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: Will a lump sum payment in lieu of continued PHSP coverage for retirees of an employer that entered into insolvency prior to XXXXXXXXXX be taxable?
Position: No
Reasons: See below
XXXXXXXXXX
2012-046492
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling is:
(i) in an earlier return of the taxpayer or a related person,
(ii) 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) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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.
Definitions
In this letter, the following terms have the meanings specified:
"Benefits" means the right of a Former Employee and the Dependants of a Former Employee for payment reimbursement or coverage arising in connection with extended health benefits under the Plans;
"CCAA" means the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 as amended to the date hereof;
"Canco" means XXXXXXXXXX;
"CRA" means the Canada Revenue Agency;
"Dependant" has the meaning assigned under subsection 118(6);
"Former Employees" means individuals formerly employed by, or who held an office in and received their remuneration from Canco, its subsidiaries and their successors who met the eligibility requirements and are approved for coverage under the Plans. Any one of the Former Employees is referred to as a "Former Employee";
"PHSP" means a private health services plan;
"Plans" means the existing extended health benefits plans provided by XXXXXXXXXX under Extended Health Care Group Numbers XXXXXXXXXX; and
"Private health services plan" has the meaning assigned in subsection 248(1).
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Canco is a corporation incorporated in Canada under the Canada Business Corporations Act.
2. As part of their compensation package during the term of their employment with Canco, one of its subsidiaries, or a predecessor, the Former Employees received extended health benefit coverage under the Plans.
3. The third party administrator of the Plans is XXXXXXXXXX (the "Administrator"). Whenever a Former Employee incurs a cost that is recoverable by him or her under the Plans, he or she files with the Administrator a claim seeking recovery of the cost within the limits of the applicable Plans.
4. The Benefits covered under the Plans are, generally speaking, reasonable and customary extended health benefits. Dependants of a Former Employee may also be covered by the applicable Plans.
5. XXXXXXXXXX
6. Under the Plans, the Administrator is required to indemnify claims made by the Former Employees and their Dependants, and Canco is required to reimburse the Administrator for these claims and to pay the Administrator a fee.
7. On XXXXXXXXXX, Canco applied for, and received, XXXXXXXXXX Order pursuant to the CCAA from the Supreme Court of XXXXXXXXXX ("the XXXXXXXXXX Order").
8. After Canco obtained the XXXXXXXXXX Order, XXXXXXXXXX. The XXXXXXXXXX is set out in the XXXXXXXXXX (the "CCAA Plan"). The Former Employees were creditors included in the CCAA Plan because Canco proposed to cease coverage of the Former Employees under the Plans.
9. Coverage of the Former Employees was to continue indefinitely. As a result of the proposal to cease coverage under the Plans, the Former Employees are, for the purposes of the CCAA process, creditors of Canco.
10. The Former Employees filed claims as unsecured creditors in the CCAA proceedings. The amount claimed by the Former Employees is the present value of the expected future claims of the Former Employees under the Plans.
11. Canco was insolvent prior to XXXXXXXXXX.
12. Each of the Plans qualifies as a PHSP.
Proposed Transactions
13. Pursuant to the CCAA Plan, the Former Employees will collectively receive a payment from Canco equal to the product obtained by multiplying the amount claimed by the Former Employees in the CCAA proceedings and the percentage of their claims that each unsecured creditor will receive under the CCAA Plan (the "Payment").
14. Canco will advise the Former Employees that for purposes of calculating the non-refundable medical expense tax credit under section 118.2, neither the Former Employee nor a Dependant can include any amounts that would otherwise be qualifying medical expenses until such time as their cumulative medical expenses since the termination of the Plans exceed their respective share of the Payment.
Purpose of the Proposed Transaction
15. The Proposed Transaction is part of a larger set of transactions pursuant to the CCAA proceeding, the purpose of which is to help Canco avoid bankruptcy by compromising the claims of Canco's creditors.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, purpose of the proposed transactions, and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:
A. The Payment received from Canco by each Former Employee in accordance with 13 above, will not be taxable under the Act.
B. Canco will not be required to withhold any amounts from the Payments under subsection 153(1) nor will Canco be required to report the Payment on an information return.
The above advance income tax ruling, which is based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed XXXXXXXXXX.
Caveats
Except as expressly stated, this advance income tax ruling does not imply that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or the proposed transactions or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above. For greater certainty, the Canada Revenue Agency has not confirmed or made a determination in respect of:
(a) whether each of the Plans qualify as a PHSP, and
(b) whether Canco was insolvent prior to XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
for Director
Business and Employment Income Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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