2003 Ruling 2003-0010273 - LONG-TERM DISABILITY PAYMENTS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Are the long-term disability payments received by the taxpayer included in income for the period when the Cox v. Carter Order applies to the amounts.

Position: No.

Reasons: The taxpayer must hold in trust for the defendants, all long-term disability payments received from the insurer until such time as the defendants have received the amounts they were ordered to pay under the Judgment.

XXXXXXXXXX 2003-001027

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayer.

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

(i) is in an earlier return of the taxpayer or a related person,

(ii) is 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) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

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

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

Definitions

(a) The "Court" is the XXXXXXXXXX;

(b) The "Defendants" include XXXXXXXXXX, the taxpayers carrying on business as XXXXXXXXXX, the taxpayers carrying on business as XXXXXXXXXX and the XXXXXXXXXX;

(c) The "Judgment" includes the Reasons for Judgment of the XXXXXXXXXX and the Judgment of the XXXXXXXXXX;

(d) The "Other Driver" is XXXXXXXXXX; and

(e) The "Taxpayer" is XXXXXXXXXX.

Facts

1. The Taxpayer resides in XXXXXXXXXX social insurance number is XXXXXXXXXX. The Taxpayer deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Center.

2. The Taxpayer was involved in a motor vehicle accident (the "Accident") when the Other Driver veered into oncoming traffic. The Other Driver was killed in the Accident and the Taxpayer was rendered unconscious and sustained multiple serious injuries. The Taxpayer's ability to carry on normal daily activities is extremely restricted as a result of XXXXXXXXXX injuries.

3. As the result of sustaining the serious injuries, the Taxpayer commenced an action against the Defendants. The Taxpayer sought non-pecuniary damages for pain and suffering, as well as pecuniary damages for past loss of income, future loss of income, future-care costs, including housing, and attendant care costs.

4. The Judgment of the Court awarded the Taxpayer damages for past loss of income, future loss of income, compensation for the purchase of a new home and cost of care benefits to cover the costs related to the ongoing need for attendant care and health care expenses. The Taxpayer was awarded $XXXXXXXXXX in total. Advances of $XXXXXXXXXX were provided to the Taxpayer prior to the Judgment. The remainder of the Judgment amount will be paid to the Taxpayer through "structured settlement" payments.

5. The Taxpayer is entitled to certain Statutory Accident Benefits and/or Income Indemnity payments pursuant to XXXXXXXXXX employer's long-term disability insurance plan and a "top up" from a statutory accident benefit insurer. In the XXXXXXXXXX calendar year, the Taxpayer continued to receive benefits under XXXXXXXXXX long-term disability insurance plan and was issued a T4A for $XXXXXXXXXX. The amount received in XXXXXXXXXX is being held in trust for the Defendants as these are the amounts that are subject to the Cox v. Carter Order, described below, and that must be paid to the Defendants.

6. In assessing the damages, and to avoid double recovery, the Court held that the circumstances of this case were appropriate for the application of a "Cox v. Carter Order". The "Cox v. Carter Order" requires that the Taxpayer, to the extent of the amount of the Judgment, hold in trust, for the Defendants, all long-term disability payments received from the no-fault carrier after XXXXXXXXXX and to pay them over to the Defendants.

7. The total amount to be paid to the Defendants is limited, in nature and extent, to each component of the $XXXXXXXXXX in damages the Taxpayer will receive from the Defendants. At that point in time when the Defendants have recovered all of the monetary claims to which they are entitled under the Taxpayer's long-term disability plan, the Defendants must re-assign to the Taxpayer all of their rights in respect of the benefits existing thereunder. The Taxpayer will thereafter be entitled to all benefits that arise under the existing long-term disability insurance plan.

8. The Cox v. Carter Order also requires the Taxpayer to co-operate with the Defendants in any application for Statutory Accident Benefits and/or Income Indemnity payments. Furthermore, should the Defendants have to engage in any mediation, arbitration, legal action or other proceeding against the Taxpayer's existing long-term disability insurer to recover any Statutory Accident Benefits and/or Income Indemnity payments to which the Defendants may be entitled, the Taxpayer must participate in such action. However, all costs associated with such participation are to be paid by the Defendants.

9. The Taxpayer will not release the funds being held in trust for the Defendants until XXXXXXXXXX is certain that the amounts received from the insurance company under the long-term disability insurance plan, and re-assigned to the Defendants, will not be included in XXXXXXXXXX income for income tax purposes. The requested advance income tax ruling will enable the Taxpayer to determine what portion of the long-term disability payments, received by the Taxpayer and currently held in trust, can be transferred to the Defendants.

Proposed Transactions

10. The Taxpayer proposes to comply with the Cox v. Carter Order of the Judgment. Upon receipt of a favorable advance income tax ruling, the Taxpayer will release to the Defendants the funds received from the insurer since XXXXXXXXXX and currently held in trust. The Taxpayer will then file XXXXXXXXXX income tax return on the basis that the benefits received from the insurer, and held in trust for the Defendants, will not be included in computing XXXXXXXXXX income for income tax purposes.

11. After the Defendants have recovered all amounts to which they are entitled pursuant to the Cox v. Carter Order, the Defendants will re-assign their rights to the Taxpayer.

Purpose of the Proposed Transactions

The long-term disability benefits, paid by the insurer to the Taxpayer, are subject to a Cox v. Carter Order. These amounts are currently being held in trust by the Taxpayer. The purpose of the proposed transactions is to enable the Taxpayer to comply with the requirement of the Judgment of the Court. The amount that will be available for release to the Defendants will be determined by whether or not the long-term disability benefits are included in computing the income of the Taxpayer for income tax purposes.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. No amount received by the Taxpayer, as a benefit under the long-term disability insurance plan and assigned to the Defendants pursuant to the Cox v. Carter Order, including the amount described in paragraph 5 above, is required to be included in computing the Taxpayer's income for income tax purposes to the extent that such amount is subject to the Cox v. Carter Order.

B. Any amounts received by the Taxpayer, after the Defendants have re-assigned their rights to the Taxpayer, will be included in computing the income of the Taxpayer pursuant to paragraph 6(1)(f) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency ("CCRA") on May 17, 2002, and are binding on the CCRA provided that the proposed transactions are initiated on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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