30 January 2006 External T.I. 2005-0159331E5 - Long term disability lump sum 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: 1) Taxability of lump sum settlement payment of future disability benefits;
2) CRA's view on whether lump sum settlement payment of future disability benefits is a considered a capital gain

3) CRA's opinion of whether relevant legislation will be amended, and whether any amendment will be retroactive.

Position: 1) Where an individual receives a lump sum payment in lieu of future benefits that would have been otherwise paid under an employer long-term disability plan, in circumstances such that the payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy in accordance with subparagraph 39(1)(a)(iii) of the Act, it is our view that the proceeds are not taxable under paragraph 6(1)(f) of the Act.

2) In accordance with subparagraph 39(1)(a)(iii) of the Act, it is our view that the proceeds are not taxable.

3) The role of the CRA is to administer and enforce the Act and Regulations as enacted by Parliament. It is the role of the Department of Finance to consider changes to existing tax legislation.

Reasons: Jurisprudence; Subparagraph 39(1)(a)(iii).

							2005-015933
XXXXXXXXXX 						Darlene Green
(613) 957-2082
January 30, 2006

Dear XXXXXXXXXX:

Re: Taxability of Lump Sum Payments post Tsaiprailis

This is in response to your email of November 16, 2005 wherein you requested confirmation of the Canada Revenue Agency's (the "CRA") position regarding taxability of lump sum payments of long-term disability benefits that do not represent arrears. Further, you ask our opinion on whether the law will be amended in the near future, and if so, whether such changes would be retroactive. Finally, you ask for the CRA's view on whether such a lump sum payment of long term disability benefits is considered a capital gain.

On the basis of the decisions of the Federal Court of Appeal and the Supreme Court of Canada in the Tsaiprailis case, we continue to be of the view that taxable amounts under paragraph 6(1)(f) of the Income Tax Act (the "Act") include lump sum settlements that are attributable to disability payments in arrears and accruing to the date of the settlement. However, where an individual receives a lump sum payment in lieu of future benefits that would have been otherwise paid under an employer long-term disability plan, in circumstances such that the payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy, it is our view that the proceeds are not taxable under paragraph 6(1)(f) of the Act or as a capital gain pursuant to subparagraph 39(1)(a)(iii) of the Act.

We are unable to opine on your question of whether the legislation will be amended in the near future, and if such an amendment would be retroactive. The role of the CRA is to administer and enforce the Act and Income Tax Regulations as enacted by Parliament. It is the role of the Department of Finance to consider changes to existing tax legislation.

We are unable to confirm that the receipt of a lump-sum payment in respect of future benefits under an employer long-term disability plan will, in all cases, be considered to be a receipt of proceeds of disposition from the disposal of an interest in an insurance policy. Such a confirmation requires a finding of fact that must be made on a case-by-case basis.

We trust that our comments will be of assistance to you.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch