Taxation of financial assistance to 1998 ice storm victims

March 11, 1999

In January 1998, a severe ice storm devastated parts of Ontario, Quebec, New Brunswick, and Nova Scotia. When disaster strikes, the federal government provides financial assistance to provinces through the Disaster Financial Assistance Arrangements (DFAA) if the cost of dealing with the disaster would otherwise place an undue burden on a province's economy. Federal government assistance to ice storm victims includes:

• $175 million in advance payments to affected regions under the DFAA;
• financial assistance through a number of temporary recovery programs aimed at helping small and medium-sized businesses, and farmers cope with expenses not covered by the DFAA;
• employment measures under the Employment Insurance Act and initiatives under the government of Canada Youth program.

Some ice storm victims may also have received support from their employers in the affected regions, and from citizens across the country through voluntary organizations.

Taxation of financial assistance from the federal and provincial governments

In general, when victims of a disaster receive payments from the government for personal losses, these payments are not taxable. Normally, the following will apply:

Payments received from governments to cover personal losses: no tax consequences
Payments received and spent to replace destroyed rental or business properties: no tax consequences
Payments received and spent to repair damaged rental or business properties: no tax consequences
Personal expenses: not deductible
Personal losses: not deductible

Assistance from employers

Usually, financial assistance that an employer gives to employees is a taxable benefit and must be reported as part of their income. Due to the extenuating circumstances of the ice storm, a tax remission order will eliminate federal tax on most payments made to ice storm victims by their employer. However, the payments must have been made under all of the following conditions:

• the assistance must be in addition to the employee's regular salary, paid even when the employee was unable to report to work because of the ice storm;
• the assistance must be seen as reasonable under the circumstances;
• the assistance must be based on an employer-employee relationship, and not the result of the employee holding shares in the business;
• the employer must have granted the assistance on a voluntary basis;
• the employer must have made the payment without regard for the employee's work performance, length of service, or any other work-related factor;
• the employer cannot have granted financial assistance in exchange for past or future services; and
• the employer cannot have used the amount of financial assistance to compensate the employee for the loss of employment income.

With the remission order, employees will not have to include the amount of any such assistance in their income when they file their 1998 income tax return. Employers are not required to withhold taxes on these payments. Employers who give financial assistance to their employees will be allowed to deduct those payments as business expenses when they file their income tax returns.

For more information

Anyone who wants more information about the tax consequences of financial assistance received should contact a Revenue Canada representative at the local tax services office.