2 March 2010 External T.I. 2009-0322501E5 - Payment in Settlement of Grievance

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 a payment made by an employer in settlement of a grievance concerning life insurance benefits is taxable.

Position: Not taxable insofar as the amount can be established as reasonable compensation for damages due to the employer's negligence. Any amount in excess of the resulting financial loss suffered is a taxable benefit.

Reasons: Damages for personal losses are non-taxable.

								2009-032250
XXXXXXXXXX 							Rita Ferguson
								519-645-5261
March 2, 2010

Dear XXXXXXXXXX :

Re: Death Benefit Payment

This is in response to your letter of May 6, 2009 inquiring about the tax status of a payment made to an employee to settle a grievance concerning life insurance benefits.

The company you work for (the "Employer") has a group insurance policy that provides optional life insurance coverage for an employee's spouse. A particular employee (the "Employee") had purchased this insurance coverage for his spouse in the amount of $20,000. Premiums for the coverage were remitted by the Employer but paid by the Employee via payroll deductions. When the spouse reached the age of sixty-five the insurer notified the Employer that the coverage had expired and the Employer adjusted the Employee's payroll deductions accordingly. However, the Employee did not receive any formal notification that his spouse was no longer insured and therefore did not take any steps to convert the group coverage to a personal life insurance policy within the time frame allowed by the insurer. According to your collective labour agreement, the onus was on the Employer to inform the Employee of this change but it failed to do so in this instance. When his spouse died, the Employee submitted a claim to the insurer. The claim was denied because coverage under the group policy had ceased. The Employee filed a complaint through his employee association. As a result of negotiations and in order to settle the grievance, the Employer made a lump sum payment to the Employee in the amount of $20,000. Your question is whether this payment is taxable, insurable and pensionable.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This

Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Subject to certain listed exceptions, paragraph 6(1)(a) of the Income Tax Act (the "Act") requires that the value of any benefits received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment be included in the taxpayer's income from employment. The broad wording of this provision means that a taxable benefit may exist where there is any connection between the particular payment or benefit and the particular office or employment. It is our view that a lump sum payment such as the one made to the Employee in this case would be made in connection with his employment such that paragraph 6(1)(a) would apply.

Nevertheless, we have previously provided interpretations in certain situations where it was established that payments were received as compensation for damages suffered as the result of misinformation or negligent advice provided by the administrators of employee benefit programs, and have concluded in those cases that such payments would not be taxable to the recipient. If it can be conclusively established that the basis for the payment to the Employee in this case is compensation for a financial loss he suffered as the result of negligence on the part of the Employer, then a reasonable amount for damages would be non-taxable. In determining such an amount, we would consider the amount of the life insurance benefit that the Employee would have received if he had converted the life insurance policy on his spouse to a personal policy within the time frame allowed by the terms of the group insurance, less the amount of premiums that he would have been required to pay for such a personal policy from the time of conversion up to the date of his spouse's death, to be a reasonable amount for non-taxable damages. The amount of the payment in excess of such a reasonable amount would still be considered an employment benefit taxable under paragraph 6(1)(a) of the Act. As per Guide T4130 "Employers' Guide - Taxable Benefits and Allowances", if an employee benefit is taxable, it is also pensionable and if the taxable benefit is paid in cash, it is also insurable.

We trust the above comments are of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch