30 January 2007 External T.I. 2006-0199501E5 - Settlement In Respect Of Future LTD 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:

Tax treatment of a lump sum settlement received by an employee or former employee in respect of future long-term disability ("LTD") benefits under an employer's self-funded LTD plan.

Position:

Where an employer's self-funded LTD plan is not an insurance plan, it is our view that Tsiaprailis [2005] DTC 5119 (SCC) would have no direct relevance in the tax treatment of a lump sum settlement received by an employee or former employee in respect of future LTD benefits under the plan. In the absence of any other information, it is our view, where an employee receives a lump sum benefit under an uninsured wage loss replacement plan pursuant to the terms of an employment contract, the amount is to be included in computing the taxpayer's income under subsection 5(1) or section 6, as income from an office or employment.

Reasons:

Reading of the relevant legislation and Agency's general position in IT-428 regarding uninsured wage loss replacement plans.

									2006-019950
XXXXXXXXXX 								D Tiu
(613) 957-8961
January 30, 2007

Dear XXXXXXXXXX:

Re: Lump Sum Settlement In Respect of Future Long-Term Disability Benefits

We are writing in response to your August 3rd, 2006 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX/Tiu). You inquired as to the tax treatment of a lump sum settlement received by an employee or former employee in respect of future long-term disability ("LTD") benefits under an employer's self-funded LTD plan. You indicated that the employer's self-funded LTD plan is not an insurance plan.

Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Notwithstanding the foregoing, we are prepared to provide the following general comments.

Where an employer's self-funded LTD plan is not an insurance plan, it is our view that Tsiaprailis [2005] DTC 5119 (SCC) would have no direct relevance in the tax treatment of a lump sum settlement received by an employee or former employee in respect of future LTD benefits under the plan. As detailed in paragraph 7 of interpretation bulletin IT-428, Wage Loss Replacement Plans, a plan for purposes of paragraph 6(1)(f) of the Act must be an "insurance" plan. Uninsured employee wage loss benefits are required to be included in employment income by virtue of subsection 5(1) and paragraph 6(1)(a). It is to be noted that, while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. If, however, insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. If the arrangement merely consists of an unfunded contingency reserve on the part of the employer, it would not be an insurance plan.

In the absence of any other information, it is our view, where an employee receives a lump sum benefit under an uninsured wage loss replacement plan pursuant to the terms of an employment contract, the amount is to be included in computing the taxpayer's income under subsection 5(1) or section 6, as income from an office or employment.

We trust that the foregoing is satisfactory.

Yours truly,

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