While the immediate business disruptions resulting from the recent flooding in Southern Alberta have, to some extent, been dealt with, the hard work of rebuilding has only just begun. While tax obligations are often over-looked in these difficult times, penalties and interest, as well as substantive tax liabilities, can result as a consequence of actions taken during the rebuild process. Fortunately, the Canada Revenue Agency (CRA) has recently issued some much needed guidance for affected Albertans. While the impact of the guidance must be assessed on a case-by-case basis, the following summarizes at a high level the applicable principles.
Extension of Tax Return Deadlines
Generally speaking, corporations with December 31st tax year ends would have had to file income tax and, possibly, GST returns by July 2, 2013. The normal deadline for individuals carrying on business was June 17, 2013. Fortunately, the Minister of National Revenue has exercised her discretion to extend some of these tax filing deadlines, confirming, on June 26, 2013, that taxpayers affected by flooding in Alberta will have until August 2, 2013, to file their federal tax returns. The press release indicates that the CRA "will proactively adjust the due date for all federal business and other returns filed in Alberta that were due during the flooding" such that a federal business return filed by August 2, 2013, will be considered as filed on time. While the press release refers only to "flooding", it is hoped that this will extend to late-filed returns which were due to the associated mandatory evacuation of many areas, including portions of downtown Calgary.
Notwithstanding this welcome relief, there remain some unanswered questions, which will need to be reviewed in the coming weeks. For example, many businesses which were unable to file election forms or objections on a timely basis due to the flooding will need to evaluate their options in obtaining extensions. Notably, the "automatic" relief does not extend to payment deadlines, such as monthly tax instalments. Where taxpayers have not been able to meet payment deadlines due to circumstances beyond their control (including flooding and mandatory evacuation), consideration should be given to making an application under taxpayer relief legislation to request the cancellation or waiver of interest and penalties. The CRA has indicated that it will expedite taxpayer relief requests, which are considered on a case-by-case basis.
While the Government of Alberta has not announced a similar automatic extension, the Alberta Tax and Revenue Administration indicated, on June 25, 2013, that penalties and interest will be waived where a corporation or business was unable to comply with legislated tax filing or payment requirements due to the flooding and mandatory evacuation. Where such penalties or interest are assessed, applications for relief will need to be made on a case-by-case basis.
Taxation of Alberta Flood Relief Assistance Payments
In the past couple of weeks, the CRA has also provided guidance to taxpayers on the taxation of disaster relief payments.
Payments to Individuals from Government
The CRA has confirmed its position that flood relief assistance payments made to individuals by a government, municipality, or public authority in respect of the individual's personal losses or expenses, as opposed to business expenses, will not be taxable. This position extends to payments to individuals from a government for temporary housing and meals and for loss or damage to an individual's personal residence.
While the CRA has not commented directly on the taxation of the pre-loaded debit cards distributed by the Government of Alberta in relation to the flood, the foregoing position should apply such that no tax should be payable on these amounts.
Payments to Individuals from Employer
Subject to a very few legislated exceptions, when an employee receives any payment from his or her employer, that payment is included in his or her employment income and hence subject to tax at ordinary income rates. The CRA has historically said that even disaster relief payments will fall within this taxable category. In the spirit of generosity displayed during the Alberta flooding, various Alberta employers, however, may wish to offer non-taxable assistance to their impacted employees. In one recent example, the CRA has confirmed that, where certain conditions are satisfied, the payment can indeed be made on a non-taxable basis.
In the example reviewed, an employer with several employees that were impacted by the flooding was creating a relief fund by collecting donations from other employees and then matching those contributions. The relief fund is to be directed to employees to assist in recovery efforts, with the payments to an employee being based solely on need and the extent of damage to that employee's property. In that situation, the CRA listed a series of criteria to be met which, if satisfied, would generally result in the payment being non-taxable, on the basis that the payment was made to a particular employee in their capacity as an impacted individual, rather than in their capacity as an employee. The enumerated criteria are as follows:
- The individual was affected by a disaster. For these purposes, the CRA refers to the definition of disaster used by Public Safety Canada, which includes, amongst other things, a naturally occurring phenomenon which overwhelms the community's ability to cope and results in 100 or more people affected, injured or evacuated. It should be beyond doubt that the Alberta flooding meets this criteria;
- The payment is made within a reasonable period of time and is philanthropic in purpose to compensate individuals for personal losses or damage they suffered during the disaster;
- The payment is voluntary, reasonable, and bona fide;
- The payment is not based on employment factors such as performance, position, or years of service, etc.;
- The payment is not made in exchange for past or future employment services or to compensate for loss of income and is not in respect of regular salary paid to an individual who is unable to report to work because of a disaster;
- The employer does not take a business expense deduction in respect of the payment (a charitable deduction would also not be available); and
- The payment is made to an individual dealing with the employer at arm's length and is not made to a shareholder or a person with influence to control the employer's decision. Where this requirement is not satisfied, the CRA will examine the particular facts to determine whether the payment was received by the individual in his or her capacity as an individual (i.e., not as an employee or shareholder) and is therefore not subject to income tax. Where the facts demonstrate that the individual received the payment on the same basis as other individuals dealing at arm's length with the employer, the CRA confirmed that the payment would likely be considered to have been received in his or her capacity as an individual, assuming all other conditions above are met.
The articulation of these criteria by the CRA remove some of the uncertainty formerly surrounding the undertaking of funding relief by employer organizations.
Payments in Respect of Business Losses from Government
The provisions of the Income Tax Act as well as the CRA's position with respect to disaster relief payments provide for a similar, although not identical, result in respect of payments made for business losses. The CRA has recently provided its views on three types of business-related government assistance.
Consistent with the provisions of the tax legislation, the CRA confirmed that government assistance received to offset the cost of business expenditures reduces the amount of otherwise deductible business expenses incurred. Alternatively, the full assistance payment made be included in income, with an offsetting deduction for the expense actually incurred, such that there is no net income inclusion.
Where government assistance is received in order to compensate for lost or damaged property, the payment will generally constitute proceeds of disposition to which the ordinary rules surrounding the computation of gains or losses from the disposition of property would apply. The Income Tax Act, however, contains certain rules which permit property owners to defer the tax on any gain to the extent that the owner reinvests the proceeds in a replacement property within a specified period. Where property characterized for tax purposes as capital property, depreciable property, or eligible capital property was damaged by the flooding, the owner may electively be able to defer any tax consequences so long as a replacement property (within the meaning of the applicable provisions) was acquired, in the case of capital property and depreciable capital property, by the end of the owner's second tax year following the year of the flooding (or, if longer, 24 months after the end of the tax year, pursuant to proposed amendments), and, in the case of eligible capital property, by the end of the owner's first tax year following the year of the flooding (or, if longer, 12 months after the end of the tax year, pursuant to proposed amendments). The replacement property rules are complex and should be reviewed with respect to each particular taxpayer's circumstances.