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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether amounts received as settlement of an action related to the entitlement to disability benefits have been correctly included in income.
Position TAKEN:
The amount was received in settlement of a the taxpayer's right to sue for damages.
Reasons FOR POSITION TAKEN:
In order to be taxed as income under paragraph 6(1)(f) the payment would have to have been paid in satisfaction of the recipient's entitlement to amounts payable pursuant to the terms of the disability insurance policy. Documentation supported the position that the payment was in exchange for a right and therefore a capital receipt.
June 9, 1994
Edmonton District Office Head Office
Client Assistance Division Rulings Directorate
Attention: Patrick Griffin J.A. Szeszycki
(613) 957-8953
940594
XXXXXXXXXX
Settlement of Claim
In respect of Disability Benefits
This is in reply to your round trip memorandum dated March 2, 1994, as supplemented by the further information provided May 3, 1994, in which you requested our views as to the correct tax treatment of an amount received by the above noted taxpayer as a settlement to a court action in respect of a claim for long term disability benefits.
Facts
The relevant facts, as we understand them, can be summarized as follows:
XXXXXXXXXX
Whether or not an amount received as a settlement of claims made as a result of a dispute over entitlement to long term disability benefits is a taxable amount under paragraph 6(1)(f) of the Act will depend on whether the amount can be considered as paid pursuant to the terms of a disability insurance plan, an income maintenance insurance plan or a sickness or accident insurance plan, to which the employer has made contributions.
The group disability plan referred to above includes as one of its criteria for eligibility to receive benefits thereunder that the member be totally disabled. The term "totally disabled" is defined within the policy contract as follows:
"'total disability' and 'totally disabled' mean, with respect to an insured person, that as a result of injury or disease is unable, during the qualifying period and the 24 month period immediately following, to perform the regular duties of the occupation in which the insured person was engaged immediately prior to the commencement of disability, and following expiry of the 24 month period, to perform the duties of any occupation for remuneration or profit within the range of the person's education, training or experience, except that the determination of 'total disability' and 'totally disabled' will be without consideration to the availability of such occupations."
With respect to the first 24 month period following the qualification period the Insurer was satisfied that XXXXXXXXXX was unable to perform the regular duties of the occupation in which she had been engaged and, therefore, she was provided benefits under the terms of the plan. Apparently, towards the end of the two-year period XXXXXXXXXX was advised that in order to enjoy continued benefits past XXXXXXXXXX she would have to submit evidence that she is unable to perform the duties of any occupation within the range of her education, training or experience. Following the expiry of the two year period she was given notice that benefits would be discontinued shortly if the requested evidence was not provided. XXXXXXXXXX payments were made on a refundable basis pending a satisfactory response from XXXXXXXXXX As no evidence was received the payments were discontinued.
The Statement of Claim and the Statement of Defense describe the underlying issue of whether XXXXXXXXXX meets the criteria for entitlement to long term disability benefits under the terms of the policy. The Full and Final Release document clearly indicates that this issue was not resolved in the settlement reached between the parties. There is no evidence available to us which would support the position that the settlement amount of $XXXXXXXXXX is an amount paid in satisfaction of periodic payments to which the payee is entitled pursuant to a disability policy and therefore taxable under paragraph 6(1)(f) of the Act. The amount appears to have been paid in exchange for XXXXXXXXXX right to take legal action in connection with the possible claims under the policy. As such, the amount in question should be treated as a capital receipt rather than an income receipt, not taxable under any provision of the Act. In Peel v. M.N.R 1987 DTC 268 similar circumstances were considered and the court concluded that the amounts were paid in satisfaction of the taxpayer's right to sue under the contract rather than as a payment in lieu of actual periodic payments payable under the policy.
It is our recommendation, therefore, that the 1992 return of XXXXXXXXXX be reassessed to delete the amount previously included in income. In addition, since the amount $XXXXXXXXXX is not being included in income, the claim for legal fees under paragraph 8(1)(b) of the Act should also be deleted.
P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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