2011 Ruling 2010-0385181R3 - Payments in lieu of continued PHSP coverage

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.

Principal Issues: Will payments in lieu of continued PHSP coverage for retirees of an employer that entered insolvency prior to 2011 be taxable?

Position: No

XXXXXXXXXX 					2010-038518

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling is:

(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act (Canada);

"Allowed Claim" has the meaning given to it in paragraph 10;

"Benefits" means the right of the Former Employees and Dependents for payment, reimbursement or coverage arising in connection with any post-employment benefit plan involving Canco whether in relation to medical, dental, disability, life insurance or other benefit, obligation or payment to which such person (or others who may be entitled to claim under or through such person) might be entitled;

"Canco" means XXXXXXXXXX ;

"Canco 2" means XXXXXXXXXX ;

"CBCA" means the Canada Business Corporations Act;

"CCAA" means the Companies' Creditors Arrangement Act;

"CCAA Applicants" means Canco 2, XXXXXXXXXX and XXXXXXXXXX ;

"Claims" means the rights of any person in respect of any indebtedness, liability or obligation of one or more of the Non-Applicants or a director or officer of the Non-Applicants existing on XXXXXXXXXX , other than any indebtedness, liability or obligation owing by any Non-Applicant to another Non-Applicant or to any of the CCAA Applicants;

"Claims Process" means the claims process established by the order of the XXXXXXXXXX Court XXXXXXXXXX on XXXXXXXXXX , as amended on XXXXXXXXXX , for the identification and determination of all Claims against the Non-Applicants;

"CRA" means the Canada Revenue Agency;

"CRO" means the chief restructuring officer of the CCAA Applicants and the Non-Applicants;

"Dependent" means a spouse, common-law partner or beneficiary who is entitled to benefits under one or more of the Plans;

"Former Employees" means retired and/or disabled former employees of Canco who had been employed in Canco's XXXXXXXXXX business (which operated under the XXXXXXXXXX name), and who are entitled to benefits under one or more of the Plans;

"Initial Order" means the Order of XXXXXXXXXX dated XXXXXXXXXX ;

"Insurer" means XXXXXXXXXX ;

"Monitor" means XXXXXXXXXX ;

"Non-Applicants" means Canco, XXXXXXXXXX and XXXXXXXXXX ;

"Plans" means the hospital, major medical and dental plans between Canco 2 and the Insurer governed by contracts XXXXXXXXXX , which were established to provide benefits for the Former Employees;

"Private health services plan" has the meaning given to it under the Act;

"Proceedings" means the proceedings commenced on XXXXXXXXXX by the CCAA Applicants under the CCAA;

"Representative Counsel" means XXXXXXXXXX ;

"Settlement Amount" has the meaning given to it in paragraph 11;

"Settlement Date" means the date on which the Settlement Amount will be paid, which is expected to be on or before XXXXXXXXXX ;

"taxable Canadian corporation" has the meaning given to it under subsection 89(1) of the Act;

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

Facts

1. Canco is a corporation governed by the CBCA. It is a taxable Canadian corporation. Canco's Business Number is XXXXXXXXXX . Its affairs are administered by the XXXXXXXXXX Tax Services Office of CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Canco is a direct wholly owned subsidiary of Canco 2.

2. Canco 2 is a corporation governed by the CBCA. It is a taxable Canadian corporation. Canco 2's Business Number is XXXXXXXXXX . Its affairs are administered by the XXXXXXXXXX Tax Services Office of CRA, and it files its returns with the XXXXXXXXXX Tax Centre.

3. The Plans became effective on XXXXXXXXXX to provide major medical and dental benefits to the Former Employees and their Dependents. The Plans are private health services plans, and are successors to similar private health services plans that have been in place for Canco's employees and former employees since XXXXXXXXXX . Under the Plans, the Insurer is required to indemnify claims for major medical and dental coverage made by the Former Employees and their Dependents, and Canco is required to reimburse the Insurer for these claims and to pay to the Insurer an administrative fee.

4. The Former Employees and the Dependents are individuals resident in Canada for purposes of the Act. The Former Employees and the Dependents are the only people entitled to benefits under the Plans. As of the date hereof, there are approximately XXXXXXXXXX Former Employees and Dependents entitled to major medical benefits under the Plans and approximately XXXXXXXXXX Former Employees and Dependents entitled to dental benefits under the Plans.

5. Pursuant to the terms of the Initial Order, the CCAA Applicants obtained protection from their creditors under the CCAA and the Monitor was appointed to monitor the property and business conduct of the CCAA Applicants during the Proceedings. Pursuant to the terms of the Initial Order, the CCAA Applicants were directed to cease making payments to their creditors. The Proceedings and the protections afforded there under have most recently been extended to XXXXXXXXXX .

6. Although Canco and the other Non-Applicants were not included in the Proceedings, each of these corporations is XXXXXXXXXX . Consequently, the XXXXXXXXXX Court XXXXXXXXXX made an order on XXXXXXXXXX , in connection with the Proceedings, authorizing and directing Canco 2 to take such steps and execute such documents as may be necessary or desirable to commence a winding-up of the Non-Applicants.

7. In connection with the winding-up of the Non-Applicants, the XXXXXXXXXX Court XXXXXXXXXX established the Claims Process to identify Claims that could be made against them. Under the Claims Process, the Monitor and the CRO have the power to review and attempt to resolve all Claims made against the Non-Applicants. Representative Counsel was appointed by the court on XXXXXXXXXX to act on behalf of the Former Employees in respect of any Claims the Former Employees may have for Benefits and to negotiate with Canco and agree to a compromise or settlement in respect of such Claims.

8. Based on all of the Claims identified through the Claims Process (including claims of former directors and officers of Canco), Canco is insolvent.

9. The Monitor, the CRO and Representative Counsel have been in negotiations regarding the Claims since they were submitted by Representative Counsel, and the Claims have been reviewed by XXXXXXXXXX and XXXXXXXXXX , the actuaries for Representative Counsel and Canco, respectively.

10. Based on the advice of XXXXXXXXXX and XXXXXXXXXX , Canco, the Monitor and Representative Counsel have agreed that the aggregate value of the Claims as of XXXXXXXXXX was approximately $XXXXXXXXXX , of which $XXXXXXXXXX (the "Allowed Claim") relates to Claims in respect of the Plans.

Proposed Transactions

11. On the Settlement Date, Canco will pay to the Former Employees, in settlement of their Claims under the Plans, an amount equal to the Allowed Claim, less (i) adjustments in respect of Former Employees and Dependents who have died before the Settlement Date and (ii) the payments made by Canco under the Plans between XXXXXXXXXX and the Settlement Date, including any amounts paid by Canco in respect of expenses, fees, or taxes (collectively, the "Settlement Amount" and to each Former Employee, the "Payment").

12. The Payment received by each Former Employee from Canco will be equal to the aggregate Settlement Amount multiplied by the proportion that his or her individual Allowed Claim is to the total Allowed Claim. No amount will be paid in respect of a Former Employee or Dependent who has died before the Settlement Date.

13. Canco will advise the Former Employees that for purposes of calculating the non-refundable medical expense tax credit under section 118.2 of the Act, neither the Former Employee nor a spouse or common-law partner can include any amounts that would otherwise be qualifying medical expenses until such time as their cumulative medical expenses since the termination of the Plans exceed their respective Payment received.

Purpose of the Proposed Transactions

14. The purpose of the payment of the Settlement Amount is to settle and resolve the Former Employees' Claims in respect of the Plans, since Canco will be unable to continue to fund the Plans following the completion of the Claims Process.

Rulings Given

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, we rule as follows:

A. The Payment received from Canco by each Former Employee in accordance with 11 and 12, above, will not be taxable under the Act.

B. Canco will not be required to withhold any amounts from the Payments under subsection 153(1) of the Act nor will Canco be required to report the Payments on an information return.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX .

Note:

This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Further, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or the proposed transactions or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
for Director
Business and Personal Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch