2004 Ruling 2004-0096101R3 - Lump-Sum Payment In Lieu of PHSP Plan

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.

Principal Issues: Whether payment of a lump sum to retirees in lieu of the discontinuance of post retirement benefits under a PHSP, is taxable.

Position: No.

Reasons: Long-standing CRA position that such payments are not income from any source that is taxable under the Act.

XXXXXXXXXX 2004-009610

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request - XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted company with respect to the taxable status of a lump-sum payment to retired employees for post-retirement health care benefits.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of a taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of a taxpayer or a related person;

(iii) is under objection by a taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

(v) is 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 relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

1. "Company" means XXXXXXXXXX.

2. "Retirees" are collectively the following retired employees of the Company:

Name
SIN
Address
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

3. "Insurer" means the XXXXXXXXXX.

4. "Plan" means the Group Benefit Plan (Group Policy Number XXXXXXXXXX) established by the Company with the Insurer, the terms of which require the Insurer to indemnify the Retirees in respect of defined hospital, medical and dental expenses incurred by the Retirees (and, in some cases, their dependents) for the duration of the Retirees' lifetimes.

5. "Health Care Benefits" mean the hospital, medical and dental care benefits payable to a Retiree under the Plan.

6. "Payment" means the single, lump-sum amount that the Company will pay to each Retiree as consideration for the termination of the Retiree's rights to continue to receive Health Care Benefits under the Plan. The amount paid to each Retiree represents the present value of the Retiree's estimated future hospital, medical and dental claims under the Plan based on actuarial determinations made by XXXXXXXXXX.

7. "CRA" means the Canada Revenue Agency.

Facts

8. The Company is a taxable Canadian corporation.

9. The Company's business number is XXXXXXXXXX.

10. The Company files its tax returns at the XXXXXXXXXX Tax Center and it deals with the XXXXXXXXXX tax services office.

11. The Company has a floating taxation year-end, which ends on the XXXXXXXXXX. The Company's most recent taxation year ended on XXXXXXXXXX.

12. The Plan is a "private health services plan" as defined in subsection 248(1) of the Act.

13. In XXXXXXXXXX, the Company sold all of its operating businesses to unrelated third parties, and consequently, as of XXXXXXXXXX, it no longer carried on a business in Canada nor had any employees in Canada.

14. Following the sale of the Company's operating divisions, the Company was advised by the Insurer that effective XXXXXXXXXX, the Plan would be terminated and it will no longer provide Health Care Benefits to the Retirees on the basis that the Company does not have an active employee population in Canada.

15. The Company approached XXXXXXXXXX other private health insurers in Canada in order to find a replacement carrier that would be willing to provide the Retirees with the same or similar benefits as those offered under the Plan. Each carrier refused to provide coverage for reasons similar to those given by the Insurer.

16. After seeking legal advice, the Company began negotiating, and in some cases has negotiated, a settlement with the Retirees, under which the Retirees and the Company will enter, or have entered, into a Release and Discharge Agreement (hereafter the "Agreement").

17. Pursuant to the Agreement, in consideration for the Retiree granting a full, final and complete waiver, release and discharge to the Company of any and all claims, indemnities, damages, and rights of action that the Retiree has or may pretend to have under the Plan, the Company agrees to make the Payment to the Retiree equal to the present value of the estimated Health Care Benefits foregone as a consequence of the termination of the Plan. The total of all of the Payments will be $XXXXXXXXXX , made as follows:

Name
Amount
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Total
$XXXXXXXXXX

18. The Company commenced making initial disbursements to each Retiree who, as of the date of this Ruling Request, has signed the Agreement, equal to the amount of the Payment less a reserve for federal and provincial tax computed at the top-marginal tax rate for the Retiree's province of residence. These disbursements were made in XXXXXXXXXX.

Proposed Transactions

19. The Company will request that each Retiree agree and confirm, in writing, that in the computation of medical expenses for purposes of calculating the non-refundable medical expense tax credit under section 118.2 of the Act, neither the Retiree nor his or her spouse will include any amounts that would otherwise be qualifying medical expenses until such time as their cumulative medical expenses since termination of the Plan exceed the amount of the Payment, and that only medical expenses that exceed the amount of the Payment since termination of the Plan will be included in the computation of their medical expense credit under subsection 118.2(1) of the Act.

20. The Company will pay the Retirees who have signed the Agreement the amount withheld from the Payment that is described in paragraph 18 above. For Retirees who have not yet signed the Agreement, the Company will pay the full amount of the Payment on signing of the Agreement.

Purpose of the Proposed Transactions

21. The Company desires to compensate each Retiree for the loss of the Health Care Benefits that would otherwise have been received had the Plan not been terminated.

Rulings Given

Provided that:

(a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) The proposed transactions are completed in the manner described above; and

(c) There are no other transactions, which may be relevant to the ruling requested,

our rulings are as follows:

A. The Payments received by the Retirees are not income from any source that is taxable under the Act.

B. The Company is not required to withhold any amount from the Payment under subsection 153(1) of the Act nor is the Company required to file an information return in respect of the payment under the Income Tax Regulations.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are carried out on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

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