Application of Paragraph 81(1)(h)
The purpose of this article is to describe how the income tax exemption applies to foster care providers. Section 81 of the Income Tax Act lists various amounts that are not included in computing a taxpayer’s income. In general, paragraph 81(1)(h) exempts from income social assistance payments to an individual caregiver (the “Caregiver”) for the benefit of a foster person (the “Cared-for individual”) under the Caregiver’s care. The Cared-for individual can be either a child or an adult.
The income tax exemption applies to an amount received by the Caregiver when all of the following conditions apply:
1. The payment is a social assistance payment ordinarily made on the basis of a means, needs, or income test.
2. The payment is made under a program provided for by a federal, provincial or territorial law.
3. The payment is received directly or indirectly by the Caregiver for the benefit of the Cared-for individual.
4. The Cared-for individual is not the Caregiver’s spouse or common-law partner or related to the Caregiver or the Caregiver’s spouse or common-law partner.
5. No family allowance under the Family Allowances Act or any similar allowance provided for by provincial or territorial law is payable in respect of the Cared-for individual for the period for which the social assistance payment is made.
6. The Cared-for individual resides in the Caregiver’s principal place of residence, or the Caregiver’s principal place of residence is maintained for use as the Cared-for individual’s residence, during the period for which the payment is made.
Social Assistance
Generally, social assistance means aid made by a government or government agency on the basis of need. It does not matter if the payments are made directly by a government or government agency or if they are received indirectly through another organization, be it a not-for-profit or for-profit entity. The social assistance payments may also be made to the Cared-for individual, who then pays the Caregiver.
Means, Needs, or Income Test
In determining whether the foster care payments are made on the basis of a means, needs, or income test, we consider each one to be a financial test:
- An “income” test is a test based solely on the income of the applicant.
- A “means” test, which is similar to an income test, also takes into account the assets of the applicant.
- A “needs” test takes into account the income, assets and financial needs of the applicant.
An example of a program with an income test is one where the benefits payable are reduced by a percentage of income of the Cared-for individual above a set amount.
Types of Eligible Payments
As stated above, the payments to a Caregiver can be made directly by a government or government agency. Alternatively, the government or government agency can provide funding to another organization (such as a children’s aid society, charity or a for-profit corporation), which contracts with the Caregiver. The Caregiver can be either self-employed or an employee of the paying organization. The social assistance payments may also be made to the Cared-for individual, who then pays the Caregiver.
Types of Business or Employment Relationships
Paragraph 81(1)(h) may apply where
- The Caregiver is an employee of the paying organization. In this situation, the payments are not subject to Canada Pension Plan (CPP) contributions. However, they are considered insurable earnings for Employment Insurance (EI) purposes. Accordingly, the employer is responsible for deducting and remitting EI premiums. The employer must also remit the employer premiums on these payments.
- The Caregiver is self-employed. The payments received by the Caregiver are not subject to CPP or EI.
- The Caregiver is an employee of a corporation that is owned in whole or in part by the Caregiver or a person related to the Caregiver. In this situation, the payments are not subject to CPP contributions; however, they may be considered insurable earnings for EI purposes. For more information, see the publication, Employers’ Guide – Payroll Deductions (BASIC INFORMATION) (T4001), which is available on our Web site at www.cra.gc.ca.
Rent
Where a Caregiver receives foster care payments that are exempt income under paragraph 81(1)(h), the exemption may also apply to rent paid to the Caregiver by the Cared-for individual. This only applies where the payment for foster care are exempted by paragraph 81(1)(h) and where the rent comes from social assistance payments received by the Cared-for individual. Where this is not the case, rent received by the Caregiver would not be social assistance exempted by paragraph 81(1)(h), but would simply be rental income received in the capacity of a landlord.
Caregiver’s Principal Place of Residence
The Cared-for individual must reside in the Caregiver’s “principal place of residence”, or the Caregiver’s “principal place of residence” must be maintained for use as the Cared-for individual’s residence, during the period for which the payment is made.
An individual’s “principal place of residence” is the place where the individual regularly, normally or customarily lives. In our view, the place where the individual normally sleeps is a significant factor in making this determination. Other significant factors include the location of the individual’s belongings, where the individual receives his or her mail, and where the individual’s immediate family, including the individual’s spouse or common-law partner and children, reside.
The “principal place of residence” requirement is not met in situations where the Caregiver and the cared-for individual do not share common living areas in the residence. This includes the kitchen, living room, dining room, family room and entrances to the home. For example, where the Caregiver lives in one unit of a duplex and the Cared-for individual lives in the other unit, the principal place of residence requirement would not met.