8 September 1998 Internal T.I. 9820777 - DISABILITY SETTLEMENT EMPLOYER

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: will amount received from employer as a result of settlement re claim for disability under insurance policy taxable?

Position: No.

Reasons: Amount if received from insurance company would not be taxable.

										September 8, 1998

	VANCOUVER ISLAND TSO						HEADQUARTERS
	Fred Vivash								M.P. Sarazin
	Director								952-9853

Attn: Pat Holberg, Verification and Enforcement

										982077

Payment received from Employer Settlement

This is in reply to your memorandum dated August 10, 1998, wherein you requested our comments regarding the taxation of amounts received by XXXXXXXXXX from his former employer, XXXXXXXXXX in respect of a settlement for lost long term disability benefits.

Our understanding of the facts is as follows:

FACTS

XXXXXXXXXX (the "Taxpayer") was employed by XXXXXXXXXX (the "Employer"). The Employer was a policy holder of a benefits package with XXXXXXXXXX. In respect of the benefits package, an employee was entitled to short term disability (premiums fully funded by the Employer) and long term disability benefits (premiums fully funded by the employees).

In XXXXXXXXXX, the Taxpayer was diagnosed with a heart condition that left him totally disabled for employment purposes. The Taxpayer was XXXXXXXXXX years old at the time and he received his last pay cheque around XXXXXXXXXX. Under the terms of the short term disability package, the Taxpayer was entitled to receive XXXXXXXXXX% of his regular employment income for a period of XXXXXXXXXX weeks (approximately $XXXXXXXXXX). Under the terms of the long term disability package, the Taxpayer was entitled to receive XXXXXXXXXX% of his regular earnings less any Canada Pension Plan disability benefits received (approximately $XXXXXXXXXX per month until age 65). The Taxpayer was eligible to commence receiving long term disability benefits on XXXXXXXXXX. The Employer did not pay him nor did they notify XXXXXXXXXX of his disability for purposes of the short term and long term disability benefits. The Taxpayer's employee benefits handbook, provided to the Taxpayer by the Employer, implied that the Taxpayer was not entitled to benefits because he was not employed on XXXXXXXXXX (he was fired by the Employer on XXXXXXXXXX).

The Taxpayer retained counsel and pursued the Employer for his entitlements under the benefits package. A review of the contract with XXXXXXXXXX revealed that the Taxpayer, contrary to the employee benefits handbook, was, in fact, entitled to benefits under the insurance contract. The Taxpayer, with the aid of the Employer, applied to XXXXXXXXXX for his long term benefit entitlements in XXXXXXXXXX declined to pay the benefits because its agreement with the Employer ended in XXXXXXXXXX and the proof of claim was not filed within the five year limit as required under the policy.

The Taxpayer commenced an action against the Employer. The Statement of Claim alleged that the Employer had wrongfully dismissed the Taxpayer resulting in him losing his entitlements to long term disability benefits he had paid for and his short term disability benefits paid for by the Employer. The matter was set for trial on XXXXXXXXXX and a settlement was reached on XXXXXXXXXX. The Employer agreed to pay the Taxpayer a total of $XXXXXXXXXX which was broken down as follows:

(a) $XXXXXXXXXX for out-of-pocket expenses,
(b) $XXXXXXXXXX for unpaid short term disability benefits, and
(c) $XXXXXXXXXX for unpaid long term disability benefits.

YOUR POSITION

In a telephone enquiry with our office, you were advised that the retiring allowance definition in subsection 248(1) of the Income Tax Act (the "Act") is so broadly worded that the full amount of the payment could be characterized as a retiring allowance. You argue that, notwithstanding the clear breakdown of how the amount was computed, the settlement amount is not clearly characterized as a retiring allowance. Consequently, you believe the $XXXXXXXXXX should be classified as general damages and excluded from the Taxpayer's income because it represents an amount resulting from a violation of the Taxpayer's human rights, as discussed in paragraph 9 of IT-337R3.

COMMENTS

A "retiring allowance" is defined in subsection 248(1) of the Act to mean an amount received

(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or

(b) in respect of a loss of office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal, by the taxpayer or, after the taxpayer's death, by a dependent or a relation of the taxpayer or by the legal representative of the taxpayer.

Where the Taxpayer receives an amount from his Employer and it is not received in recognition of long service or as a result of the loss of office or employment then the amount would not constitute a retiring allowance for purposes of the Act. In our view, the comments in paragraph 9 of IT-337R3 only apply to damages received in respect of an employee's loss of office or employment.

Where an amount is paid by the Employer to the Taxpayer in settlement of the Taxpayer's right to an amount under an insurance contract between the Employer and an insurance company, we are of the view that the amount received would not be categorized as being received in recognition of long service or in respect of the loss of office or employment. Therefore, the amount would be damages paid by the Employer regarding the Taxpayer's loss of long term disability benefits paid for by the Taxpayer.

We also believe that it would be very difficult to argue that the amount would constitute a benefit received under paragraph 6(1)(a) of the Act. Our position is based upon the fact that paragraph 6(1)(f) of the Act specifically excludes insurance benefits from being categorized as an employment benefit where the employee pays all of the insurance premiums related to such coverage. In this regard, we would refer you to paragraph 1 of IT-428.

The lump-sum settlement of disability benefits in the amount of $XXXXXXXXXX may be regarded as amounts due to the Taxpayer under his long-term disability plan. Accordingly, since the plan is an employee pay-all plan, the amount would not be taxable. In this regard, we refer you to paragraph 16 of IT-428, Wage Loss replacement Plans.

We trust that the above comments will be helpful.

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch