Principal Issues: [TaxInterpretations translation] Are amounts periodically paid to pensioners to compensate for the termination of their private health insurance program taxable?
Position: No
Reasons: Based on our research of the Act, our various Interpretation Bulletins and Technical Interpretations, we are of the view that compensation payments to former employees are not taxable under the Act. The payments made do not meet the criteria of subsections 5(1) and 6(3) or section 56. That type of payment is not from the sources listed in the Act.
2006-021648 XXXXXXXXXX Nancy Turgeon, CGA (613) 957-2082 February 27, 2007
Dear Sir,
Subject: Request for a technical interpretation: Taxability of a payment
This is in response to your letter of December 1, 2006, concerning the taxation of certain periodic payments to pensioners.
Context
In your letter you stated the following facts:
XXXXXXXXXX pays a portion of the premiums for a private health insurance program for its retirees. Under that program, retirees submit claims for drugs or medical expenses to an insurer and the insurer reimburses a percentage of the medical expenses or drug costs, subject to a deductible and other limits. Pensioners can benefit from that program until they reach the age of XXXXXXXXXX.
On XXXXXXXXXX, the retiree health insurance program was terminated for any employee retiring on or after that date. Retirees currently benefiting from that program will not be affected. Employees have already been notified of the repeal of that program. As compensation for the termination of the program, XXXXXXXXXX has agreed to pay an allowance of $XXXXXXXXXX/month to each of its retirees who retired after XXXXXXXXXX. The amount of $XXXXXXXXXX/month will be indexed by XXXXXXXXXX% per year starting on XXXXXXXXXX. This special allowance will be payable until the pensioner reaches the age of XXXXXXXXXX.
Questions
1. Will the amounts that XXXXXXXXXX proposes to pay to its former employees be taxable or non-taxable in the hands of those former employees?
2. If it is decided that those amounts are taxable, will those amounts be subject to withholding tax?
3. If so, which deductions should be made from these amounts: Income tax? Employment insurance premiums? CPP/QPP?
Analysis
Written confirmation of the tax consequences of specific transactions is provided by the Directorate only if the transactions are proposed and are the subject of an advance tax ruling request. Where the transactions have been carried out, the request for information should be addressed to the appropriate Tax Services Office. However, we are prepared to provide the following comments.
Question 1
Normally, income is taxable to the extent that it is derived from one of the sources listed in the Income Tax Act (the "Act"), i.e. an office or employment, property or business. Income will also be taxable if it is derived from one of the sources listed in section 56 of the Act.
Based on our research of the Act, our various Interpretation Bulletins and technical interpretations previously issued by the CRA, we are of the view that the compensation amounts paid to your former employees are not taxable under any section of the Act.
Subsection 5(1) provides for the taxation of amounts, including salary, wages and gratuities, arising from an office or employment – criteria which are not satisfied by the payments. Interpretation Bulletin IT196R2 reviews what arises from an office or employment.
Furthermore, the payments do not meet the criteria of subsection 6(3), which deals with amounts paid on account of or in full or partial consideration or partial consideration of an obligation between an employer and employee. Rather, the compensation received in this case relates to the loss of a plan benefit.
As for section 56, there is no provision in that section that allows the amounts paid by XXXXXXXXXX to be included in the income of the beneficiaries.
In the following technical interpretations and advance rulings, the Canada Revenue Agency ("CRA") has repeatedly ruled that this type of payment is not taxable on the basis that the amounts do not come from one of the sources listed in the Act: 2004-0096101R3, 2003-0001577 and 2000-0028843.
However, since the compensation received for the loss of their private health insurance plan is not taxable, the retiree or the retiree’s spouse will have to take into account the amounts received when determining the amount of medical expenses for the purposes of the non-refundable tax credit under section 118.2. Only medical expenses in excess of the amounts received from XXXXXXXXXX will be eligible for the credit by virtue of subsection 118.2(1), item B of the formula. This is to ensure that the retiree does not receive a double benefit.
We also refer you to the Supreme Court of Canada decision in Fries v. the Queen [1990] 2 S.C.R. 1322 where the Court determined that an amount must come from one of the sources listed in the Act to be taxable.
Questions 2 and 3
As a result of the response provided to the previous question, it is not necessary to answer questions 2 and 3.
We hope that these comments are of assistance.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate