13 September 2005 External T.I. 2005-0141511E5 - Disability Policy Settlement - Future 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.

Principal Issues: Whether the receipt of a lump sum amount in settlement of future benefits under a employer disability insurance plan is non-taxable by virtue of subparagraph 39(1)(a)(iii) of the Act.

Position: Provided the circumstances are such that the lump sum payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy, it is our view that the recipient of the proceeds will not have realized a capital gain in respect of such proceeds. Whether the receipt of a lump sum payment in respect of future benefits under an employer long-term disability plan will, in all cases, be considered to be a receipt of proceeds of disposition from the disposal of an interest in an insurance policy is a question of fact which must be considered on a case by case basis.

Reasons: Subparagraph 39(1)(a)(iii).

XXXXXXXXXX                                      2005-014151

September 13, 2005

Dear XXXXXXXXXX:

We are writing in reply to your e-mail enquiry dated July 11, 2005, wherein you requested confirmation of the CRA's position on the taxation of a lump-sum disability payment received by an individual in respect of future benefits under an employer long-term disability plan. 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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.

The SCC in Tsiaprailis v. The Queen (2005 SCC 8) held that a lump-sum payment in respect of arrears benefits payable under an employer long-term disability plan is taxable under paragraph 6(1)(f) of the Income Tax Act (the "Act"), and that the portion of the payment "for future benefits is in the nature of a capital payment and is not taxable under [paragraph] 6(1)(f)". The Federal Court of Appeal in this case (The Queen v. Tsiaprailis, (2003 FCA 136)), also stated that the settlement payment in respect of future benefits is a "capital transaction" resulting from "the disposition of a right". Consistent with the comments of the SCC and FCA, we are of the view that a lump-sum payment in respect of future benefits under an employer long-term disability plan constitutes proceeds of disposition of a capital property by the recipient.

Generally, the proceeds of disposition of a capital property are used to calculate the vendor's capital gains for the taxation year in which the disposition occurs. However, paragraph 39(1)(a) of the Act provides that capital gains will not be considered to result from the disposition of certain types of property. In particular, subparagraph 39(1)(a)(iii) of the Act excludes from the determination of a taxpayer's capital gains, any gains arising from the disposition of an insurance policy, including a life insurance policy, but excluding that part of an insurance policy that is deemed by paragraph 138.1(1)(e) of the Act to be an interest of the policyholder in a related segregated fund trust. Accordingly, where an individual receives a lump-sum payment in respect of future benefits under an employer long-term disability plan, in circumstances such that the lump-sum payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy, it is our view that the recipient of the proceeds will not have realized a capital gain in respect of such proceeds.

We are unable to confirm that the receipt of a lump-sum payment in respect of future benefits under an employer long-term disability plan will, in all cases, be considered to be a receipt of proceeds of disposition from the disposal of an interest in an insurance policy. Such a confirmation requires a finding of fact which much be made on a case by case basis.

While our comments are not binding on the Agency with respect any particular situation, we do hope that the comments will clarify the CRA's views in regard to the taxability of lump-sum payments in respect of future benefits under an employer long-term disability plan.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate