18 February 2004 2003-0050841E2 - Paragraph 81(1)(h)

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: Does paragraph 81(1)(h) apply to amounts received in specific situations?

Position: 1. Amounts received by a corporation do not qualify.

2. Received by a principal shareholder who resides in the residence where the cared-for individuals reside may qualify.

3. Amounts received by the shareholder who resides elsewhere do not qualify.

Reasons: 1. Paragraph 81(1)(h) does not apply to corporations.

2. Question of fact.

3. The requirement that the cared-for individual resides in the caregiver's principal place of residence is not satisfied.

XXXXXXXXXX 		T. Young, CA
		2003-005084
February 18, 2004

Dear XXXXXXXXXX:

Re: Paragraph 81(1)(h) of the Income Tax Act (the "Act")

We are writing in response to your letter of November 26, 2003, concerning the application of paragraph 81(1)(h) of the Act to a specific situation.

In your letter, you outlined this scenario:

? A for-profit corporation ("ACo"), registered in Alberta, is licensed to operate a 24-hour a day care facility for handicapped adults.

? ACo is owned 50% each by Mrs. B and Mrs. C.

? The principal residence of Mrs. B is used to provide the 24-hour care and is considered to be the principal place of residence of the handicapped adults.

? Mrs. C provides some part-time care in her principal residence, but her residence is not considered the principal place of residence of the handicapped adults.

? ACo receives funding from the Persons with Developmental Disabilities organization under the Foster Child Care Act for the following services:

(i) room and board for the handicapped adults at an hourly rate;

(ii) time spent accompanying the handicapped adults to community functions and businesses calculated on an hourly basis; and

(iii) providing 24-hour home care under the "Support Home Program".

Using the above information, you asked us a number of questions.

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide the following comments, which may be of assistance to you.

As you are aware, the paragraph 81(1)(h) applies to the income of an individual (the "Caregiver") when the following conditions apply:

1. The payment is a social assistance payment ordinarily made on the basis of a means, needs, or income test.

2. The payment is made under a program provided for by federal, provincial or territorial law;

3. The payment is received directly or indirectly by the Caregiver for the benefit of the Cared-for individual;

4. The Cared-for individual cannot be the Caregiver's spouse or common-law partner or related to the Caregiver or the Caregiver's spouse or common-law partner;

5. No family allowance under the Family Allowances Act or any similar allowance provided for by provincial or territorial law can be payable in respect of the Cared-for individual for the period for which the social assistance payment is made.

6. The Cared-for individual must reside in the Caregiver's principal place of residence, or the Caregiver's principal place of residence must be maintained for use as the Cared-for individual's residence, during the period for which the payment is made.

With respect to the specific points you raised:

(a) Confirm that paragraph 81(1)(h) can only apply to the funding described in (iii) above.

Whether paragraph 81(1)(h) is applicable to a particular situation must always be determined based on the particular facts of a situation. However, it may be possible for the foster care funding received for (i), (ii) and (iii) to qualify for the exemption provided the requirements of the provision are otherwise met.

(b) Confirm that paragraph 81(1)(h) does not apply to corporations.

The exemption in paragraph 81(1)(h) only applies to income received by individuals, other than trusts, not corporations.

(c) Assuming the income is taxable to ACo, is it possible to expense the amount of this income from ACo to the shareholders on a tax-exempt basis?

Amounts paid to shareholders to provide foster care may be deductible by ACo. The amounts received by the shareholders may qualify for the exemption in paragraph 81(1)(h) provided the requirements of the provision are otherwise met.

(d) Under what circumstances would the clause, "the caregiver's principal place of residence must be maintained for use as the cared-for individual's residence" apply? Would Mrs. C meet this criterion?

In general terms, the clause means that, whether or not the cared-for individual is actually residing in the caregiver's principal place of residence, the residence is maintained for that purpose. This may apply to amounts (often called "bed reservation fees") paid to individuals to maintain their residence available for use by a foster person. In our view, Mrs. C would not qualify because her principal place of residence would not be the residence of the cared-for individual nor is it maintained for that purpose.

(e) Please confirm that if any of this income is exempt, then the expenses incurred to generate this income would accordingly not be tax deductible.

Since the income ACo receives is taxable, expenses incurred by ACo to earn this income would, subject to the provisions of the Act, be deductible. However, any expenses incurred by an individual in respect of income that is exempt by virtue of paragraph 81(1)(h) would not be deductible.

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 Planning Branch