30 November 1997 Ruling 9816373 - DAMAGES RE POST-RETIREMENT HEALTH 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:

As part of a proposed Settlement Agreement (the “Agreement”), regarding a dispute between X Co and the members (the “Members”) XXXXXXXXXX, X Co will make a lump sum payment in the amount of $XXXXXXXXXX, plus interest from XXXXXXXXXX up to the “Effective Date” of the Agreement, to be distributed equally amongst the Members.

1. Is each Member’s portion of the lump sum payment of $XXXXXXXXXX (i.e., excluding the interest portion of the lump sum payment) to be included income for purposes of the Act?

2. Is each Member’s portion of the interest taxable?

Position TAKEN:

1. No.

2. Yes.

Reasons FOR POSITION TAKEN:

1. Subsection 5(1) does not apply to include the payment in income as the Members are not employees or officers of X Co (the employer/employee relationship was severed on retirement) and, in addition, the payment is not in the nature of salary, wages or other remuneration.

Subsection 6(3) does not apply as the amount will not be received “in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was” an employee of the payer. XXXXXXXXXX the above payment will be made pursuant to an obligation arising out of the Agreement, which did not exist immediately prior, during or immediately after employment, and which will be entered into as a consequence of a threatened legal action. In any event, the above payment does not fall within the purview of subsection 6(3), as it is also not in the a nature of the amounts described in paragraph 6(3)(c), (d) or (e).

The above payment is not a superannuation or pension benefit, within subparagraph 56(1)(a)(i) and as defined in subsection 248(1). The payment is also not a retiring allowance as used in subparagraph 56(1)(a)(ii) and defined in subsection 248(1) (it is not “in respect of a loss of an office or employment” of the Members). In summary, the payment does not fall under any source of income in the Act and, in accordance with the decision of the Supreme Court of Canada in Fries v. The Queen, 90 DTC 6662, is therefore not taxable as income “from a source” within the meaning of section 3 of the Act. It is also reasonable to treat the above damage payment as non-taxable, since it relates to actions of the former employer which resulted in the Members’ interim loss of non-taxable health care coverage.

2. Amounts received on account, or in lieu, of interest are included in income under paragraph 12(1)(c) in some circumstances. However, the Department does not tax pre-judgment interest in respect of personal injury, death or wrongful dismissal. The interest to be received by the Members does not fall under any of these exceptions.

XXXXXXXXXX
XXXXXXXXXX 3-981637
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge receipt of the additional information provided in your letters of XXXXXXXXXX.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Tax Centre in connection with an income tax return already filed and none of the issues is under objection or appeal.

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

FACTS

1.

XXXXXXXXXX

2. X Co is a manufacturer of XXXXXXXXXX which carries on business throughout Canada, and is a Canadian wholly-owned subsidiary of XXXXXXXXXX.

3. The Members are former salaried (i.e., non-union) employees of X Co, who retired, or elected early retirement, from X Co’s employ prior to XXXXXXXXXX. There are XXXXXXXXXX Members.

4. The contract of employment of each Member with X Co included tax free group benefits, under a “private health services plan” as defined in subsection 248(1) of the Income Tax Act (the “Act”), which was to provide post-retirement benefits for the Member’s lifetime.

5. The post-retirement provisions of X Co’s private health services plan were varied by X Co such that, effective XXXXXXXXXX, certain benefits under the plan were eliminated, while others were reduced for the Members.

6. The Representative, on his behalf and on behalf of the Members, commenced legal action on XXXXXXXXXX against X Co, pursuant to the XXXXXXXXXX, seeking compensation for damages sustained as a result of X Co’s conduct. In this action, the Representative alleged that X Co improperly eliminated and reduced post-retirement health benefits which the Representative claims had vested upon retirement and were not subject to subsequent change by X Co. X Co denies the allegations and the claims that the Representative has made in the action, and denies that it acted wrongfully in any way, or that it is liable to the Members.

PROPOSED TRANSACTIONS

7. The Members and X Co propose to enter into a Settlement Agreement (the “Agreement”).

8. Pursuant to the Agreement, and subject to certain qualifications contained therein, the post-retirement benefits of the Members, under X Co’s private health services plan, will be reinstated, as of the “Effective Date” of the Agreement. The “Effective Date” is defined in section XXXXXXXXXX of the Agreement and is, inter alia, dependant on obtaining a Court order which approves the Agreement and on the settlement of any appeal or motion which may be brought in respect of the Court order.

9. As part of Agreement, X Co will, inter alia, make a lump sum payment, within 30 days following the Effective Date, in the amount of $XXXXXXXXXX, plus interest from XXXXXXXXXX up to the Effective Date, to be distributed equally amongst the Members.

PURPOSE OF THE PROPOSED TRANSACTIONS

10. The purpose of the proposed transactions is to settle the dispute between the Members and X Co in a manner that is acceptable to all parties.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above and that the final settlement agreement is substantially the same as the Agreement submitted with your letter of XXXXXXXXXX, our rulings are as follows:

A. Each Member’s portion of the lump sum payment of $XXXXXXXXXX will not be included in the Member’s income for purposes of the Act.

B. Each Member’s portion of the interest described in 9 above will be included in the Member’s income, pursuant to paragraph 12(1)(c) of the Act, when received by the Member.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding provided that the proposed transactions are completed by XXXXXXXXXX.

These ruling are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.

Yours truly,

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