2019 Ruling 2018-0757561R3 - Payment in lieu of continued WLRP payments -- summary under Paragraph 6(1)(f)

Background

Parentco (a taxable Canadian corporation) filed for and obtained protection under the CCAA (or Bankruptcy and Insolvency Act) by order of the Court. Parentco was responsible for the adequacy of long term disability plan (the “LTDP Fund”) that had been established for resident disabled employees. Upon any termination of the LTDP Fund by Parentco, its Trustees were required to satisfy all claims and obligations arising under the Plan up to the termination, and Parentco to fund such payments.

Proposed transactions

1. As contemplated in the CCAA plan, and after an actuarial computation of the net present value of each of the Disabled Employees’ future entitlement to benefits under the Plan as at the Termination Date, the Trustees will direct the Custodian to make one or more cash payments out of or under the LTDP Fund to each Disabled Employee in lieu of the Disabled Employee’s future entitlement to benefits under the Plan (described in the CRA summary as “lump sum payment out of a health and welfare trust in lieu of continued wage loss replacement plan benefits”) equal to the amount shown in the Actuary’s report.
2. If following such payments there are any remaining assets the Trustees will equitably allocate them “to the beneficiaries of the LTDP Fund who were entitled to benefits thereunder as of a specified date (the ‘Residual Beneficiaries’) subject to a Residual Beneficiary revoking in writing their distribution in which case the revoking Residual Beneficiary’s entitlement amount will form part of the pool to be distributed to the other Residual Beneficiaries.”
3. The LTDP Fund will be wound up.

Rulings

A. The payments to a Disabled Employee [in 1 above] will not be included in a Disabled Employee’s income for purposes of the Act and the payor will not be required to withhold and remit income tax or file an information return in respect of the payments.

B. The payment to a Residual Beneficiary [in 2 above] will be included in the income of a Residual Beneficiary under sections 5 and 6 of the Act in the year of receipt and will be subject to the appropriate income tax withholding … .

The CRA summaries state the respective rationales for the two rulings as “being consistent with established jurisprudence in respect of such settlement payments” and “the payment represents a taxable benefit from employment.”