Principal Issues: [TaxInterpretations translation] What is the tax treatment for the taxpayer of amounts reimbursed to an insurer?
Position: A question of fact. In this case, paragraph 8(1)(n) appears to be applicable.
Reasons: All the conditions for the application of paragraph 8(1)(n) appear to have been satisfied.
2007-026259 XXXXXXXXXX Anne Dagenais, Advocate, M. Fisc.
May 29, 2008
Dear Madam,
Subject: Repayment of amounts paid - paragraph 8(1)(n)
This is further to your request of December 12, 2007, in which you asked our opinion on the tax treatment of a refund by an employee of amounts initially received from an insurer. More specifically, you are seeking clarification regarding the application of paragraph 8(1)(n) of the Income Tax Act (the "Act") in the situation described below.
You described a situation where a taxpayer benefits from a benefit plan that includes a disability insurance policy taken out by the employer with an insurer. The taxpayer received disability insurance benefits that were suspended in early 2004 due to a change in the definition of disability. The individual then applied to the Régie des rentes du Québec to obtain the disability pension provided for in the Act respecting the Québec Pension Plan. In addition, the employer granted the taxpayer the right to retire retroactively on January 1, 2004 and paid the taxpayer a retirement pension effective from that date. The insurer finally recognized the taxpayer's long-term disability and resumed payment of benefits retroactively to the time it had suspended them.
The insurer subsequently claimed reimbursement of the amounts paid to the taxpayer in 2004 and 2005 since it was not possible for the taxpayer to combine the retirement pension paid by his employer with the insurer's disability benefits.
You therefore wish to know the tax treatment to the taxpayer of the amounts reimbursed by the employee to the insurer.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Our Comments
The situation you have indicated in your letter appears to be related to an actual situation, which concerns a specific taxpayer. As explained in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling.
Whether an amount was paid to an employee in error and whether the employee is required to repay that amount remains a question of fact that can only be resolved after an analysis of all the facts of a particular situation. However, where it is determined that an amount was paid to an employee in error, the Canada Revenue Agency is generally of the view that the amount does not have to be included in the employee's income for the year in which it is received. If the employee is subsequently required to reimburse this amount, no deduction from income will be allowed in respect of the repayments made.
Paragraph 8(1)(n) permits a deduction in computing a taxpayer's income for an amount paid in the year pursuant to an arrangement under which the taxpayer is required to reimburse any amount paid to the taxpayer for a period throughout which the taxpayer did not perform the duties of the office or employment. However, this arrangement must not be an arrangement described in subparagraph 6(1)(b)(ii) of the definition "top-up disability payment". The deduction is allowable only if the amount so paid to the taxpayer was included in computing the taxpayer's employment income, regardless of whether the payer of the amount was the taxpayer's employer or not. In addition, the deduction cannot exceed the total of all amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.
We note that the term "arrangement" is not defined in the Act. Therefore, it is necessary to rely on its common meaning. Louis Ménard's Dictionary of Accounting and Financial Management [Le Dictionnaire de la comptabilité et de la gestion financière] defines the term "arrangement" as follows: [TaxInterpretations translation] "agreement - Syn: arrangement; accommodation; compromise. Law: Negotiated solution to settle a situation. "
We are of the view that the word "arrangement" is broad enough to include a situation where a taxpayer must reimburse disability benefits to an insurer.
Thus, as long as all the conditions of paragraph 8(1)(n) are satisfied, we are of the view that the taxpayer may deduct the disability benefits reimbursed by the taxpayer to the insurer.
These comments are not advance income tax rulings and are not binding on the CRA in respect of any particular factual situation.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Division
Income Tax Rulings Directorate.