21 April 2005 External T.I. 2005-0121521E5 - Lump-Sum Payment For Long Term Disability

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: Following the SCC decision in Tsiaprailis, what is the taxable status of a lump-sum payment made by a liquidator of a company to its retired employees in settlement of their lost future long-term disability benefits?

Position: A lump-sum payment in respect of future benefits under an employer long-term disability plan constitutes proceeds of disposition of a capital property that must be used to calculate the recipient's taxable capital gain resulting from the disposition.

Reasons: Consistent with the SCC and FCA decisions in Tsiaprailis. The SCC held that a lump-sum payment in respect of arrears benefits payable under an employer long-term disability plan is taxable under paragraph 6(1)(f) of the Income Tax Act, and that the portion of the payment "for future benefits is in the nature of a capital payment and is not taxable under 6(1)(f)". The FCA also stated that the settlement payment in respect of future benefits is a "capital transaction" resulting from "the disposition of a right".

XXXXXXXXXX Randy Hewlett
2005-012152
April 21, 2005

Dear XXXXXXXXXX:

Re: Liquidator's Lump-Sum Payment For Lost Future Long-Term Disability

We are writing in response to your letter of March 16, 2005, wherein you asked for our opinion on the taxable status of a lump-sum payment made by the liquidator of the

XXXXXXXXXX to its retired employees in settlement of their lost future long-term disability benefits. You requested that we confirm that these payments are non-taxable as a result of the Supreme Court of Canada decision in Tsiaprailis v The Queen (Docket: 29777).

Our Comments

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. However, we are prepared to offer the following comments.

The SCC in Tsiaprailis held that a lump-sum payment in respect of arrears benefits payable under an employer long-term disability plan is taxable under paragraph 6(1)(f) of the Income Tax Act, and that the portion of the payment "for future benefits is in the nature of a capital payment and is not taxable under [paragraph] 6(1)(f)". The Federal Court of Appeal in this case also stated that the settlement payment in respect of future benefits is a "capital transaction" resulting from "the disposition of a right". Consistent with the comments of the SCC and FCA, we are of the view that a lump-sum payment in respect of future benefits under an employer long-term disability plan constitutes proceeds of disposition of a capital property that must be used to calculate the recipient's taxable capital gain resulting from the disposition.

We trust our comments are of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch