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:
Whether policy holder/Exempt Entity is constructive trustee for employees of long-term disability insurance surplus
Position: if and when Court makes such an Order
Reasons: 1988 CTF Q.31
November 20, 2003
XXXXXXXXXX TSO HEADQUARTERS
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
Attention: XXXXXXXXXX
2003-003402
Voluntary Disclosure - Non-Profit Organization
This is in response to a facsimile transmission of August 7, 2003 wherein XXXXXXXXXX of your office enquired about the income tax consequences concerning the receipt and investment by an employer of surplus funds received from an insurer and invested by the employer on the termination of an employee pay all long-term disability plan.
Facts
Our understanding of the relevant facts is as follows:
1. An entity that is exempt from tax (the "Exempt Entity") and that has several hundred employees maintained, pursuant to a collective bargaining agreement, a long-term disability plan (the "Plan") for the benefit of certain of its employees. Exempt Entity was named as the policy holder. Premiums under the Plan were paid solely by the employees.
2. Effective XXXXXXXXXX, the Plan was terminated.
3. The Plan provided that any positive balance of premiums paid by employees, after certain deductions for claims, costs and reserves, represented surplus funds payable to Exempt Entity as policy holder.
4. The amount of the surplus was approximately $XXXXXXXXXX.
5. Because it was not clear as to how this surplus was to be used, Exempt Entity invested the surplus in a GIC account on XXXXXXXXXX in order to give it time to determine what it should do with the funds. Since XXXXXXXXXX, approximately $XXXXXXXXXX in interest has been earned in respect of the surplus.
6. You have provided us with details concerning the court case that was decided in the spring of 2002: Northern Alberta Institute of Technology Academic Staff Association ("NASA") v. NAIT (Alta. Q.B). In that case, as a result of the demutualization of Mutual Life, NAIT, the policy holder of an insurance policy under the terms of NAIT's collective bargaining agreement with NASA, received a conversion benefit in respect of the policy. The court held that although NAIT was the owner of the policy, it was essentially acting as an agent of the members of NASA when it received the conversion benefit and the court imposed a constructive trust in respect of the proceeds arising from the conversion benefit.
7. As a result of the decision in the aforementioned court case, Exempt Entity has decided to distribute the entire surplus amount, plus interest, and less the costs it has and will incur, directly to its employees. After consulting with the relevant unions, Exempt Entity has decided upon a distribution scheme for the surplus and interest, for which it will seek the court's approval.
Resolution Proposed by Exempt Entity and the CCRA
8. Seek an Order of the Court of XXXXXXXXXX (the "Order") to declare Exempt Entity an agent of the employees that will benefit from the distribution scheme as agreed upon with the unions and thereby become the constructive trustee for such beneficiaries effective the date of the Order.
9. Prior to the date of the Order, all interest would be earned by Exempt Entity and not subject to income tax.
10. For the period from the date of the Order to the date of the final distribution of the surplus (which is expected in XXXXXXXXXX), Exempt Entity will, as trustee for the employees, report and pay income tax on any income generated from the surplus during that time period.
11. The employees will be subject to the income tax consequences relating to their receipt of the surplus funds from the constructive trust.
We agree with the above Resolution, provided that Exempt Entity, as constructive trustee pursuant to the Order, acquires control of the surplus on the date of the Order.
We hope this opinion will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content