Date: 20020201
Docket: 2001-3087-IT-I
BETWEEN:
DEBRA FARROW,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at London,
Ontario on January 10, 2002 pursuant to the Informal Procedure of
this Court.
Issue
[2] The issue is whether an amount of
$17,748.60 received in 1999 by the Appellant from Clarica Life
Insurance Company ("Clarica") as a long-term disability
benefit is taxable.
Facts
[3] I find the relevant facts to be as
follows:
1. The Appellant commenced
employment with LifeScan Canada Ltd. ("LifeScan") in
1988.
2. From 1992, and possibly
earlier, to the end of 1998 the Appellant paid 100% of the
long-term disability premiums. In other words, up to at least
December 31, 1998 the plan in force with Mutual Life (predecessor
of Clarica) was an employee pay-all plan, the result of which
under section 6 of the Income Tax Act (the
"Act") is that any benefits received are not
included in taxable income which contrasts with an employer
pay-all plan the result of which is that the long-term
disability benefits received are subject to tax.
3. At the outset counsel
for the Appellant stated that there was no objection with respect
to the claimed disability amount of $4,233 and that the only
issue before the Court was the one described above with respect
to the $17,748.60.
4. Notwithstanding some
errors and confusion discussed below, the long-term disability
plan applicable to employees of LifeScan was changed to an
employer pay-all plan effective January 1, 1999, thus changing
the plan from an employee pay-all to an employer pay-all
plan.
5. The Appellant became
eligible for long-term disability benefits on July 27, 1999.
6. Janssen-Ortho Inc.
("Janssen") had been the administrator of the plan of
LifeScan and since January 1, 1999. Clarica became the carrier
for the long-term disability plan.
7. Janssen had not
provided Clarica with proper information, which resulted in
Clarica setting up the Appellant under section 1 which relates to
long-term disability payments which are not taxable.
8. By letter dated June
15, 1999 Barbara Starnes ("Starnes"), benefits
administrator for Janssen, wrote to the Appellant (Exhibit R-2)
stating as follows:
As you are aware you have been off on Short Term Disability
since January 26, 1999 and are eligible for Long Term Disability
effective approximately July 26, 1999.
The letter also states:
Long Term Disability income benefits will begin after you have
been on Short Term Disability for 26 weeks due to illness. These
benefits are equal to 66 2/3% of your monthly earnings and are
taxable.
9. Four payments were made
by Clarica as long-term benefits, each in the amount of $3,550.
The dates of payment were August 25, 1999,
September 25, 1999, October 25, 1999 and November 25,
1999. No tax was withheld on any of these payments. Tax was
withheld on all payments from and after December 25, 1999.
10. A letter of Clarica dated August
6, 1999 (Exhibit A-6) informs the Appellant that her long-term
disability benefits claim had been approved effective July 26,
1999 and further indicates that those benefits are considered to
be non-taxable income and that the Appellant would not receive a
tax slip and would not be required to report the benefits as
income on her tax return. In the margin of that letter where this
tax information is recited, there is a handwritten note of
Starnes, which states that "This is incorrect. I have
requested a revised letter.".
11. By a letter to the Appellant dated
September 9, 1999 Starnes encloses the Appellant's first
long-term disability payment in the amount of $3,550. This
letter also states that Starnes was enclosing a copy of the
letter from Clarica that has some wrong information in it and
indicating that Starnes will forward a new letter as soon as she
receives it.
12. By letter dated October 1, 1999
Clarica advises the Appellant that her long-term disability
benefits are considered taxable income and that she would receive
a tax slip for income tax purposes.
13. On February 7, 2000 the
Appellant writes a letter to Janssen stating as follows:
I enclose my cheque in the amount of three hundred seven
dollars and eighty-six cents ($307.86), to reimburse you for the
premiums paid on my behalf regarding my long term disability
benefit for 1999.
14. Once the Appellant became eligible
for long-term disability benefits on July 26, 1999 the obligation
of the employer to make any more premium payments ceased. This
was the same situation under the prior employee pay-all plan. The
said cheque for $307.86 was cashed by Janssen.
