6 June 1994 Internal T.I. 9408117 - WAGE LOSS REPLACEMENT PLAN BENEFITS

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:

The issue is whether benefits received under a wage loss replacement plan are exempt under ITAR 19(1).

Position TAKEN:

On the basis of the information provided, it appears that the benefits are exempt.

Reasons FOR POSITION TAKEN:

For the benefits to be exempt, there are two conditions that need to be satisfied. The first is that the event that gave rise to the disability must have occurred prior to 1974. The second is that the plan must have been established prior to 1974 and must not be a changed plan subject to comments in the first sentence of paragraph 4 of IT-54. The information provided suggests that the conditions has been satisfied.

		June 6, 1994

	Sudbury Taxation Centre	Head Office
	Client Services	Rulings Directorate
Mr. Claudio Lenti (Unit 1-6)	M. Eisner
Ms. Christina Eady	(613) 957-8953
		940811

Wage Loss Replacement Plan Benefits

We are responding to the submission made to us in respect of wage loss replacement benefits received by XXXXXXXXXX The issue is whether the benefits are exempt under subsection 19(1) of the Income Tax Application Rules (ITARS).

The issue arises as a consequence of comments we set out in a letter dated April 28, 1993 (file # 923828) which you enclosed. The information in this letter indicated that

XXXXXXXXXX

included a long term disability insurance plan which provided for the payment of benefits (66_% of certain income of the disabled individual at the time of the disability) in respect of a disability extending beyond 6 months. The benefits are paid for the duration of the disability up to the age of 65.

The premiums for the insurance were shared between the employer and the employees. The basic provision of 66_% of certain income was never changed.

With respect to the above information, the taxpayer indicated that he had a destructive lung disease (emphysema) and that, as a consequence, he had been receiving disability benefits since XXXXXXXXXX. He also mentioned that since the disease was caused by a genetic deficiency that went back to his birth, he asked whether the related benefits are exempt under subsection 19(1) of the ITARS.

In considering the information supplied to us, it was not possible to provide a definitive opinion. We, accordingly, proceeded to indicate that in order for the benefits paid under the disability plan to be totally exempt from income tax, the following conditions must be fulfilled:

(a)the event that gave rise to the disability payments must have occurred prior to 1974; and

(b)the plan must have been established prior to June 19, 1971 and must not be a changed plan although the comments in the following paragraph must also be taken into account.

With respect to the condition in (b) above, it is our view that if changes were made to the plan subsequent to June 19, 1971 and the changes can be regarded as being "exceptions" referred to in the first sentence of paragraph 4 of IT-54, the benefits received under the plan would be fully exempt assuming the condition in (a) has been satisfied. On the other hand, to the extent that changes are considered to fall outside the exceptions, the resulting increase in benefits, as indicated in paragraph 21 of Interpretation Bulletin IT 428 "Wage Loss Replacement Plans", would be taxable while the remaining benefits would be exempt.

After the taxpayer had received our letter, he was in the course of proceeding to obtain information when, unfortunately, he died. However, his representative has recently made a submission in relation to the above conditions.

With respect to (a), a medical report was included with your submission. The report was prepared by

XXXXXXXXXX

and indicated that the taxpayer was diagnosed as having emphysema in 1986. In addition, the report indicates that this medical condition is of a congenital nature and that it was clinically evident in pulmonary studies carried out in November of 1974. This comment in the report was supported by a copy of the laboratory report prepared on November 12, 1974 which indicates that the findings therein were consistent with, inter alia, emphysema and there were also obstructive features as well. XXXXXXXXXX also stated that "It is certainly possible to say that a number of years before that he likely experienced diminution of his lung function secondary to that disease".

On the basis of the above information from the laboratory report and XXXXXXXXXX opinion, it is our view that it has been reasonably established that the onset of emphysema commenced prior to 1974 and that the disease resulted in the payments of the benefits in question. We, accordingly, consider the condition set out in (a) above to have been satisfied.

In determining the effect of changes that have been made to a plan for the purposes of our comments in (b) above, it is necessary to carry out a review of the terms of the plan along with the subsequent changes. As such information has not been provided to us, it is not possible for to provide you with an opinion in that regard. However, notwithstanding this point, the taxpayer's representative has provided the Department with a letter from the XXXXXXXXXX.

This letter has been signed by the benefits administrator and states that "the Long Term Disability Plan which was in effect as at June 1, 1971, with respect to Administrative Staff employees of the XXXXXXXXXX has remained essentially unchanged to the present time". On the basis of this letter, we would be inclined to accept that the benefits in question paid to the taxpayer can be regarded as being exempt.

The file of XXXXXXXXXX which you provided to us is attached.

Should further technical assistance be required, we would be pleased to provide our views.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch