5 January 1995 Internal T.I. 9433456 - DISABILITY PAYMENTS

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 ITAR 19 applies to exempt the 87 & 88 disability payments arising from a 1987 work stoppage due to Turrette Syndrome where the disease was first diagnosed before 1974.

Position TAKEN:

ITAR 19 does not technically apply but the file is under review by Client Assistance, Ministerial Correspondence who can review for administrative relief as it appears that the payments would have qualified for the exemption under the IT guidelines

Reasons FOR POSITION TAKEN:

The Federal Court of Appeal in a recent decision (Jastrebski, 94 DTC 6355) stated that the Department's position as outlined in the bulletin was unduly generous and that both the loss of employment and the disability must occur before 1974 in order for the exemption to apply.

			January 5, 1995

	Hélène Beauchemin	HEAD OFFICE
	Director	Rulings Directorate
	Client Assistance Directorate			D. Zion
(613) 957-8953

	Attention: Rollande Sauvé
	           Correspondence Section
		943345

Minister's Mail Docket #94-10241M - XXXXXXXXXX
Disability Insurance - Application of ITAR 19

We are writing in response to your memorandum of December 22, 1994 wherein you request our views regarding the taxability of disability benefits received by XXXXXXXXXX.

We will not restate the sequence of events which you have included with your enquiry (attached), suffice it to comment that XXXXXXXXXX has had ongoing discussions with the Department regarding the taxability of these payments since the assessment of his 1987 tax return and

XXXXXXXXXX

Our Comments

Subsection 19(1) of the Income Tax Application Rules, 1971 (ITAR) provides that where an employee received payments under a wage loss replacement plan in existence on June 18, 1971 that would otherwise be included in income under paragraph 6(1)(f) of the Income Tax Act (the Act), those amounts may be excluded from income if they were in consequence of an "event" that occurred prior to 1974. If the plan is a changed plan, benefits payable under that plan will contain both taxable and non-taxable components. (See paragraph 21 of IT-428).

The Department's position as outlined in paragraph 3 of Interpretation Bulletin IT-428 is that the "event" is that which caused the disability which led to the loss of employment. In case of a degenerative illness which continues to afflict the taxpayer, the bulletin states that the "event" is considered to be the onset of the disease however much later the incapacity occurs. While it was the Department's view that the position in the bulletin did not apply in the particular case of Jastrebski v the Queen (94 DTC 6355), the Federal Court of Appeal looked to the intent of the transitional provision and stated that the position in the bulletin was unduly generous and incorrect. The Court stated that the event could only be the actual disability which prevented the employee from working at full capacity and thus caused the loss of employment income. As a result, the Court found that section 19 of the ITAR only applies where both the disability and the loss of employment income commence before 1974.

Since XXXXXXXXXX loss of employment commenced in 1987, it is our view that the payments received by XXXXXXXXXX do not qualify for the exemption under section 19 of the ITAR. However, based on the information provided to us and the Plan information discussed above, it is our view that he would have qualified for the exemption under the guidelines set out in the bulletin. Under these guidelines, the benefits received under the Plan will be partially exempt from income tax under ITAR 19(1) as discussed in IT-54 generally and paragraph 21 of IT-428, specifically.

Should your Directorate determine that administrative relief should be given in respect of XXXXXXXXXX 1987 and 1988 returns, it will be necessary to establish the level of benefits the taxpayer would have been entitled to receive under the Plan before the first changes made to the Plan, subsequent to June 18, 1971, (i.e. the changes that became effective on XXXXXXXXXX) and that made this Plan a new Plan. XXXXXXXXXX should be able to make the required determinations regarding the level of benefits the taxpayer would have been eligible to receive on a tax-free basis, prior to this major revision to the Plan. Any additional amounts received by XXXXXXXXXX pursuant to the revisions would be taxable.

We would like to mention that irrespective of whether administrative relief is granted in respect of future payments made to XXXXXXXXXX under this Plan, section 19 of ITAR does not exempt the insurer from the obligation to prepare the information slip required by paragraph 200(2)(f) of the Regulations.

We trust that our comments will be of assistance.

B.W. Dath
Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch