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 lump sum payments in lieu of future long-term benefits are non-taxable receipts for purposes of the Income Tax Act.
Position:
Yes.
Reasons:
The SCC affirmed in Tsiaprailis [2005] DTC 5119 that amounts received from any settlement attributable to the disposition of the employee's entitlements to future benefits under a disability insurance plan is a payment on account of capital. The CRA's position is that the term "insurance policy" is broad enough to include an employer-sponsored disability insurance plan, and therefore, subparagraph 39(1)(a)(iii) applies to exclude the amount of a capital gain in respect of the insurance policy from capital gains treatment.
2006-021719
XXXXXXXXXX D Tiu
(613) 957-8961
January 4, 2007
Dear XXXXXXXXXX:
Re: Lump Sum Payments In Lieu Of Future Long-Term Benefits
We are writing in response to your December 7th, 2006 inquiry on the above subject. You inquired whether lump sum payments in lieu of future long-term benefits are non-taxable receipts for purposes of the Income Tax Act (the "Act").
The Supreme Court of Canada ("SCC") affirmed in Tsiaprailis [2005] DTC 5119 that amounts received from any settlement attributable to the disposition of the employee's entitlements to future benefits under a disability insurance plan is a payment on account of capital. However, the SCC did not consider subparagraph 39(1)(a)(iii) of the Act in its decision. The Canada Revenue Agency's position is that the term "insurance policy" is broad enough to include an employer-sponsored disability insurance plan, and therefore, subparagraph 39(1)(a)(iii) applies to exclude the amount of a capital gain in respect of the insurance policy from capital gains treatment. Please note that if any portion of the amounts received from the settlement is attributable to an employee's entitlement to any benefit payments in-arrears, the amount is included in computing the income of the employee under paragraph 6(1)(f).
Yours truly,
Randy Hewlett
Section Manager
For Division Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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