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: Taxability of lump sum settlement payment of future disability benefits.
Position: Where an individual receives a lump sum payment in lieu of future benefits that would have been otherwise paid under an employer LTD plan, in circumstances such that the payment can reasonably be considered to be proceeds of disposition of an interest in an insurance policy in accordance with subparagraph 39(1)(a)(iii) of the Act, the proceeds are not taxable under paragraph 6(1)(f) of the Act.
Reasons: Jurisprudence; Subparagraph 39(1)(a)(iii).
2005-016055
XXXXXXXXXX Darlene Green
(613) 957-2082
April 7, 2006
Dear XXXXXXXXXX
Re: Long Term Disability (LTD) Buy-out
This is in response to your email of November 24, 2005 wherein you inquired, in the case of an employee currently receiving taxable LTD payments, whether a lump sum received in lieu of future LTD benefits will be taxable.
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.
On the basis of the decisions of the Federal Court of Appeal and the Supreme Court of Canada in the Tsaiprailis case, we are of the view that taxable amounts under paragraph 6(1)(f) of the Income Tax Act (the "Act") include lump sum settlements that are attributable to LTD payments in arrears and accruing to the date of a settlement. However, where an individual receives a lump sum payment in lieu of future LTD benefits that would have been otherwise paid under an employer LTD 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 under paragraph 6(1)(f) of the Act or as a capital gain pursuant to subparagraph 39(1)(a)(iii) of the Act.
We are unable to confirm that the receipt of a lump sum payment in respect of future benefits under an employer LTD 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
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