2004 Ruling 2004-0085121R3 - Long Term Disability Payments

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Are the long-term disability payments received by the taxpayer included in the taxpayer's income for the period when provincial legislation provides that such amounts must be assigned to an insurance company

Position: No.

Reasons: The taxpayer must hold all amounts received as long-term disability payments in trust for the insurance company.

XXXXXXXXXX 2004-008512

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the additional information in your XXXXXXXXXX letters. We also acknowledge receipt of the additional information provided in our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the above taxpayers, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Canada Revenue Agency ("CRA").

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "Taxpayer" is XXXXXXXXXX;

(b) "Insurance Company" is XXXXXXXXXX;

(c) "Employer's Insurance Company" is XXXXXXXXXX;

(d) "Court" is the Ontario Superior Court of Justice;

(e) "Insurance Act" is the Ontario Insurance Act, R.S.O. 1990, c. I.8;

(f) "Accident" is the XXXXXXXXXX;

(g) "Benefits" are the long-term income protection disability payments payable to the Taxpayer by the Employer's Insurance Company;

(h) "Pension Benefits" are the retirement pension payments payable to the Taxpayer under the Public Service Pension Plan;

(h) "Statutory Accident Benefits" are the benefits to which the Taxpayer is entitled pursuant to section 268 of the Insurance Act;

(i) "Statement of Claim" is the Statement of Claim filed by the Taxpayer and other persons affected by the Accident in Court on XXXXXXXXXX;

(j) "Co-Defendants" are XXXXXXXXXX and the Insurance Company;

(k) "Settlement" is the Minutes of Settlement dated XXXXXXXXXX;

(l) "Settlement Funds" is the lump sum amount received by the Taxpayer pursuant to the Settlement;

(m) "Assignment Agreement" is the Assignment Agreement executed by the Taxpayer and the Insurance Company on XXXXXXXXXX, respectively;

Facts

1. The Insurance Company is a corporation incorporated under the laws of Ontario and is a resident of Canada for purposes of the Act. The Insurance Company currently carries on an automobile insurance business in Canada, with its principal place of business located in XXXXXXXXXX.

2. The Insurance Company's federal tax number is XXXXXXXXXX. The Insurance Company deals with the XXXXXXXXXX Centre and files its tax returns at the XXXXXXXXXX Taxation Centre in XXXXXXXXXX.

3. The Taxpayer resides in XXXXXXXXXX and is a resident of Canada for purposes of the Act. The Taxpayer's social insurance number is XXXXXXXXXX. The Taxpayer deals with the XXXXXXXXXX Tax Services Office and files her tax returns at the XXXXXXXXXX Taxation Centre.

4. The Taxpayer sustained multiple serious and permanent injuries in the Accident. The Taxpayer's ability to carry on normal daily activities is extremely restricted as a result of the injuries sustained in the Accident.

5. The Taxpayer, and certain other persons affected by the Accident, filed the Statement of Claim against the Co-Defendants in Court on XXXXXXXXXX. The Insurance Company provided third-party automobile insurance coverage on the vehicles operated by two of the Co-Defendants at the time of the Accident.

6. As set out in the Statement of Claim, the Taxpayer sought non-pecuniary and pecuniary damages for past and future loss of income and earning capacity and for future health and care costs.

7. The Taxpayer is entitled to, and has been receiving, the Benefits from the Employer's Insurance Company. The Taxpayer is also entitled to, and has been receiving, the Statutory Accident Benefits from the Insurance Company.

8. Subsection 267.8(9) of the Insurance Act provides the following:

Future collateral benefits

"A plaintiff who recovers damages for income loss, loss of earning capacity, expenses that have been or will be incurred for health care, or other pecuniary loss in an action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of an automobile shall hold the following amounts in trust:

1. All payments in respect of the incident that the plaintiff receives after the trial of the action for statutory accident benefits in respect of income loss or loss of earning capacity.

2. All payments in respect of the incident that the plaintiff receives after the trial of the action for income loss or loss of earning capacity under the laws of any jurisdiction or under an income continuation benefit plan.

3. All payments in respect of the incident that the plaintiff receives after the trial of the action under a sick leave plan arising by reason of the plaintiff's occupation or employment.

4. All payments in respect of the incident that the plaintiff receives after the trial of the action for statutory accident benefits in respect of expenses for health care.

5. All payments in respect of the incident that the plaintiff receives after the trial of the action under any medical, surgical, dental, hospitalization, rehabilitation or long-term care plan or law.

6. All payments in respect of the incident that the plaintiff receives after the trial of the action for statutory accident benefits in respect of pecuniary loss, other than income loss, loss of earning capacity and expenses for health care."

9. Subsections 267.8(12) and (13) of the Insurance Act provide the following:

Assignment of future collateral benefits

"The court that heard and determined the action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of the automobile, on motion, may order that, subject to any conditions the court considers just,

(a) the plaintiff who recovered damages in the action assign to the defendants or the defendants' insurers all rights in respect of all payments to which the plaintiff who recovered damages is entitled in respect of the incident after the trial of the action,

(i) for statutory accident benefits in respect of income loss or loss of earning capacity,

(ii) for income loss or loss of earning capacity under the laws of any jurisdiction or under an income continuation benefit plan,

(iii) under a sick leave plan arising by reason of the plaintiff's occupation or employment,

(iv) for statutory accident benefits in respect of expenses for health care,

(v) under any medical, surgical, dental, hospitalization, rehabilitation or long-term care plan or law, and

(vi) for statutory accident benefits in respect of pecuniary loss, other than income loss, loss of earning capacity and expenses for health care; and

(b) the plaintiff who recovered damages in the action co-operate with the defendants or the defendants' insurers in any claim or proceeding brought by the defendants or the defendants' insurers in respect of a payment assigned pursuant to clause (a).

Application of subsection (9)

(13) Subsection (9) no longer applies if an order is made under subsection (12)."

10. Following negotiations between counsel for the Taxpayer and counsel for the Insurance Company, the parties agreed to settle the issues set out in the Statement of Claim without proceeding to trial.

11. The Settlement included the following:

(a) The Insurance Company agreed to pay the Taxpayer a lump sum amount in respect of her claims for damages and to deliver the Settlement Funds no later than XXXXXXXXXX.

(b) The Taxpayer agreed to hold any Benefits received after XXXXXXXXXX in trust, for the benefit of the Insurance Company, in accordance with subsection 267.8(9) of the Insurance Act, and agreed to remit such Benefits to the Insurance Company.

(c) The Taxpayer agreed to enter into the Assignment Agreement with the Insurance Company. The Assignment Agreement requires that the Taxpayer assign her legal and equitable rights to all Benefits payable to her after XXXXXXXXXX , in accordance with subsection 267.8(12) of the Insurance Act. In the event that the Assignment Agreement is subsequently held to be invalid, illegal or unenforceable, the Assignment Agreement will constitute an irrevocable direction to the Employer's Insurance Company to forward all Benefits payable to the Taxpayer to the Insurance Company, effective with respect to all Benefits payable to the Taxpayer after XXXXXXXXXX.

(d) If the Taxpayer elects to receive Pension Benefits prior to XXXXXXXXXX , the Taxpayer will assign any such Pension Benefits to the Insurance Company from the date such Pension Benefits are received until XXXXXXXXXX. The total of any Pension Benefits to be assigned to the Insurance Company will not exceed the amount of Benefits otherwise assigned to the Insurance Company had the Taxpayer retired on XXXXXXXXXX. If the assignment of Pension Benefits is prevented by statute or pursuant to the terms and conditions of the Public Service Pension Plan, the Taxpayer agrees to hold such benefits in trust for the Insurance Company and to remit such benefits to the Insurance Company. If the Taxpayer chooses to retire after XXXXXXXXXX, the Taxpayer will continue to assign the Benefits until the date of actual retirement.

(e) The Taxpayer agreed to the "consent to a judgement" in accordance with the Settlement.

12. The Assignment Agreement terminates on the later of XXXXXXXXXX and the date that the Taxpayer no longer qualifies for Benefits. The Taxpayer's entitlement to Benefits ceases when the Taxpayer retires.

Proposed Transactions

13. The Taxpayer and the Insurance Company will comply with the terms of the Settlement and the Assignment Agreement, as described in paragraphs 11 and 12 above.

14. Upon receipt of a favourable advance income tax ruling, the Taxpayer will release to the Insurance Company the Benefits received after XXXXXXXXXX and currently held in trust. The Taxpayer will file her XXXXXXXXXX and subsequent income tax returns on the basis that the Benefits received after XXXXXXXXXX are held in trust for, and/or have been assigned to, the Insurance Company and are not the Taxpayer's income for income tax purposes.

In the event that the Taxpayer retires prior to XXXXXXXXXX, the Taxpayer will file her income tax returns on the basis that a portion of the Pension Benefits received in each year are held in trust for, and/or have been assigned to, the Insurance Company and are not the Taxpayer's income for income tax purposes. The amount that will be excluded from income inclusion will be equal to the Benefits the Taxpayer would have been entitled to receive had the Taxpayer not retired.

In the event that the Taxpayer elects to retire after XXXXXXXXXX, the Taxpayer will file her income tax returns on the basis that the Benefits received after XXXXXXXXXX are held in trust for, and/or have been assigned to, the Insurance Company and are not the Taxpayer's income for income tax purposes.

15. All Benefits paid or payable to the Taxpayer after XXXXXXXXXX will be remitted to the Insurance Company.

Purpose of the Proposed Transactions

16. The proposed transactions will enable the Taxpayer and the Insurance Company to comply with the terms of the Settlement and the Assignment Agreement, as described in paragraphs 11 and 12 above. The Taxpayer has continued to receive Benefits subsequent to XXXXXXXXXX and currently holds these amounts in trust for the Insurance Company. These Benefits are subject to the provisions of section 267.8 of the Insurance Act. The purpose of the proposed transactions is to enable the Taxpayer to comply with the requirements of section 267.8 of the Insurance Act and to fulfill the Taxpayer's obligations under the Assignment Agreement.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. No amounts received by the Taxpayer, as Benefits under the long-term income protection disability insurance plan and assigned to the Insurance Company pursuant to the Assignment Agreement, including the amounts held in trust and described in paragraph 14 above, is required to be included in computing the Taxpayer's income for income tax purposes to the extent that such amounts are subject to the Assignment Agreement.

B. No amounts received by the Taxpayer as Pension Benefits, and assigned to the Insurance Company pursuant to the Assignment Agreement, including the amounts held in trust and described in paragraph 14 above, is required to be included in computing the Taxpayer's income for income tax purposes to the extent that such amounts are subject to the Assignment Agreement.

C. All Pension Benefits, received by the Taxpayer after the Assignment Agreement terminates, will be included in computing the income of the Taxpayer pursuant to paragraph 56(1)(a) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are initiated on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch