2014-0517101E5 Self-employment assistance

Principal Issues: Does paragraph 12(1)(x) of the Act apply to financial assistance received under the self-employment program for support amounts such as living supports, dependent care, transportation, etc.

Position: It is a question of fact.

Reasons: Where the funding is provided through a program that is established under the Labour Market Development Agreement, the amounts appear to meet the criteria of subparagraph 56(1)(r)(iii) and would be included in income under that provision. Where the funding is provided from other programs, the amounts are assistance under paragraph 12(1)(x).

Author: Wirag, Eric
Section: 56(1)(r); 12(1)(x)

XXXXXXXXXX                                2014-051710
                                                        Eric Wirag, CPA, CMA
                                                        (613) 670-9053

July 31, 2015

Dear XXXXXXXXXX,

We are replying to your letter of November 26, 2013, in which you asked whether paragraph 12(1)(x) of the Income Tax Act (the “Act”) would apply to amounts received for financial assistance by self-employed clients of the Employment Program XXXXXXXXXX (the “Program”). We also acknowledge our telephone conversation of November 4, 2014, between members of the Income Tax Rulings Directorate, the XXXXXXXXXX and the XXXXXXXXXX. 

It is our understanding that the Program supports clients in achieving sustainable employment through a variety of measures, such as employment counselling, services, and financial supports.  You state in your letter that clients meet eligibility for financial assistance through the Program based on a “means, needs and income test.” The Program is administered through various delivery organizations throughout the province, and the financial assistance is provided through these delivery organizations. 

Our understanding is that the delivery organization will provide assistance to eligible clients who are starting their own business. In addition to meeting the means, needs or income test for eligibility, the client must provide evidence of personal investment in their self-employment venture. An eligible client may receive amounts directly from the delivery organization or the amounts may be paid to a third party for the benefit of the client for living supports, dependant care, transportation, essential work supplies, clothing and equipment, personal grooming, food, and certifications and licenses.  

Our comments:

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

You have explained that the intention of the Program is to replace the employment programs and services funded under Part II of the Employment Insurance Act (the “EI Act”) and the employment programs targeting XXXXXXXXXX recipients. Additionally, the Program must meet all of the applicable legislative and regulatory requirements listed in XXXXXXXXXX of the Program Policy Manual, of which you provided an excerpt. The list of applicable legislative and regulatory requirements includes section 63 of the EI Act, the Canada-XXXXXXXXXX Labour Market Development Agreement (“LMDA”), and other legislative and regulatory requirements and agreements. However, it is unclear to us exactly how each program under the Employment Program XXXXXXXXXX was established, and which of the legislative and regulatory requirements are applicable to each program or type of financial assistance. Therefore, we are providing the following general comments to assist you.

Paragraph 56(1)(r) of the Act

Paragraph 56(1)(r) of the Act requires that certain benefits and training-related amounts received by an individual in the year be added in computing income. Financial assistance paid to an individual or paid to a third party for the benefit of an individual is included in income under subparagraph 56(1)(r)(iii) of the Act if the financial assistance is provided under a program that is:

(i)   established by a government or government agency in Canada or by an organization, 

(ii)  similar to a program established under Part II of the the EI Act, and

(iii) the subject of an agreement between the government, government agency or organization and the Canada Employment Insurance Commission because of section 63 of the EI Act. 

The preamble to the LMDA states that the agreement is established between the XXXXXXXXXX and the Government of Canada, as represented by the Minister of Human Resources and Skills Development and the Canada Employment Insurance Commission. It also states that the Government of Canada “is authorized under section 63 of the EI Act to enter into an agreement with XXXXXXXXXX to provide for payment of contributions towards the costs of benefits and measures provided by XXXXXXXXXX that are similar to employment benefits and support measures under Part II of the EI Act and consistent with the purpose and guidelines of Part II of that Act.”

Therefore, based on the noted criteria in the preamble of the LMDA, it is our view that financial assistance provided under a program that is established by a government or organization and that is the subject of the LMDA meets the requirements of subparagraph 56(1)(r)(iii) of the Act, and the amounts would be included in the income of the client for the year under that provision. This would apply to financial assistance for living supports, dependant care, transportation, essential work supplies, personal grooming, food, certifications and licenses that are paid directly to the client or paid to a third party for the benefit of the client.

Paragraph 12(1)(x) of the Act

Generally, inducements, reimbursements, contributions, allowances, grants, and assistance received by a taxpayer in the course of earning income from a business or property are required to be included in the income of the taxpayer under paragraph 12(1)(x) of the Act, unless otherwise included in income or deducted from the cost of an outlay or expense, the cost of depreciable property, the amount of eligible capital expenditures, or the adjusted cost base of capital property. Accordingly, amounts paid to individuals to assist them in starting their own businesses would ordinarily be included in income under paragraph 12(1)(x) of the Act unless otherwise included in income under another provision, such as paragraph 56(1)(r) of the Act. Therefore, it is our view that the payments provided to clients of the self-employment component of the Program, if not included in income pursuant to paragraph 56(1)(r), would generally be taxable under paragraph 12(1)(x).

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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