14 October 1997 Internal T.I. 9715477 - SETTLEMENT FOR LONG-TERM DISABILITY 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:

Whether a lump sum amount paid to a taxpayer in settlement of a lawsuit to recover long-term disability benefits is taxable.

Position:

Yes

Reasons:

It could be argued the amount paid relates to amounts that are computed as having been due and payable under the disability plan up to the time of settlement and are therefore taxable under paragraph 6(1)(f) of the Act. Alternatively, it could be argued that the amount is taxable under paragraph 6(1)(a).

		October 14, 1997

	Winnipeg Tax Services Office	HEADQUARTERS
	Client Services		J. Gibbons
(613) 957-8953
	Attention:  C. Fanset

		7-971547

Settlement for Long-Term Disability Benefits

This is in response to your memorandum, which we received on June 9, 1997, requesting our comments regarding the taxability of a lump sum amount paid to a taxpayer in settlement of a lawsuit to recover long-term disability benefits.

In support of her position that the lump sum amount is not taxable, the taxpayer refers to Peel v. M.N.R., 87 DTC 268, a case which was decided in favor of the taxpayer. In that case, Mr. Peel had applied for benefits under a group disability insurance plan but was denied benefits by the insurer. Mr. Peel took legal action against the insurer and eventually settled out of court. As part of the settlement, an agreement was reached under which Mr. Peel received a lump sum amount in exchange for a dismissal of any and all actions against the insurer. The court indicated that, while it might not be expected to find words within the settlement agreement setting out an admission of liability under the terms of the policy, the absence of such admission is a critical element in determining the nature of the payment. The court also stated that the fact that the amount of the lump sum payment may be founded in some measure on a computation of the benefits denied does not amount to an admission of liability for benefits. In the end, the court found that the payment was not in satisfaction of the individual's entitlement to benefits under the plan, but rather in settlement of the "right" to take legal action for an alleged breach of contract, and therefore that it was not taxable.

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was that despite statements in a settlement agreement denying any liability under the disability plan, a standard clause in such agreements, it could be argued that the amount paid is a settlement of amounts computed as due to the employee under the terms of the plan. It is felt that the closer that a settlement amount is to the amount claimed by the employee, based on benefits denied, the greater the burden that would be placed on the parties to show that paragraph 6(1)(f) of the Income Tax Act (the "Act") does not apply to the payment.

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Paragraph 6(1)(a) of the Act requires the inclusion in income of benefits of any kind whatever that are received by virtue of, in respect of, or in the course of an office or employment. The latter phrases were considered in the landmark decision in the R. v. Savage, 83 DTC 5409, and subsequent cases, and given the largest possible scope. If paragraph 6(1)(f) of the Act is not considered to apply in a particular case with circumstances similar to those in Peel, in our view, the payment would not be considered to be made pursuant to the terms of the disability plan to which the employer made contributions. It would follow, therefore, that the exception to a paragraph 6(1)(a) inclusion, with respect to benefits derived from a group sickness or accident insurance plan to which the employer contributed, would not apply.

It is our recommendation, therefore, that to the extent that the settlement amount relates to amounts that are computed as having been due and payable up to the time of settlement, the amounts should be considered taxable under paragraph 6(1)(f) of the Act. To the extent that the settlement amount represents the taxpayer’s future benefit entitlement under the terms of the group disability plan but which are not yet due and, therefore, not described in paragraph 6(1)(f) of the Act, an assessment under paragraph 6(1)(a) of the Act should be pursued.

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