Since she is keeping it, it's taxable.  It wouldn't even qualify for the special treatment for Canadian Social Security (0%-85% taxable depending on amount of other income) because basically it's just stolen funds.  If she ends up paying it back she has a "claim of right" computation in the year it's done.  Canada has an embassy and 13 consulates in the U.S. -- I wonder how hard she is trying to resolve the problem.  And can't she tell her bank not to accept them?