25 March 2003 Internal T.I. 2003-0001577 - LUMP SUM RE MEDICAL AND LIFE BENEFITS

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:

Are payments received in settlement of an action for compensation for discontinuance of retiree health benefits taxable?

Position: No

Reasons:

Not income under section 5, section 6 or section 56. The amounts do not constitute proceeds of disposition, as defined in section 56. Consistent with prior Ruling regarding the same employer.

				March 25, 2003

	TORONTO NORTH TSO		HEADQUARTERS
				Income Tax Rulings
	Attention:  Bruce McNally			  Directorate
				Renée Shields
(613) 948-5273

				2003-000157

Taxation of payments in settlement of foregone life and health benefits

This is in response to your memorandum of February 5, 2003 with which you forwarded correspondence from XXXXXXXXXX (the "Taxpayer") regarding the taxation of amounts he received in settlement of an action for termination of retiree life and health benefits.

XXXXXXXXXX

On XXXXXXXXXX the Income Tax Rulings Directorate issued ruling 2000-002884 (the "Ruling") to the Employer with respect to the taxation of amounts in respect of foregone Benefits paid to the Represented Retirees. The Ruling stated that no portion of any amount paid by the XXXXXXXXXX of the Employer to the Represented Retirees would be included in the Represented Retirees' income pursuant to section 3, section 5, section 6 or section 56 of the Income Tax Act (the "Act"). The Ruling went on to state that such amounts would not constitute proceeds of disposition, as defined in section 54 of the Act.

The Taxpayer has written to the Canada Customs and Revenue Agency ("CCRA") to request that his Settlement Amount receive the same tax treatment as similar amounts paid to the Represented Retirees for foregone Benefits. As indicated above, his letter was forwarded to our attention. Since written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002, we cannot provide binding comments to the Taxpayer. However, we felt our comments may be of assistance to your office in considering the Taxpayer's submission.

In prior similar cases, in determining whether amounts received in settlement of a claim for foregone Benefits would be taxable, certain factors have been considered relevant.

Where an employer/employee relationship was severed on retirement, it has been considered that subsection 5(1) of the Act does not apply to include a payment similar to the Settlement Amount in income because the retired individual is not an employee or officer of the former employer. In addition, we have opined that payments like the Settlement Amount are not in the nature of salary, wages or other remuneration.

In situations similar to the Taxpayer's where a payment similar to the Settlement Amount was not received in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an employee of the payer, we have found that subsection 6(3) of the Act does not apply. While it could be argued that the obligation to provide Benefits arose out of an individual's employment contract, we have considered that such payments were made pursuant to an obligation arising out of a settlement agreement, which did not exist immediately prior, during or immediately after employment, and which was entered into as a consequence of a threatened legal action. In any event, it has been our view that such a payment does not fall within subsection 6(3) of the Act as it is not in the nature of the amounts described in paragraph 6(3)(c), (d) or (e) of the Act. In this regard, reference may also be made to paragraph 2 of IT-196R2, "Payments by Employer to Employee" which states that to be considered taxable under subsection 6(3) of the Act, any amount payable pursuant to a written or oral contract must have the nature and quality of salary, wages, commissions, etc.

We have opined that payment of an amount like the Settlement Amount is not a superannuation or pension benefit within subparagraph 56(1)(a)(i) of the Act and as defined in subsection 248(1) of the Act (see also IT-499R, "Superannuation or Pension Benefits"). Since the payment is not in respect of a loss of an office or employment of the individual, we have also opined that it is not a retiring allowance within subparagraph 56(1)(a)(ii) of the Act and defined in subsection 248(1) of the Act.

In summary, it would appear that the Settlement Amount does not fall under any source of income in the Act and, in accordance with the decision of the Supreme Court of Canada in Fries v. The Queen, 90 DTC 6662, is therefore not taxable as income from a source within the meaning of section 3 of the Act.

The above views are consistent with the approach adopted in the Ruling and in our files 964192, 961288, 921025 and 930837. Consequently, you may want to consider providing similar treatment to the Settlement Amount as was given to the amounts paid to the Represented Retirees. This is assuming that the Settlement Amount is the same in nature as the amounts recovered by the Represented Retirees.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch