28 January 1992 Income Tax Severed Letter 9133535 - Wage loss plan — lump sum payment taxable not damages

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: WAGE LOSS PLAN LUMP SUM PAYMENT TAXABLE NOT DAMAGES Section(s): 6(1)(f), 81(g.1)]

January 28, 1992

Source Deductions Division Business and General
P. Remillard Division
Chief R.B. Day
DO/TC Support Services Section (613) 957-2136
913353

Taxation of Lump-Sum Settlement Payment
arising from claim for non-payment of
Disability Insurance Benefits-paragraph 6(1)(f)

We are writing in reply to your memorandum of December 4, 1991, wherein you requested our comments regarding the above noted subject that was referred to you by the Windsor District Office.

Our understanding of the facts in this case is as follows:

XXX

District Office Position

XXX

Source Deductions Position

It is your view that the settlement is in satisfaction of unpaid disability benefits and as such, is taxable under paragraph 6(1)(f). The lump-sum payment was thus correctly reported as income on Form T4A by the XXX.

Our Comments

From our review of the documentation submitted with your referral, it is our opinion that the lump-sum settlement payment is taxable in the taxpayer's hands pursuant to paragraph 6(1)(f). The reasons in support of our opinion are as follows:

• a) Although personal injury was suffered by the taxpayer as a consequence of the motor vehicle accident, the amounts paid under the LTD plan relate to compensation for lost employment income as a consequence of the taxpayer being unable to work. None of the amounts, whether paid under the LTD plan on a periodic basis or paid as a lump-sum, relate to compensation for personal injury as envisioned by the comments in paragraphs 1 and 2 of IT-365R2. In addition, paragraph 11 of IT-428 states that; "If a lump-sum payment is made in lieu of periodic payments that amount will be considered to be income under paragraph 6(1)(f)."
• b) The fact that the lump-sum payment is additional compensation paid under the terms of the LTD plan is further supported by the terms of the Consent Judgment of the Supreme Court of Ontario as set out in

XXX

To illustrate, paragraph two of the company's release states, in part that the amount of the compensation is "XXX." Similarly, in the concluding phrase of paragraph one of the taxpayer's release, he acknowledges that "the acceptance of said sum is in full accord and satisfaction of a disputed claim ...". It should also be noted that the amount of the settlement is exactly the same as the company's "without prejudice" offer of XXX, which stated that the payment represented a reinstatement of benefits for the period from XXX. (See paragraph 6 above).

• c) With respect to paragraph 81(1)(g.1), this provision exempts from taxation any income earned from property acquired by or on behalf of a person pursuant to an action for certain damages during taxation years any part of which the taxpayer was under 21 years of age. (See IT-365R2, paragraph 6). Not withstanding the age of the taxpayer in this case, there is no award for damages and no income from property acquired as a consequence of an award for damages. It is our view, therefore, that this paragraph has no application in this case.

In conclusion, we are in complete agreement with your views in this case.

B.W. Dath

Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch