21 September 1999 External T.I. 9924035 - LTD-LUMP SUM SETTLEMENT

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 payment by an insurer of a long-term disability plan, part of which has been described as general damages, is taxable.

Position: The portion of the settlement that is related to the taxpayer's long-term disability plan is taxable.

Reasons: Since there are specific rules in paragraph 6(1)(f) to tax LTD benefits, whether received as a lump-sum or not, our general position concerning general damages would not apply.

XXXXXXXXXX	J. Gibbons
		5-992403
September 21, 1999

Dear XXXXXXXXXX:

We are responding to your letter of September 1, 1999, concerning the taxability of a lump-sum settlement pursuant to your employer's long-term disability plan (LTDP) with XXXXXXXXXX. As indicated in our letter of July 29, 1999, to you, in order to provide definitive comments, we would have to examine all the documentation relating to the lump sum payment to you, including a copy of the court proceedings, if any, and a copy of the LTD plan.

You enclosed a breakdown of the settlement with XXXXXXXXXX as per the mediation settlement dated XXXXXXXXXX, as follows:

a) Portion of past LTD income payment	$XXXXXXXXXX
b) Special Damages
(future medical costs of $XXXXXXXXXX, travel
$XXXXXXXXXX therapy $XXXXXXXXXXand future loss
of earnings $XXXXXXXXXX)	$XXXXXXXXXX
c) Legal costs	$XXXXXXXXXX
d) Rehabilitation/vocational	$XXXXXXXXXX
	   Total lump sum	$XXXXXXXXXX

After reviewing the breakdown of the XXXXXXXXXX payment and the information given in your letter, we offer the following comments:

You indicated that your employer, XXXXXXXXXX, has advised you that it paid the premiums under the LTD plan, whereas you seem to be claiming that the plan has been funded by the employees. Since you did not provide us with a copy of the plan, we are unable to comment. However, this is an aspect that you may wish to investigate further with your employer and with reference to the terms of the plan. Of course, if it is found to be an employee-pay-all plan", then the Department's position outlined in paragraphs 16 to 21 of interpretation bulletin IT-428, Wage Loss Replacement Plans will apply.

In our earlier reply to you, we stated that our general view was that the comments in IT-365R2, Damages, Settlement, and Similar Receipts, would not apply to the lump-sum settlement since there are specific rules under paragraph 6(1)(f) of the Income Tax Act governing the treatment of payments out of an employer's LTDP. This is stated in general terms at the end of paragraph 2 of the bulletin.

After reviewing the breakdown of your settlement, it is our view that the portion of your settlement that is related to your LTD benefits is taxable. Thus, it appears that your insurer has correctly applied the income tax rules concerning the taxation of these types of payments. The determination of taxability is made with reference to the legislative rules in the income tax legislation, as well as any related income tax jurisprudence.

The insurer also has the legal responsibility to issue an information slip when certain types of payments are made.

We regret that our response could not be favourable and trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate