19 May 2010 External T.I. 2009-0339901E5 - Foregone Life Insurance Benefit Retired Employees

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: What is the tax treatment of amounts paid to retired employees in order to terminate their life insurance benefit?

Position: General comments provided

Reasons: Question of facts.

XXXXXXXXXX 							2009-033990
								Andrea Boyle, CGA
May 19 2010

Dear XXXXXXXXXX :

Re: Lump Sum Payment in Lieu of Foregone Life Insurance Benefit

This is in reply to your email of September 8, 2009 in which you asked about the tax implications of terminating a life insurance benefit of retired employees.

We understand that through the acquisition of another company, your company became responsible for the retired employees' life insurance benefit. Specifically, you have indicated that the retirees have life insurance coverage which provides a death benefit of $XXXXXXXXXX and your company would like to pay an amount of $XXXXXXXXXX net to the retirees to terminate this benefit. You asked if the amount can be paid out to the retirees as a retiring allowance.

The particular situation outlined in your email appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("Act").

A retiring allowance is defined in subsection 248(1) to mean an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received by a taxpayer on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service or in respect of a loss of an 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.

Whether a payment qualifies as a retiring allowance is a question of fact but based on the information you provided, it seems unlikely that the amount paid would be a retiring allowance.

However, it is our view that the payment received by the retirees could be deemed by subsection 6(3) to be employment income for the purposes of section 5. Subsection 6(3) provides, in part, that an amount received on account, in lieu of payment or in satisfaction of obligation arising out of an agreement made immediately before, during or immediately after a period of employment is considered to be remuneration for services rendered during the period of employment unless it can be established that the amount can reasonably be regarded as other than a the payment received under the employment contract, for entering the contract of employment, or for a covenant with respect to what the payee is or is not to do before or after his or her employment terminates.

In the situation you have described, we are unable to comment more specifically under which provision of the Act the amount is taxed as all the relevant facts and documents must be examined to determine the tax consequences that may arise. Accordingly, we would be prepared to deal with your request in the context of an advance income tax ruling request.

We trust that these comments will be of assistance.

Yours truly,

Louise J. Roy
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch