2001 Ruling 2001-0106033 - SETTLEMENT UNDER DISABILITY INSUR.

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 CCRA.

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

Principal Issues:

Whether benefits paid to taxpayer under a group disability insurance policy would be taxable when received if insurer financed payments by means of the purchase of an annuity similar to a structured settlement. The taxpayer was concerned that the purchase of the annuity by the insurer to fund the payments might result in the value of the annuity being included in XXXXXXXXXX income in one year.

Position: Payments would be taxed as received.

Reasons:

The payments made to the taxpayer fell within the purview of paragraph 6(1)(f) of the Act in that they were periodic payments made pursuant to a group disability plan to which the employer contributed, and they were paid in respect of the loss of employment income. The purchase of the annuity was merely a funding vehicle to finance the periodic payments.

XXXXXXXXXX 2001-010603

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer involved,

none of the issues involved in the ruling request is:

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

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

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

(iv) before the courts or, if a judgment has been issued, 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 are as defined in the Act unless otherwise indicated.

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

FACTS

1. XXXXXXXXXX (the "taxpayer") was born on XXXXXXXXXX, and presently resides in the City of XXXXXXXXXX. In XXXXXXXXXX, the taxpayer was employed by XXXXXXXXXX (the "employer").

2. The taxpayer was the beneficiary under a disability policy issued by XXXXXXXXXX, which was issued to the employer. All premiums under the Policy were paid by the employer.

3. On or about XXXXXXXXXX , the taxpayer became completely disabled as the result of XXXXXXXXXX and was unable to engage in the pre-disability employment or any other gainful employment. Consequently, the taxpayer applied for disability benefits under the Policy. The Policy provided for payment of long-term disability benefits to age XXXXXXXXXX, without indexation, in the amount of $XXXXXXXXXX per month. The taxpayer received these payments from XXXXXXXXXX up to and including XXXXXXXXXX, at which time the benefits were terminated. The disability benefits were included in the taxpayer's income pursuant to paragraph 6(1)(f) of the Act.

4. The taxpayer commenced an action in the Ontario Superior Court of Justice against XXXXXXXXXX (the "Defendants").

PROPOSED TRANSACTIONS

5. The taxpayer is proposing to accept a tentative out-of-court settlement reached with the Defendants, subject to receipt of a favourable advance income tax ruling with respect to the payments under the settlement.

6. The terms of the settlement provide for payments to the taxpayer of $XXXXXXXXXX per month effective as of XXXXXXXXXX, without indexation, and payable to the earlier of death or age XXXXXXXXXX years. In addition, XXXXXXXXXX will pay the taxpayer's legal costs amounting to $XXXXXXXXXX.

7. The obligation to make the monthly payments referred to above will be met by XXXXXXXXXX by virtue of an assignment from XXXXXXXXXX, pursuant to an Assignment and Assumption Agreement. Under this agreement, XXXXXXXXXX will assign to XXXXXXXXXX funds of $XXXXXXXXXX that it has on deposit with XXXXXXXXXX which will be used by XXXXXXXXXX to purchase an annuity issued by XXXXXXXXXX. In addition, XXXXXXXXXX will pay XXXXXXXXXX a fee of $XXXXXXXXXX for assuming its obligations under the settlement.

8. The annuity purchased by XXXXXXXXXX will be used to fund its obligation to make the periodic payments under the settlement. The annuity contract will be non-commutable, non-assignable and non-transferable. The owner and annuitant (beneficiary) under the annuity contract will be XXXXXXXXXX. However, an irrevocable direction will be executed in respect of the annuity contract directing XXXXXXXXXX to make such payments directly to the taxpayer. The taxpayer will be issued a T4 slip in respect of payments received in each year.

9. In consideration of XXXXXXXXXX making such payments, the taxpayer will settle the claims against the Defendants. XXXXXXXXXX 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.

PURPOSE OF THE PROPOSED TRANSACTIONS

10. The purpose of the proposed transaction is to settle the claim of the taxpayer against the Defendants in respect of the disability, and to provide for the payment of disability benefits in respect of such claim.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described in paragraphs 5 to 9 above, our ruling is as follows:

We confirm that the payments, which will be received by the taxpayer as set forth in paragraph 6 above, will be required to be included in the taxpayer's income when received, by virtue of paragraph 6(1)(f) of the Act.

The ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the CCRA provided the transactions are completed by XXXXXXXXXX.

The ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

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