30 November 1996 Ruling 9638273 - EX GRATIA PAYMENT IN LIEU OF LIFE INSURANCE

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:

taxation of a payment in settlement of a dispute over amount of life insurance in effect on date of employee's death. Employer to make an ex gratia payment to the named beneficiary of the policy equal to difference between the amount of insurance actually in effect on the life of the employee and the amount of coverage that was to be provided under the collective agreement. Interest to be paid from the date of death of the employee

Position:

the lump sum payments are not taxable but the interest is

Reasons:

the facts show that the amount in question is neither paid by reason of the deceased's employment with the payor nor in recognition of deceased's service -instead it is paid as damages, or in lieu of, a non-taxable receipt, being the amounts received upon death under the terms of the group term life insurance policy

XXXXXXXXXX

XXXXXXXXXX
									963827
XXXXXXXXXX, 1997

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are replying to your letter of XXXXXXXXXX, in which you asked for an advance income tax ruling in respect of a proposed settlement between yourself and XXXXXXXXXX.

Our understanding of the facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX was an employee of XXXXXXXXXX. XXXXXXXXXX became ill and never returned to work. During his illness, he received sick leave pay, short-term disability benefits and then long-term disability benefits. XXXXXXXXXX

2. As an employee of XXXXXXXXXX was entitled to life insurance coverage under the group term life insurance policy held by XXXXXXXXXX. XXXXXXXXXX was the named beneficiary of XXXXXXXXXX under that policy although he was not related to XXXXXXXXXX.

3. Prior to the renegotiation of the collective agreement between XXXXXXXXXX and its employees in XXXXXXXXXX, the amount of coverage for each employee was $XXXXXXXXXX. Under the terms of the collective agreement covering the period XXXXXXXXXX, the amount of coverage for each employee under the policy was increased to $XXXXXXXXXX effective on the signing of the collective agreement, XXXXXXXXXX.

4. XXXXXXXXXX were under the impression that XXXXXXXXXX was covered for the increased amount as of the date of signing the collective agreement. However, the terms of the insurance policy with XXXXXXXXXX state that, for employees who were on disability leave at the time the increased coverage was to take effect, the increased coverage would not become effective until the employee returned to work. Since XXXXXXXXXX never returned to work, XXXXXXXXXX refused to pay more than $XXXXXXXXXX as a benefit under the group term life insurance policy.

5. While XXXXXXXXXX originally submitted premiums to XXXXXXXXXX on the basis that XXXXXXXXXX was entitled to coverage of $XXXXXXXXXX returned the excess premiums to XXXXXXXXXX. In addition, XXXXXXXXXX sent XXXXXXXXXX letters advising him that he was only entitled to the lesser coverage of $XXXXXXXXXX under the terms of the policy. The amount of benefit included on XXXXXXXXXX income tax return under subsection 6(4) of the Income Tax Act (the Act) from the provision of life insurance was based on coverage of $XXXXXXXXXX.

6. To the best of your knowledge, none of the issues involved in this request is presently being considered by a tax services office or taxation centre in connection with a tax return already filed nor are any of the issues under objection or appeal.

Proposed Transaction

7. XXXXXXXXXX propose to enter into a Settlement Agreement under which XXXXXXXXXX agrees to pay a total of $XXXXXXXXXX as follows:

8. XXXXXXXXXX

9. The Settlement Agreement further provides that XXXXXXXXXX will renounce any and all recourse he has or may have against XXXXXXXXXX in respect of this matter.

Purpose of the Proposed Transaction

10. The purpose of the transaction is to settle the dispute in respect of the amount of life insurance coverage applicable to XXXXXXXXXX at the time of his death under XXXXXXXXXX group term life insurance policy.

Rulings Given

Provided that the above facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the executed Settlement Agreement is substantially the same as the document submitted with your letter of XXXXXXXXXX, and that the transaction is carried out as described herein, we confirm that:

A. the XXXXXXXXXX payments of $XXXXXXXXXX specified in paragraph 7 above, will not be subject to tax in the hands of XXXXXXXXXX under any provision of the Act, as it presently reads, and

B. the interest payments described in paragraph 7 above will be included in the income of XXXXXXXXXX under paragraph 12(1)(c) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding on the Department provided the Settlement Agreement is executed on or before XXXXXXXXXX.

Yours truly,

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch