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: Whether rental payments made by a band for its members would be considered a social assistance payment as described in paragraph 56(1)(u) of the Income Tax Act or a property situated on a reserve and thus exempt from tax under paragraph 87(1)(b) of the Indian Act.
Position: It depends on the facts.
Reasons: Please see the response.
Author: Mahendran, Anandavally
Section: 81(1)(a) and 56(1)(u) of the Income Tax Act and 87(1)(b) of the Indian Act
March 12, 2015
Taxpayer Services Directorate, TSDMB Income Tax Rulings Directorate
Taxpayer Services and Business and Employment Division
Debt Management Branch Ananthy Mahendran
395 Terminal Avenue, 4th Floor, 905-721-5204
Ottawa ON K1A 0L5
Attention: Chantal Roy 2014-055411
Senior Programs Officer
Individual Programs Support Section
Taxation of Social Assistance Paid to an Indian
This is in response to your email enquiry dated November 3, 2014, wherein you ask for our comments on whether rental payments made by a band for its members would be considered a social assistance payment as described in paragraph 56(1)(u) of the Income Tax Act (the “Act”) or a property situated on a reserve and thus exempt from tax under paragraph 87(1)(b) of the Indian Act.
Our understanding of the facts in your particular situation is as follows:
* A group of individuals who are Indians, as that term is defined in subsection 2(1) of the Indian Act, lost their houses on the reserve due to XXXXXXXXXX.
* Due to a shortage of housing on the reserve, these individuals, who would otherwise be resident on the reserve, were accommodated by the band in houses off, but near the reserve.
* They received additional financial assistance from their band in order to pay for their housing off the reserve.
* The band did not issue a T5007 slip, Statement of benefits, to the recipients of the monthly assistance payments. Instead, it issued a statement with a breakdown of band assistance payments.
It is always a question of fact whether a particular payment is a social assistance payment as described in paragraph 56(1)(u) of the Act or a property situated on a reserve as specified in paragraph 87(1)(b) of the Indian Act. In the case of rental assistance received by an Indian, several factors must be taken into consideration in determining the tax status of the assistance.
Whether the assistance is a social assistance payment under paragraph 56(1)(u) of the Act
Paragraph 56(1)(u) of the Act includes, in calculating a taxpayer’s income for the year, social assistance payments that are made on the basis of a means, needs, or income test, except to the extent that such payments are otherwise required to be included in the taxpayer’s income or the income of the taxpayer’s spouse or common-law partner. However, amounts included in a taxpayer’s income under paragraph 56(1)(u) are offset by a corresponding deduction under paragraph 110(1)(f) of the Act, such that there are no accompanying income tax implications related to this income inclusion other than it may affect certain income-tested programs.
The first requirement in paragraph 56(1)(u) of the Act is that the amount must be a “social assistance” payment. The term “social assistance” is not defined in the Act. It generally means a system whereby financial assistance is extended to those individuals whose income is inadequate or non-existent owing to disability, unemployment, old age, etc. Such assistance may be provided under the auspices of a private organization as well as a government organization. In the current situation, the rental assistance is an aid provided by a band to its members who are deemed to require the assistance, and therefore, it can reasonably be considered a social assistance payment.
The second requirement in paragraph 56(1)(u) of the Act is that the payment must be “made on the basis of a means, needs or income test”. In this regard, there are three main types of financial eligibility tests used in Canadian financial assistance programs. They are:
* the needs test: takes into account the assets, income, and needs, as defined in provincial legislation of the applicant;
* the income test: based solely on the income of each applicant; benefit levels set by legislation, but not based on specific needs; and
* the means test: same as an income-tested program, but also includes an asset test.
In the current situation, the band runs a program and provides financial assistance to those individuals who are deemed to require the assistance. Therefore, the payments appear to be made on the basis of a means, needs, or income of the individual.
Where these two requirements are met, the rental payments made by a band for its members would be considered a social assistance payment as described in paragraph 56(1)(u) of the Act.
Whether the assistance is exempt from tax under paragraph 87(1)(b) of the Indian Act
Paragraph 81(1)(a) of the Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that “the personal property of an Indian or a band situated on a reserve” is exempt from taxation. Accordingly, in order for the paragraph 87(1)(b) exemption to apply, the person claiming the exemption must meet the following two requirements: (1) the person must be an Indian and (2) the personal property of the Indian must be situated on a reserve. With respect to the first requirement, an Indian is defined in subsection 2(1) of the Indian Act as a person who is registered as an Indian or is entitled to be registered as an Indian.
With respect to the second requirement, the courts have determined that income, including social assistance payments, is personal property for purposes of section 87 of the Indian Act. Therefore, to satisfy the second requirement, what must be determined is whether the assistance received by the Indian is situated on a reserve. The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor. If the most significant factors connect the property to a location on a reserve, the income will be exempt from tax under paragraph 87(1)(b) of the Indian Act.
It is the position of the Canada Revenue Agency that if a social assistance payment is made under a program run by a First Nation (which can generally be characterized as a program that makes benefits available only to Indians) and if the recipient of the social assistance payment is an Indian who is resident on a reserve, then the assistance received under such a program will be sufficiently connected to the reserve to be exempt from tax under paragraph 87(1)(b) of the Indian Act.
Furthermore, it is always a question of fact whether in a particular situation the social assistance is actually paid by a band pursuant to a program which provides benefits only to Indians and whether the recipient is an Indian who is resident on a reserve. For example, if social assistance is paid under a special program run by a government or private organization (other than a band or band council), such a program will not generally be characterized as a program that makes benefits available only to Indians. Also, the nature of the housing arrangement (whether it is temporary or permanent) can play an important role in determining whether the recipient is resident on a reserve.
In the current situation, if the rental assistance payments are made under a band assistance program and the recipients of the payments are Indians who would otherwise be resident on the reserve and their off-reserve accommodation is a temporary arrangement, then the assistance received under the band assistance program can reasonably be considered to be sufficiently connected to the reserve to be exempt from tax under paragraph 87(1)(b) of the Indian Act, as the purpose of the assistance is to accommodate the loss of their homes on the reserve and the housing on the reserve is limited.
In the event that the rental assistance payment is not exempt under paragraph 87(1)(b) of the Indian Act, it will be treated as an income inclusion with an offsetting deduction as described below.
Reporting requirements to the recipient of social assistance
To the extent that a payment is a “social assistance payment” and is “made on the basis of a means, needs or income test,” the recipient of such assistance is required to include the amount received in his or her income pursuant to paragraph 56(1)(u) of the Act. However, paragraph 110(1)(f) of the Act allows the recipient to deduct this amount in computing taxable income for the year.
Reporting requirements to the payer of social assistance
Subsection 233(1) of the Income Tax Regulations (the “Regulations”) requires every person who makes a payment described in paragraph 56(1)(u) of the Act to file an information return in prescribed form in respect of such payment. Social assistance payments are generally reported on a T5007 slip. However, subsection 233(2) of the Regulations lists certain exceptions from these reporting requirements.
As described in subsection 233(2) of the Regulations, the following types of payments do not have to be reported on a T5007 slip:
A payment that:
(a) is in respect of medical expenses incurred by or on behalf of the payee
(b) is in respect of child care expenses, as defined in subsection 63(3) of the Act, incurred by or on behalf of the payee or a person related to the payee;
(c) is in respect of funeral expenses in respect of a person related to the payee;
(d) is in respect of legal expenses incurred by or on behalf of the payee or a person related to the payee;
(e) is in respect of job training or counselling of the payee or a person related to the payee;
(f) is paid in a particular year as a part of a series of payments, the total of which in the particular year does not exceed $500; or
(g) is not a part of a series of payments.
A payment that is in respect of rental expenses is not included in the list of exclusions provided under subsection 233(2) of the Regulations. Therefore, to the extent that the rental assistance payment is a social assistance payment and is made on the basis of a means, needs or income test, the band is required to prepare the information return prescribed in subsection 233(1) of the Regulations (T5007) and issue a T5007 slip to the recipient.
We trust that this information will be of assistance to you.
Roger Filion, CPA, CA
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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