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 payment of a lump sum to a retiree's spouse in lieu of the discontinuance of post retirement benefits under a PHSP is taxable
Position: No
Reasons: Long-standing CRA position that such payments are not income from any source that is taxable under the Act. Subsection 5(1) does not apply to include the payment in income as the taxpayer is not an employee or officer of the Company. The employer/employee relationship was severed upon the retirement and death of the taxpayer's spouse. The payment is not in the nature of salary, wages or other remuneration. Subsection 6(3) does not apply as the amount will not be received in satisfaction of an obligation arising out of an agreement made by the taxpayer with the payee immediately prior to, during or immediately after a period that the payee was an employee of the payer.
XXXXXXXXXX 2007-022014
XXXXXXXXXX , 2007
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request - XXXXXXXXXX (Social Insurance Number XXXXXXXXXX)
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer with respect to the taxable status of a lump-sum payment to a retired employee's spouse for post-retirement health care benefits. We also acknowledge additional information provided to us during various telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues described herein:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is the subject of any notice of objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
"CRA" means the Canada Revenue Agency.
"Company" means XXXXXXXXXX;
"Health Care Benefits" mean the hospital, medical and dental care benefits payable to the Taxpayer under the Plan.
"Insurer" means XXXXXXXXXX was registered under the Prepaid Hospital and Medical Services Act, the provisions of which require that an "association" carries on its activities on a non-profit basis.
"Payment" means the single, lump-sum amount that the Company will pay to the Taxpayer as consideration for the termination of her rights to continue to receive Health Care Benefits under the Plan. The amount paid to the Taxpayer represents the value of the Taxpayer's estimated future hospital, medical and dental claims under the Plan.
"Plan" means the XXXXXXXXXX Group Benefit Plan established by the Company, the terms of which require the Company to indemnify the Retiree in respect of defined hospital, medical and dental expenses incurred by the Retiree, and those of the Retiree's spouse for the duration of the Retiree and Retiree's spouse lifetimes.
"Private Health Services Plan" has the meaning as defined in subsection 248(1) of the Act.
"Retiree" is a retired employee (now deceased) of the Company: XXXXXXXXXX;
"Taxpayer" means XXXXXXXXXX.
FACTS
1. The Taxpayer files her tax returns at the XXXXXXXXXX Tax Center and deals with the XXXXXXXXXX Tax Services Office.
2. The Company is a non-profit organization exempt from income tax under Part 1 in accordance with paragraph 149(1)(l) of the Act. The fiscal year end of XXXXXXXXXX is XXXXXXXXXX.
3. The Company's business number is XXXXXXXXXX.
4. The Company was in the business of providing group medical and disability insurance using plans of the same design that was provided to the Retiree. The Company's most recent fiscal year ended on XXXXXXXXXX.
5. Neither the Taxpayer nor any individuals who do not deal with the Taxpayer at arm's length have any interests in the Company or related corporations of the Company.
6. The Plan is a Private Health Services Plan as defined in subsection 248(1) of the Act.
7. The directors of the Company have decided to wind-up the Company.
8. Pursuant to the Agreement, in consideration for the Taxpayer granting a full release and discharge to the Company of any and all claims and rights of action that the Taxpayer has under the Plan, the Company agrees to make the Payment to the Taxpayer equal to the value of the estimated Health Care Benefits foregone as a consequence of the termination of the Plan. The total Payment will be $XXXXXXXXXX.
PROPOSED TRANSACTIONS
9. The Company will request that the Taxpayer agree and confirm, in writing, that in the computation of medical expenses, for purposes of calculating the non-refundable medical expense tax credit under section 118.2 of the Act, the Taxpayer will not include any amounts that would otherwise be qualifying medical expenses until such time as the cumulative medical expenses after the termination of the Plan exceed the amount of the Payment, and that only medical expenses that exceed the amount of the Payment since termination of the Plan will be included in the computation of her medical expense credit under subsection 118.2(1) of the Act.
10. The Company will pay the full amount of the Payment on signing of the Agreement.
PURPOSE OF THE PROPOSED TRANSACTIONS
11. The Company desires to wind-up the Company and terminate the Plan. The Company desires to settle its liability under the Plan, with the Taxpayer, by compensating the Taxpayer for the loss of the Health Care Benefits that would otherwise have been received had the Plan not been terminated.
RULINGS
Provided that:
a) the Plan meets the definition of a "private health services plan" in subsection 248(1) of the Act;
b) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
c) the proposed transactions are completed in the manner described above; and
d) there are no other transactions, which may be relevant to the rulings requested,
our rulings are as follows:
A. The Payment to be received by the Taxpayer will not be included in the Taxpayer's income for purposes of the Act.
B. The Company will not be required to withhold any amount from the Payment under subsection 153(1) of the Act nor will the Company be required to file an information return in respect of the payment under the Income Tax Regulations.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are carried out on or before XXXXXXXXXX.
The CRA has not verified the accuracy of the calculations or the value of the amount that represents the Taxpayer's estimated future hospital, medical and dental claims under the Plan.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly that the CRA has agreed that the Plan meets the definition of a private health services plan in subsection 248(1) of the Act.
Yours truly,
XXXXXXXXXX
for Director
Business and Health Division
Income Tax Rulings Directorate
Legislative Policy and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 2007
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