXXXXXXX
• Clean-up debris in yard, dugouts, etc. $XXXXXXXXXX

You stated that you believe that the inclusion of the entire $XXXXXXXXXX in XXXXXXXXXX income will further increase the financial hardship this taxpayer has been placed in by the loss of his buildings and virtually all his farm equipment. He has been forced to divert normal operating funds to replace capital items while waiting for insurance settlements in XXXXXXXXXX leaving him with a higher than usual net farm income before inclusion of this recovery grant, so that income tax payable on this amount will cause him severe hardship.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, as in your situation, the enquiry should be addressed to the relevant Tax Services Office. Also, it would be necessary to review all relevant documentation before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.

In general terms, when a natural disaster strikes, government assistance may be received in respect of the operation of a business, property held for the purpose of earning income, or a personal loss or expenditure. Payments received by an individual from a government for personal losses and expenses incurred as a result of a disaster do not ordinarily affect income for tax purposes.

To the extent that the government assistance is received to pay for the cost of replacing depreciable property used in your client's business that was destroyed by XXXXXXXXXX, it forms part of the "proceeds of disposition" for purposes of calculating "undepreciated capital cost" as defined in subsection 13(21) of the Income Tax Act (the "Act"), or "recaptured depreciation" as defined in 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 normally no income tax consequences in such cases. If replacement property is acquired within two years of the end of the taxation year in which the property was destroyed, subsection 13(4) could apply to reduce the proceeds of disposition of the property that was destroyed and the adjusted cost base of the replacement property.

Government assistance received to assist in the purchase of capital property and not as compensation for property that was destroyed is generally taxable under paragraph 12(1)(x) of the Act. However, the taxable amount is reduced to the extent that it reduces the cost or capital cost of a property under subsection 13(7.1) or 13(7.4) of the Act. The result is that there normally would be no income tax consequences to the taxpayer.

Government assistance received to help offset some of the additional business expenses incurred as a result of XXXXXXXXXX is generally taxable under paragraph 12(1)(x) of the Act. However, the assistance is offset by the amount of additional expenses incurred in the same year as the assistance is received.

In situations where the outlay or expense (unless incurred in respect of property) will not be incurred until the year following the year in which the assistance is received, there is relief under subsection 12(2.2) of the Act, 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 expenses in income in the year the assistance is received. Once an election is filed, the Canada Customs and Revenue Agency will reassess the first taxation year to take into account the additional costs incurred.

To summarize, government assistance in respect of personal loss or expenditures is generally not included in income. Government assistance received in respect of the operation of a business is included in the taxpayer's income, but is generally offset by the additional expenditures incurred in the year or the following year. Government assistance received in respect of the purchase or replacement of capital assets 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 assets by the amount of related government assistance received. To permit a taxpayer to receive government assistance on a tax-free basis and then deduct the resulting expenditures (either as current expenses or as capital cost allowance) would result in income for tax purposes that does not reflect the economic outcome of the transactions.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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