21 March 2007 External T.I. 2006-0215791E5 - Workers' Compensation Settlement - Post Mortem

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 or not the post mortem Workers' Compensation settlement amount or the related pre-settlement interest is taxable under the Act.

Position: Neither the settlement amount nor the related pre-settlement interest income is taxable under the Act.

Reasons: The death occurred before the right to the settlement amount was determinable. The CRA has certain administrative exceptions for interest income, such as pre-settlement interest related to amounts for personal injury, death, and retroactive workers' compensation, which are not considered taxable.

XXXXXXXXXX 								2006-021579
									Kathryn McCarthy, CA
March 21, 2007

Dear XXXXXXXXXX:

Re: Workers' Compensation Estate Settlement - Post Mortem

We are writing in response to your letter of November 24, 2006, concerning the above noted subject.

You indicated that your father passed away from lung cancer and emphysema in XXXXXXXXXX. In 2005, a claim was made to the Workplace Safety and Insurance Board (WSIB) of Ontario with respect to his XXXXXXXXXX and consequently, various amounts were paid to the estate of your late mother (who had died in XXXXXXXXXX ) as follows:

Spousal award						  $ XXXXXXXXXX
Funeral expenses					          XXXXXXXXXX
Pension adjustment (2005 T5007 amount)		    XXXXXXXXXX
Compensation adjustment for XXXXXXXXXX 		    XXXXXXXXXX 

Total Settlement received				    XXXXXXXXXX 

Interest received on late payment			    XXXXXXXXXX 

Total Settlement and Interest received		   $XXXXXXXXXX 

All of the amounts were paid in 2005, except the compensation adjustment of $XXXXXXXXXX, which was paid in 2006. In 2005, the WSIB issued a T5007, Statement of Benefits, supplementary slip for $XXXXXXXXXX. You enquire as to whether or not the settlement amount of $XXXXXXXXXX and the pre-settlement interest of $XXXXXXXXXX are taxable under the Income Tax Act (the Act).

Our Comments

Workers' compensation payments are included in income pursuant to paragraph 56(1)(v) of the Act. By virtue of subparagraph 110(1)(f)(ii), however, these amounts are deducted in computing a taxpayer's taxable income for the year. As a result, there generally are no accompanying income tax implications related to the income inclusion other than a possible effect on income-tested programs. In our opinion, the settlement amount included on the T5007 and received by your mother's estate must be included in the income of the estate for the 2005 taxation year.

Interest income, including pre-settlement interest, is generally taxable and included in income pursuant to paragraph 12(1)(c) of the Act. In the case of pre-settlement interest, however, the CRA has certain administrative exceptions. For example, pre-settlement interest related to amounts for personal injury, death, and retroactive workers' compensation is not considered taxable. Therefore, the pre-settlement interest received by your mother's estate would not be taxable. Please note that any interest income earned by the estate after the settlement would be required to be included in income.

We trust 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