1 February 2007 External T.I. 2006-0218401E5 - Disability 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 certain wage loss replacement benefits are exempt from taxation pursuant to section 19 of the Income Tax Application Rules.

Position: Question of fact.

Reasons: Both the event which causes the disability and the loss of employment must have occurred prior to 1974.

								2006-021840
XXXXXXXXXX 							S. Lewis
(613) 941-7239
February 1, 2007

Dear XXXXXXXXXX:

Re: Wage Loss Replacement

We are writing in response to your letter of December 5, 2006, wherein you inquire whether certain wage loss replacement benefits are taxable under paragraph 6(1)(f) of the Income Tax Act (the "Act"). We also acknowledge additional information you provided in our conversation on January 31, 2007.

You indicated that you were diagnosed with scoliosis in the 1972/1973 school year. Shortly after the diagnosis you began treatment for your scoliosis, which was unsuccessful. From 1979 - 1984 you had three surgeries in an attempt to relieve your symptoms. Between these surgeries you attempted to maintain a normal life and continued to work until you were finally unable to do so in 1990. In 1984, you first received disability payments from a disability plan to which your employer had contributed. Each taxation year since you have received payments from which your insurer has withheld income tax.

Recently you have read the Ontario Government's May 2006 document, entitled "A Guide to your Benefits". The Guide contains the following statement:

LTIP [Long Term Income Protection] benefits are taxable unless your disability, or what caused your disability, occurred before January 1, 1974.

In light of that statement, it is your view that since the diagnosis of your scoliosis occurred prior to 1974, the payments you received should be exempt from taxation and the amounts withheld by your insurer should be refunded.

Our Comments

Paragraph 6(1)(f) of the Act provides that, for 1972 and subsequent taxation years, amounts received on a periodic basis by an employee or an ex-employee as compensation for loss of income from an office or employment that were payable under a sickness, accident, disability or income maintenance plan to which the employer made a contribution, are required to be included in the employee's income.

The statement that you read in the Ontario Guide appears to be in reference to transitional provisions in section 19 of the Income Tax Application Rules (the "ITAR"). Section 19 of the ITAR stipulates that amounts that would otherwise be included in income under paragraph 6(1)(f) of the Act are to be excluded from income if they were received pursuant to a plan that existed on June 18, 1971, and were also as a consequence of an event that occurred prior to 1974. Section 19 of the ITAR has been subject to judicial interpretation, including the Federal Court Appeal's decision of Jastrebski v. The Queen, 94 DTC 6355. In that decision the Court determined that for 1974 and subsequent taxation years the exemption in section 19 of the ITAR is applicable only when the following two conditions are met:

• The amounts received by a taxpayer are attributable to an event occurring before 1974 which causes the disability; and
• The loss of employment which triggers the disability payments occurs prior to 1974.

It is a question of fact whether the amounts received are attributable to a disability caused by an event occurring before 1974. The Agency generally relies on the insurer to determine whether a disability is caused by an event occurring before 1974. In any case, since it is apparent that your loss of employment occurred after 1974, it is our view that section 19 of the ITAR would not apply in your situation. Consequently, the payments you received are taxable under paragraph 6(1)(f) of the Act.

While we regret that we could not give you a favourable response, we hope that the foregoing comments have been of assistance.

Yours truly,

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