2000 Ruling 2000-0028843 - payments to retirees for forgone medi. bene.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether payments made by the taxpayer to retired employees and/or their families for foregone benefits in respect of life insurance and medical benefits are taxable. These benefits were discontinued as a result of financial difficulties.

Position: No.

Reasons: The payment will not be considered income pursuant to section 3, section 5, section 6 or section 56, nor will such amount constitute proceeds of disposition, as defined in section 54.

XXXXXXXXXX 2000-002884

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, which was further to our request for additional information.

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in the ruling request is:

i. in an earlier return of the company or a related person;

ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the company or a related person;

iii. under objection by the company or a related person;

iv. before the courts or, if a judgment has been issue, the time limit for appeal to a higher court has not expired; and

v. the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

FACTS

1. XXXXXXXXXX (the "Taxpayer") was incorporated under the laws of Canada on XXXXXXXXXX. The Taxpayer is a XXXXXXXXXX The Taxpayer's head office is located in XXXXXXXXXX. The Taxpayer is a taxable Canadian corporation and its taxation year end is XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. The Taxpayer has been filing its Canadian federal income tax returns since XXXXXXXXXX.

5. The Taxpayer suffered ongoing severe financial difficulties

XXXXXXXXXX.

6. XXXXXXXXXX.

7. In conjunction with the commencement of the XXXXXXXXXX proceedings of the Taxpayer, the XXXXXXXXXX Court XXXXXXXXXX of XXXXXXXXXX Order gave the XXXXXXXXXX possession and control of XXXXXXXXXX to all of the Taxpayer's XXXXXXXXXX assets for the purposes of satisfying claims XXXXXXXXXX.

8. The Liquidator XXXXXXXXXX.

9. XXXXXXXXXX.

10. XXXXXXXXXX.

11. In accordance with the WURA, XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX

16. At the time of the winding-up order, there were over XXXXXXXXXX Retirees who were entitled to the Retiree Benefits. Approximately XXXXXXXXXX Retirees were entitled to the Retiree Benefits as retired employees (their spouses and dependent children) XXXXXXXXXX.

17. The Retiree Benefits consisted of: (1) group term life insurance (the "Group Life Benefits") and (2) major medical and, in the case of the XXXXXXXXXX Retirees XXXXXXXXXX dental benefits (hereinafter collectively referred to as the "Medical Benefits"). Many of the Retirees have been retired for many years, are elderly and depended upon the continuation of these benefits.

18. At the time of the winding-up order, the Medical Benefits were provided to the XXXXXXXXXX Retirees on a self-insured basis through a series of plan documents and administrative services only ("ASO") contracts. The group plans and ASO contracts were for a term of XXXXXXXXXX and covered XXXXXXXXXX Retirees XXXXXXXXXX active employees of the Taxpayer's XXXXXXXXXX. The medical benefits were provided to the XXXXXXXXXX Retirees under a "private health services plan" as defined in subsection 248(1) and were reported by the Taxpayer as non-taxable to the XXXXXXXXXX Retirees. These benefits were paid in full by the Taxpayer, and the expenses relating thereto were deducted by the Taxpayer in computing income.

19. At the time of the winding-up order, the Group Life Benefits were provided to the XXXXXXXXXX Retirees through group insurance policies XXXXXXXXXX The Group Life Benefits were provided to the XXXXXXXXXX Retirees under a "group term life insurance policy" as defined in subsection 248(1). The premiums in respect of the Group Life Benefits provided to the XXXXXXXXXX Retirees were paid in full by the Taxpayer and deducted by the Taxpayer in computing income. The Taxpayer reported the benefit in respect of the premiums as taxable to the XXXXXXXXXX Retirees.

20. XXXXXXXXXX.

21. XXXXXXXXXX.

22. XXXXXXXXXX.

23. XXXXXXXXXX.

24. Issues arose regarding the nature and status of claims with respect to the following:

(a) the Retiree Benefits;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX.

25. XXXXXXXXXX.

26. XXXXXXXXXX.

27. XXXXXXXXXX.

28. XXXXXXXXXX.

PROPOSED TRANSACTIONS

29. The Liquidator has now determined that there are sufficient assets in the estate of the Taxpayer to make distributions to ordinary creditors who have filed valid claims against the estate of the Taxpayer on account of their claims. The Liquidator accordingly proposes to make interim distributions to all ordinary creditors including such distributions to each of the XXXXXXXXXX Retirees XXXXXXXXXX in respect of their claim against the estate of the Taxpayer for recovery of the Group Life Benefits and Medical Benefits.

30. The ultimate amount to be distributed to each Retiree by the Liquidator will be determined as assets are realized and claims are determined. The amount distributed will be a percentage of each Retiree's foregone Group Life Benefit and Medical Benefit calculated by a Fellow of the Canadian Institute of Actuaries in accordance with Generally Accepted Actuarial Principles. More particularly, each Retiree's claim in the liquidation with respect to foregone Retiree Benefits was determined as the present value of such Retiree's foregone Retiree Benefits as at XXXXXXXXXX. The present value of each Retiree's foregone Medical Benefit was calculated as the expected future payout for each individual using an average annual health care cost determined on the basis of past claims experience of the Retirees as a group. The present value of each Retiree's foregone Group Life Benefit was calculated as the expected future payout for each individual using their actual amounts of term life insurance coverage reflecting future reductions in such coverage, if applicable.

31. XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

32. The purpose of the distribution being made by the Liquidator to the Retirees is to fulfill the Liquidator's obligations to settle the claims filed against the estate of the Taxpayer which is a company in liquidation. The right of the Retirees to recover as ordinary creditors against the estate of the Taxpayer on account of foregone Group Life Benefits and Medical Benefits was determined by the XXXXXXXXXX Court.

RULINGS REQUESTED AND GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transaction, and purpose of the proposed transaction, and the proposed transaction is completed as described above, our rulings are as follows:

A. No portion of any amount paid by the Liquidator to a XXXXXXXXXX Retiree XXXXXXXXXX at the time such payment is made on account of foregone Medical Benefits or Group Life Benefits will be included in the XXXXXXXXXX Retiree's XXXXXXXXXX income pursuant to section 3, section 5, section 6 or section 56 nor will such amount constitute proceeds of disposition, as defined in section 54.

B. No portion of any amount paid by the Liquidator to a XXXXXXXXXX Retiree XXXXXXXXXX Canada at the time such payment is made on account of foregone Medical Benefits or Group Life Benefits will be included in the XXXXXXXXXX Retiree's XXXXXXXXXX taxable income earned in Canada pursuant to section 115 or be subject to non-resident withholding tax under Part XIII of the Act.

C. The Liquidator and the Taxpayer will not be required to withhold and remit to Canada Customs and Revenue Agency any amount on account of any payment made by the Liquidator to a XXXXXXXXXX Retiree XXXXXXXXXX in respect of foregone Medical Benefits or Group Life Benefits pursuant to either section 153 or 215 of the Act.

CAVEAT

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency has agreed to or reviewed the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Director
Business and Publications Division
Income Tax Rulings Directorate

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