Principal Issues: [TaxInterpretations translation] 1. If the amounts in respect of long-term disability benefits paid by an insurance company following an out-of-court settlement had been received during the individual's lifetime, would they have been considered as income from an office or employment?
2. (a) Are long-term disability benefits relating to periodic benefits that have fallen due and (b) survivor's benefits, received by the individual's estate as a result of an out-of-court settlement, taxable and, if so, by whom?
Position: 1. Yes. 2. (a) The deceased. (2)(b) The survivor's benefit appears to qualify as a death benefit and would be taken into account in this calculation by the recipient of the benefit.
Reasons: 1. If the long-term disability benefits were paid periodically to the individual by the insurance company under a wage-loss replacement plan, similar to that described in paragraph 1 of IT-428, the benefits received as such by the individual during his or her lifetime were required to be included in income from an office or employment under paragraph 6(1)(f) of the Act (re position confirmed by the SCC in Tsiaprailis.)
2. (a) 70(2) shall apply if the deceased has a legal claim to the said amount. 2(b) Application of Act.
XXXXXXXXXX 2008-029313 Danielle Bouffard March 23, 2009
Dear Sir,
Subject: Benefits received by an estate
This is in response to your email of September 8, 2008 requesting our opinion on the taxation of long-term disability and survivor benefits received by an individual's estate as a result of litigation with an insurance company.
In the situation you described, an individual suffering from an illness that prevented carrying on the individual’s employment, received long-term disability benefits for a certain period of time. These benefits were provided under a group agreement with an insurance company. At a certain point, the insurance company determined to cease payments on the grounds that the individual was fit to return to work. Prior to the individual’s death in 2007, the individual initiated legal proceedings to recover the amounts due. As these proceedings were continued by the individual's estate, an out-of-court settlement was ratified during 2008 between the insurance company and the individual's estate. The amounts received by the estate were made up of two components: long-term disability benefits that were unpaid during the individual's lifetime; and a survivor's benefit.
Questions
1. If the amounts in respect of long-term disability benefits paid by the insurance company following the out-of-court settlement had been received during the individual's lifetime, would they have been considered as income from an office or employment?
2. Are long-term invalidity benefits and survivor's benefits received by the individual's estate as a result of the out-of-court settlement taxable and, if so, for whom? Since the individual's long-term disability benefit was provided for under a group agreement in force with the insurance company prior to the death, can the amount received by the estate be characterized as a right or thing that is subject to taxation in a separate return in the hands of the deceased?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Long-term disability benefits
According to paragraph 1 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans, amounts received on a periodic basis by an employee or an ex-employee as compensation for loss of income from an office or employment, that were payable under a sickness, accident, disability or income maintenance insurance plan (in that Bulletin referred to as a "wage loss replacement plan") to which the employer made a contribution, are to be included in income by virtue of paragraph 6(1)(f) of the Income Tax Act (the "Act"). In order for an amount to be taxable under this paragraph, the employer must have contributed to the wage loss replacement plan. The amount to be included in the employee's income under paragraph 6(1)(f) may be reduced by the amount of contributions made to the plan by the employee after 1967.
If we assume that the long-term disability benefits were paid periodically to the individual by the insurance company under a wage-loss replacement plan, similar to the one described in the preceding paragraph, such benefits received by the individual during the individual’s lifetime were required to be included in income from an office or employment by virtue of paragraph 6(1)(f).
You stated that part of the amount received from the insurance company related to disability benefits that were unpaid during the individual's lifetime. If the portion of the amount paid by the insurance company following the out-of-court settlement as long-term disability benefits related to periodic benefits that had fallen due, these benefits, if received during the individual's lifetime, would have been included in computing income from an office or employment of the individual by virtue of paragraph 6(1)(f). This position was confirmed by the Supreme Court of Canada in Tsiaprailis v. The Queen, 2005 DTC 5126.
Based on the only information available to us, if the portion of the amount paid by the insurance company following the out-of-court settlement as long-term disability benefits related to periodic benefits that had fallen due, such benefits received by the estate in 2008 would constitute a right, or thing since at the time of his death it appears to us that the individual had a legal right to the said benefits and that its amount could be determined by the parties.
Survivor's benefit
If we assume that the survivor's benefit received by the individual's estate is one of the components of the long-term disability insurance plan, it is likely that this benefit would qualify as a "death benefit" and would be taken into account in this calculation by the recipient or recipients of the benefit.
Under subsection 248(1), a "death benefit" is the total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of services rendered by the employee in excess of the deduction allowed under that subsection of up to $10,000. The recipient must include the death benefit in computing income pursuant to subparagraph 56(1)(a)(iii).
A benefit received as a consequence of the death of a person qualifies as a death benefit if it can reasonably be regarded as being paid in recognition of services rendered by that person in connection with an office or employment.
Whether the amount paid by the insurance company to the estate as a survivor's benefit was, in particular, in recognition of the services rendered by the individual is, however, a question of fact.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.