16 March 1998 External T.I. 9730785 - manitoba flood

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:

Whether financial assistance to be paid by a corporation, to an individual who is both the sole shareholder and a full-time employee of the corporation, will qualify for the tax relief provided in the remission order which was recommended by the Minister of National Revenue, regarding Red River flood relief payments to employees.

Position TAKEN:

Question of fact best resolved by a TSO. Nonetheless, based on the limited information provided, the proposed financial assistance, in this case, appears to be excessive, such that it would be a benefit conferred on the individual as a shareholder and included in the individual’s income pursuant subsection 15(1) of the Act, and would not be deductible to the paying corporation.

Reasons FOR POSITION TAKEN:

Position taken in other similar files. Where an individual is the sole shareholder and employee of a corporation, in order to consider financial assistance received from the corporation as reasonable and as having been received in his or her capacity as an employee, it would have to be established that employees with similar duties and responsibilities to another employer of a similar size, but who are not shareholders or related to shareholders of the other employer-corporation, have received financial assistance of similar amounts under similar conditions as that provided the individual. Such a determination requires a review of all the facts of a particular case, in relation to other cases encountered.

5-973078
XXXXXXXXXX M. Azzi

March 16, 1998

Dear Sirs:

Re: 1997 Manitoba Flood Victims

This is in reply to your letter of November 12, 1997, wherein you requested our views on the tax treatment of financial assistance to be paid by a corporation to an individual who is both the sole shareholder and a full-time employee of the corporation. We also acknowledge receipt of the copy of your letter which was sent to the Honourable Herb Dhaliwal, Minister of National Revenue.

We understand that the financial assistance is to compensate the individual for personal losses and damages suffered as a result of the 1997 flood in the Red River Valley of Manitoba. You indicate that the assistance will be in the amount of $12,500, which represents 25% of the individual’s net loss of $50,000. You enquire whether this assistance will qualify for the tax relief provided in the remission order which was recommended by the Minister of National Revenue, regarding Red River flood relief payments to employees (the “Remission Order”). In particular, you question whether the amount of this assistance is reasonable, as you feel that the other requirements of the Remission Order have been met.

Our Comments

To qualify for the tax relief provided in the Remission Order, the financial assistance provided to employees must, inter alia, be reasonable and must be received as a result of an employer-employee relationship, and not as a result of the employee holding shares in the employer. If it is established that the financial assistance is received by an individual in his or her capacity as a shareholder of the paying corporation, the financial assistance will be included in computing the shareholder’s income pursuant to subsection 15(1) of the Income Tax Act (the “Act”) and will not be deductible in computing the corporation’s income. If, on the other hand, it is established that the financial assistance is received by the individual in his capacity as an employee of the paying corporation, the assistance is reasonable, and the other requirements of the Remission Order are met, the financial assistance will not be taxable in the employee’s hands and will be deductible in computing the employer’s income.

It is a question of fact to be determined on a case-by-case basis as to whether financial assistance is reasonable and whether it was received by an individual in his or her capacity as a shareholder or an employee of a corporation. No specific guidelines have been established for making this determination. However, in our view, where an individual is the sole shareholder and employee of a corporation, in order to consider financial assistance received from the corporation as reasonable and as having been received in his or her capacity as an employee, it would have to be established that employees with similar duties and responsibilities to another employer of a similar size, but who are not shareholders or related to shareholders of the other employer-corporation, have received financial assistance of similar amounts under similar conditions as that provided the individual. As such a determination requires a review of all the facts of a particular case, in relation to other cases encountered, your local Tax Services Office is in a better position to provide you with assistance in this regard. Nonetheless, based on the limited information provided, the above-described assistance of $12,500 appears to be excessive, such that, in our view, it would be a benefit conferred on the individual as a shareholder and included in the individual’s income pursuant to subsection 15(1) of the Act, and would not be deductible to the paying corporation.

We have communicated with Mr. Gord Mizak of the Winnipeg Tax Services Offices (204-984-3920) regarding the above issues. He has indicated that he would be pleased to provide you with any further assistance which you may require in establishing the amount of financial assistance which would qualify for the tax relief provided in the Remission Order.

We trust that these comments will be of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Mr. Gord Mizak, Client Services

Winnipeg Tax Services Office

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