15. Submitted as Exhibit R-1 are pages
28 to 31 of an apparent manual outlining the various benefits of
the plan, which commenced on January 1, 1999. This
manual indicates that the employer pays the premium. On page 31
the following appears:
Revenue Canada will consider any LTD benefits you receive to
be taxable income, including benefits received from the
Company-provided Basic Long Term Disability benefit.
16. An e-mail dated October 25, 2000
(Exhibit R-3) from a representative of LifeScan indicates that
the cheque for $307.86 was paid in error and cashed by
Janssen's accounts receivable in error and that Janssen had
no right to hold onto the money and that they would arrange for a
cheque for $307.86 plus interest from February 17, 2000 (the date
the cheque was cashed) to the date of the new cheque to be sent
to the Appellant as soon as possible. By further e-mail dated
October 25, 2000 the Appellant advised that she does not want the
money to be returned to her at this time.
17. The amended T-4A 1999 was issued
to the Appellant indicating an amount of $17,748.60 as other
income with a clarification that this represented wage loss
replacement. However the Appellant submitted a T1 adjustment
request with her Notice of Objection on
November 1, 2000 requesting that the income she
received in 1999 from Clarica, in the amount of $17,748.60, be
considered as non-taxable long-term disability payments as she
had paid the full premium on the plan.
18. LifeScan's letter of November
1, 2000 (Exhibit R-5) sends the Appellant a cheque for $307.86
plus interest of $16.16. The Appellant chose not to cash that
cheque.
Analysis and Decision
[4] Paragraph 6(1)(f) of the
Act reads in part:
6.(1) There shall be included in
computing the income of a taxpayer for a taxation year as income
from an office or employment such of the following amounts as are
applicable:
...
(f) the total
of all amounts received by the taxpayer in the year that were
payable to the taxpayer on a periodic basis in respect of the
loss of all or any part of the taxpayer's income from an
office or employment, pursuant to
(i) a sickness
or accident insurance plan,
(ii) a disability
insurance plan, or
(iii) an income
maintenance insurance plan
to or under which his employer has made a contribution, not
exceeding the amount, if any, by which ...
[5] Notwithstanding all the confusion
and mistakes of some of the companies involved, the fact is that
the employer paid the premiums from January 1, 1999. The attempt
by the Appellant to try and have the policy considered as an
employee pay-all policy, thus producing non-taxable income, was
only carried out in February, 2000 when the Appellant sent the
cheque for $307.86. Further, that amount plus interest was
refunded to her on November 1, 2000.
[6] Also the very first notification
to the Appellant of the nature of the new plan was contained in
Janssen's letter of June 15, 1999 and that letter indicated
that the benefits were taxable. Thus when the Appellant became
eligible in July, 1999 and commenced receiving cheques in
August, 1999 she had already been advised that the benefits were
taxable.
[7] I do not believe the mistakes
mentioned above, including the cashing in error by Janssen of the
$307.86 cheque, suffice to change the nature of the policy from
one, which is an employer pay-all to an employee pay-all
policy.
[8] Consequently paragraph
6(1)(f) of the Act is applicable. The amount of
$17,748.60 was taxable income to the Appellant in 1999 and
therefore the appeal is dismissed.
Signed
at Ottawa, Canada, this 1st day of February, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-3087(IT)I
STYLE OF
CAUSE:
Debra Farrow v. The Queen
PLACE OF
HEARING:
London, Ontario
DATE OF
HEARING:
January 10, 2002
REASONS FOR JUDGMENT BY: The Honourable
Judge Terrence O'Connor
DATE OF
JUDGMENT:
February 1, 2002
APPEARANCES:
Counsel for the
Appellant: J.
Douglas Skinner
Counsel for the Respondent: Rosemary
Fincham
COUNSEL OF RECORD:
For the
Appellant:
Name:
J. Douglas Skinner
Firm:
Harrison Pensa LLP
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3087(IT)I
BETWEEN:
DEBRA FARROW,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 10, 2002 at London,
Ontario, by
the Honourable Judge Terrence O'Connor
Appearances
Counsel for the
Appellant:
J. Douglas Skinner
Counsel for the
Respondent:
Rosemary Fincham
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1999 taxation year is dismissed in accordance with
the attached Reasons for Judgment.
Signed
at Ottawa, Canada, this 1st of February, 2002.
J.T.C.C.
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