30 January 2006 External T.I. 2005-0154041E5 - Long term disability lump sum payments

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 a lump sum payment of long term disability benefits is taxable.

Position: Question of fact. Taxable amounts under paragraph 6(1)(f) of the Act include lump sum settlements that are attributable to disability payments in arrears and accruing to the date of the settlement. However, where an individual receives a lump sum payment in lieu of future benefits that would have been otherwise paid under an employer long-term disability plan, in circumstances such that the payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy, it is our view that the proceeds are not taxable; not under paragraph 6(1)(f) of the Act or as a capital gain.

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

							2005-015404
XXXXXXXXXX 						Darlene Green
(613) 957-2082
January 30, 2006

Dear XXXXXXXXXX

Re: Long Term Disability Benefits - Lump Sum Payment

This is in response to your correspondence of October 11, 2005 wherein you enquired about the tax implications of a lump sum disability payment. You indicated that you currently receive a monthly long term disability benefit and that you are considering a lump sum payout in lieu of the monthly payment.

Our Comments:

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 general comments.

Paragraph 6(1)(f) of the Income Tax Act (the "Act") generally applies to include in employment income any benefits paid to an employee from a long term disability plan where the employer pays all or part of the premiums for the plan. The amount of the benefit included in income is reduced by the amount, if any, of employee contributions. Taxable amounts under paragraph 6(1)(f) of the Act include lump sum settlements that are attributable to disability payments in arrears and accruing to the date of the settlement. However, where an individual receives a lump sum payment in lieu of future benefits that would have been otherwise paid under an employer long-term disability plan, in circumstances such that the payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy, it is our view that the proceeds are not taxable; not under paragraph 6(1)(f) of the Act or as a capital gain.

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 that must be made on a case-by-case basis.

We trust that our comments will be of assistance to you.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch