According to Public Safety Canada, a disaster is a hazard that overwhelms a community’s ability to cope and may cause serious harm to people’s safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.
The Canada Revenue Agency (CRA) understands that disasters can cause great difficulties for taxpayers whose primary concerns during these times are their families, homes, businesses, and communities.
Those giving to charities in times of disasters should remember to give wisely.
Financial assistance payments from your employer or to your employee
If an employer makes a financial assistance payment to an employee because of a disaster, is it taxable?
A financial assistance payment that an employer makes to an employee is not taxable if the person received the payment in his or her capacity as an individual and not as an employee. The CRA considers a person to have received a payment in his or her capacity as an individual when all the following conditions are met:
- The individual was affected by a disaster (for the criteria, go to www.publicsafety.gc.ca/cdd).
- The payment is philanthropic, to compensate the individual for personal losses or damage he or she suffered during a disaster.
- The payment is made within a reasonable time after a disaster.
- The payment is voluntary, reasonable, and bona fide.
- The payment is made to an individual dealing with the company at arm’s length (for example, the individual does not control the company or is not related to a person who controls the company). See Income Tax Folio S1-F5-C1: Related persons and dealing at arm's length, for more information.
- The payment is not made to a shareholder, a connected person (for example, a person related to a shareholder or a shareholder of a related corporation), or a person of influence (for example, an executive with power to control company decisions).
- The payment is not based on employment factors such as performance, position, or years of service.
- The payment is not made in exchange for past or future employment services or to compensate for loss of income.
- The payment is not the regular salary paid to an individual who is unable to report to work because of a disaster.
- The employer has not taken a business expense deduction for the payment.
If an employer makes a financial assistance payment to an employee who is a shareholder or an executive, is it taxable?
When a financial assistance payment is received by a shareholder, a connected person, or a person of influence, the facts must be examined to determine whether the payment was received in his or her capacity as an individual (that is, not as an employee or a shareholder). If so, it is not taxable. If the employee received the payment on the same basis as other employees, the payment is likely to be considered to have been received in his or her capacity as an individual, assuming all the other conditions listed above are met.
If an employer makes a financial assistance payment to an employee, is the payment tax-deductible?
If the financial assistance payment is made to an individual in his or her capacity as an employee, the payment is taxable and the employer can deduct it as a business expense if it is reasonable and was incurred to earn business income. The taxable portion of the payment should be reflected in the employee’s T4 information slip in Boxes 14 and 40.
If the financial assistance payment is made to an employee in his or her capacity as an individual (see above), the payment is not taxable and the employer cannot deduct it as a business expense.
The employer is not entitled to claim a charitable donation tax credit or a deduction for the payment because it is not a gift made to a registered charity or other qualified donee.
Goods and services tax/harmonized sales tax (GST/HST)
GST/HST will not apply to financial assistance payments that an employer makes to an employee, including an employee who is a shareholder, when the conditions, as outlined above for income tax purposes, are met and the payments are not taxable for income tax purposes. If the employer’s financial assistance payment to an employee is taxable for income tax purposes, the GST/HST does not apply to the payment since the GST/HST does not apply to salaries, wages, commissions, and other remuneration. In either case, the employer cannot claim an input tax credit for the payment.
Financial assistance payments from your government
Is government assistance paid to an individual taxable?
Generally, a disaster relief payment that an individual receives from a government, municipality, or public authority for personal losses and expenses is not taxable and is not included in the recipient’s income for income tax purposes. This includes payments for temporary housing, clothing, and meals. As well, government compensation for loss of or damage to a personal residence does not ordinarily result in any income tax consequences.
Is government assistance paid to a business taxable?
Generally, government assistance that a business receives to help offset the cost of expenditures incurred because of a disaster can either directly reduce the amount of business expenses incurred or be included in income and the business expenses deducted when incurred in the normal manner. In either case, the business will effectively have no net income related to the assistance.
Government assistance received to help replace destroyed or damaged property will generally reduce the capital cost of that property. To the extent that the government assistance is compensation for property that has been lost or destroyed, the amount of the assistance is treated similarly to insurance proceeds so that the compensation is proceeds of disposition.
Generally, the Income Tax Act allows a business to elect to postpone recognizing a capital gain or a recaptured capital cost allowance when a former property is disposed of involuntarily and a replacement property is acquired. A replacement property must be acquired within a specified time limit (generally within 24 months of the end of the tax year in which the proceeds were receivable). A property is a replacement property for a former property only if specific conditions are met.
To ease the financial burden that might arise when a business elects to postpone recognizing a capital gain or a recaptured capital cost allowance, the CRA may accept security in lieu of payment of taxes owing until the final determination of taxes is made or the period for acquiring the replacement property has expired. For more information on posting security, see paragraph 3 of Interpretation Bulletin IT-259R4, Exchange of Property.
If the business is unable to pay or secure the tax debt arising from such a scenario, it is CRA policy to work with the business to establish a payment arrangement based on the business’s ability to pay.
The business should file its income tax return in the normal manner for the year that the proceeds are received and file its replacement property rules election within the specified time to amend the tax assessment for the year the proceeds were received and reduce the amount payable on the proceeds. In the meantime, to offer security or discuss a payment arrangement, the business can call the CRA at 1-888-863-8657.
Goods and services tax/harmonized sales tax (GST/HST)
In general, the provision of financial assistance by a government (or other grantor) to an individual or a business to subsidize the individual or business for losses or expenses resulting from a disaster will not be considered a supply and, therefore, the GST/HST will not apply to it, if there is no direct link between the financial assistance and a supply by the individual or business to the grantor or a third party specified by the grantor. For more information, see Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies.
Compensation you receive from your employer or government is, generally, not considered income in most circumstances. Any time you receive compensation for a disaster, including insurance, it’s always wise to talk to an accountant or tax preparer to ensure your non-taxable position.