2000 Ruling 2000-0047383 - LONG TERM DISABILITY

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

1. Is a payment received in respect of denied long-term disability coverage included in the taxpayer's income under 6(1)(f) ?

2. Is the reimbursement for legal fees income and deductible under 8(1)(b)?

3. Are the ongoing monthly payment subject to taxation under 6(1)(f) ?

Position TAKEN

1. Yes
2. Not income or deductible
3. YES

Reasons FOR POSITION TAKEN

1. Fact indicate recovery of employer paid Long term disability coverage, thus the Provisions of 6(1)(f) apply.

2. Not a reimbursement subject to income under 6(1)(j) and not deductible under 8(1)(b)

3. Long term disability coverage award.

XXXXXXXXXX 2000-004738

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear XXXXXXXXXX

Re: XXXXXXXXXX (the "Claimant")
XXXXXXXXXX
Advance Income Tax Ruling

We are replying to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the Claimant with respect to a proposed out of court settlement in respect of a long term disability suffered by the Claimant.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is, in an earlier tax return of the taxpayer or a related person, 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 or is under objection by the taxpayer or a related person or is the subject of a ruling previously issued and is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Our understanding of the facts and proposed transactions are as follows:

Statement of Facts

1. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX. The Claimant was initially employed by XXXXXXXXXX and in that connection was covered under long term disability insurance policy number XXXXXXXXXX (the "Policy") from XXXXXXXXXX the "Insurer".

2. At all material times, the Claimant was an insured beneficiary under the Policy, and was entitled to long-term disability benefits as prescribed by the Policy. In this regard, the Policy provided for the payment of a monthly gross benefit of $XXXXXXXXXX until death or the age of 65, so long as the insured continued to qualify for long-term disability coverage. Under the terms of the Policy, the payment of the monthly benefit was neither indexed nor guaranteed. The premiums on the Policy were funded by the employer.

3. On or about XXXXXXXXXX, the Claimant developed physical symptoms arising out of an accident, injury and/or illness, which resulted in a total disability.

4. The Claimant has received and continues to receive personal medical supervision and regular treatment for the illness and injuries and is not expected to ever resume any form of compensable employment.

5. In XXXXXXXXXX, the Insurer began paying monthly long-term disability benefits to the Claimant, which benefits were received by him as taxable long-term disability benefits pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act").

6. The Insurer paid long-term disability benefits to the Claimant until XXXXXXXXXX, at which time the payments ceased.

7. On XXXXXXXXXX, the Claimant commenced an action in the XXXXXXXXXX Court (General Division) (XXXXXXXXXX), by filing a Statement of Claim, Court file number XXXXXXXXXX, against the Insurer for breach of contract, general damages, and punitive damages.

8. The Claimant has now reached an out-of-court settlement with the Insurer with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling regarding the payments under the settlement.

9. The terms of the settlement provide, among other matters, for payment to the Claimant by the Insurer of $XXXXXXXXXX in respect of denied disability coverage for the period ending XXXXXXXXXX; $XXXXXXXXXX for solicitors' costs, and; $XXXXXXXXXX a month starting XXXXXXXXXX, ending on the earlier of the Claimant attaining the age of 65 or XXXXXXXXXX death. The latter amounts are intended to constitute a novation of the Claimant's entitlement to long term disability benefits under the Policy and are intended to maintain the same paragraph 6(1)(f) tax treatment as the original payments described in paragraph 5 above.

10. The obligation to make the monthly payments referred to in paragraph 9 will be met by XXXXXXXXXX (the "Second Insurer") on an assignment and assumption of the obligation of the Insurer to make the payments pursuant to the Assignment and Assumption Agreement. In consideration of the Second Insurer making such payments, the Claimant will settle XXXXXXXXXX claim against the employer and the Insurer. The Second Insurer will not, however, be released and discharged from making such payments and each payment shall, to the extent thereof and only to that extent, operate as a pro tanto release and discharge of the obligation to make such payments.

11. The Second Insurer proposes to fund its obligation to make the foregoing payments under the settlement by the purchase of an annuity contract (the "Annuity Contract") to be issued by XXXXXXXXXX ("Lifeco"). The Annuity Contract will be non-commutable, non-assignable and non-transferable.

12. The owner and annuitant (beneficiary) under the Annuity Contract will be the Second Insurer, however, an irrevocable direction will be executed in respect of the Annuity Contract directing Lifeco to make such payments directly to the Claimant.

Proposed Transaction

13. The Claimant proposes to enter into a settlement arrangement containing, among other matters, the provisions set forth in paragraph 9 above.

Purpose of the Proposed Transaction

14. The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the employer and the Insurer in respect of the Claimant's right to long-term disability benefits under the Policy and to provide for the payment of certain amounts to the Claimant on a similar basis that payments would have been paid under the Policy had the Insurer not ceased making payments in respect of the Claimant's right to long-term disability benefits.

Rulings Given

Provided that the above mentioned facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the draft Assignment and Assumption Agreement and draft Final Release is substantially the same as the documents provided to us, and that the transaction is carried out as described herein, we confirm that the payments which will be received by the Claimant as set forth in paragraph 9 above will be subject to taxation under the relevant provisions of the Act as follows:

A. The $XXXXXXXXXX payment received by the Claimant in respect of denied long-term disability coverage for the period XXXXXXXXXX, will be included in the Claimant's income in the taxation year it is received pursuant to paragraph 6(1)(f) of the Act.

B. The $XXXXXXXXXX payment received by the Claimant in respect of XXXXXXXXXX solicitors' costs will not be included in the Claimant's income in the year received under any provisions of the Act, nor will the $XXXXXXXXXX payment be deductible by the Claimant under any provision of the Act.

C. Amounts received by the Claimant on an on going monthly basis in accordance with Schedule "A" of the draft Final Release will be subject to taxation in XXXXXXXXXX hands as and when received pursuant to paragraph 6(1)(f) of the Act and the Second Insurer or Lifeco will be subject to the same withholding requirements under subsection 153(1) of the Act and section 101 of the Income Tax Regulations as the Insurer would have been if not for the Assignment and Assumption Agreement.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Canada Customs and Revenue Agency (the "Agency") and is binding on the Agency provided the Final Release and the Assignment and Assumption Agreement is executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch