Principal Issues: [TaxInterpretations translation] Is the difference between a total disability benefit from a general expense insurance policy and the office expenses actually incurred and related to the operation of a commercial or professional business taxable?
Position: Yes.
Reasons: By virtue of subsection 9(1) and in accordance with Interpretation Bulletin IT-223.
2009-033769 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. February 8, 2010
Dear Sir,
Subject: Overhead Expense Insurance
This is in response to your letter that we received on August 14, 2009, in which you requested our opinion regarding the tax treatment of additional amounts of insurance benefits you received during a period of disability to cover your office expenses. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
On XXXXXXXXXXXX, you purchased a disability insurance policy that provides for the payment of an injury or illness claim equal to the monthly overhead expenses you incur in the operation of your business.
As a result of a claim for total disability benefits made on XXXXXXXXXX, you received XXXXXXXXXX periodic payments of $XXXXXXXXXX for maximum overall benefits of $XXXXXXXXXX. In this regard, we have assumed that these disability benefits were intended to cover the monthly overhead expenses related to the operation of your business or professional practice, which are described in paragraph XXXXXXXXXX of the policy. However, you indicated that the office expenses you actually incurred were $XXXXXXXXXXXX.
Your Question
You asked whether the difference between the total maximum benefits received from your insurer and the office expenses actually incurred during the maximum benefits period are taxable.
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
The insurance you described should be distinguished from income insurance, which protects against loss of income.
In this case, we are of the view that the difference between the total maximum benefits received from your insurer and the office expenses you actually incurred during the maximum benefits period must be included in computing your income under subsection 9(1). In addition, the premiums paid in respect of the disability insurance policy are deductible in computing your income from a business in the year in which the premiums are paid.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.