| 19(1) | 901773 |
| R.B. Day | |
| (613) 957-2136 |
October 18, 1990
19(1)
Re: Income Replacement Plans
We are writing in reply to your letter of July 27, 1990 wherein you requested that we clarify the income tax status of "survivor benefits" in the situation described in your letter.
As we understand it, survivor benefits are a feature of some Long Term Disability ("LTD") plans and provide a lump sum payment to the surviving spouse or children of an insured individual who was receiving LTD benefits at the time of death. It is usually amount equal to 3 or 6 months of disability benefit which was being paid to the claimant and is intended to provide the family with immediate funds for necessary expenses.
Our Comments
We are assuming that the Income Replacement Plans referred to above are synonymous with Wage Loss Replacement Plans and that the guidelines set out in interpretation bulletin IT-428 (copy enclosed) would apply.
We will respond to the questions posed in your letter in the order in which they appear.
1. With respect to a non-taxable LTD plan (i.e. an "employee payment plan" as discussed in paragraph 16 of IT-428) it is our opinion that since periodic LTD benefit payments would not have been taxable to the claimant, the lump sum survivor payment to the spouse would similarly be non-taxable.
2. In the situation involving a taxable plan (i.e., where the employee pays either a portion or none of the LTD premium) it is our view that the lump sum payment to the spouse would be taxable in the recipients hands. In this regard, please refer to paragraph 11 of IT-428, which states that otherwise periodic payments paid in a lump sum are income to the recipient, and paragraph 22 which states that the amounts received by the claimant's survivors would be included in their income as a death benefit to the extent they exceed the exemption provided in subsection 248(1) of the Income Tax Act. A copy of IT-508 "Death Benefits-Calculation" is also enclosed for your information.
3. Our comments in 1 and 2 above would not be altered by the fact that the recipient may be either a surviving child or children rather than a spouse.
4. Our comments in 1 and 2 above would not be altered if the LTD plan is written to allow survivor benefits to be paid to a named beneficiary.
Should the situation set out in your letter involve an actual taxpayer and a proposed transaction you may wish to submit all relevant facts and details of the proposed transactions for a binding advance income tax ruling. Otherwise, where a specific transaction has been completed you may wish to submit all relevant facts and documentation to the appropriate District Office for their comments.
We would caution that the above comments reflect an expression of opinion only and as such are not binding upon the Department.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch