22 January 1990 Ministerial Letter 59198 F - Disabled Employees and Pensions

January 22, 1990

Dear Sirs:

Re:  Disabled Employees and Pensions

We are responding to your letter of November 24, 1989, concerning 24(1)

We do not generally offer opinions on proposed transactions except by way of an advance income tax ruling.  The procedure for obtaining a ruling is outlined in the attached Information Circular 70-6R "Advance Income Tax Rulings".  Please note that the current rate for a ruling is $65 per hour and the minimum fee has been replaced with a $325 deposit.  However, we would like to offer the following general comments concerning the issues you have raised.

You present the following facts:

24(1)

However you are concerned about the tax consequences to the recipients resulting from such an arrangement.

1.     You have asked whether it would be possible for the individuals in question to continue to receive their disability benefits tax-free.

     While the benefits from an employee pay-all wage loss replacement plan are not subject to tax, annuity payments are included in income under paragraph 56(1)(d) of the Act.  However to the extent that the annuity payments are received on account or in satisfaction of rights under the pension plan, it is our view that the payments would be included in income as pension income under subparagraph 56(1)(a)(i) of the Act rather than as annuity payments.  Consequently, if an individual agrees to give up his right to a benefit under the LTD Plan in exchange for benefits under the pension plan, it is our view that the payments under the pension plan would be taxable as pension income.

2.     Alternatively, you have asked whether the Department would accept a lump sum payment from the Employer in lieu of future payments to be received from the employees on account of their tax for the year(s) of receipt of the annuity payments.

     The Department does not have the authority to barter on the amount of tax due and thus is not in a position to accept such a proposal.  Furthermore, it should be noted that a payment by an employer on account of an employee's tax liability represents a taxable benefit to that employee.

3.     As a third alternative, you ask whether it would be possible for the Employer to increase the disabled employee's benefit by 15% in order that the employee receive the same net benefit from the pension fund as received previously under the LTD Plan.

     If the Employer supplements the pension payments, it is our view that the amount so paid to the disabled employee by the Employer would represent employment income unless it could not reasonably be said to be received by virtue of the past or present employment of that individual.

     However, our telephone conversation of January 3, 1990  19(1) Humenuk), you indicated that it would be possible under the pension plan rules for the pension plan to pay a disability pension to the individuals who qualify, greater than that available under the LTD Plan.  Provided that the rights to payment under the annuity contract are rights provided for by the pension plan, the payments will be included in income when received as pension income.  However, if the benefits under the annuity contract exceed the benefits available under pension plan, an amount equal to the fair market value of the annuity contract at the time the contract is entered into is required to be included in the recipient's income for the year in which the contract is entered into under paragraph 254(b) of the Act.

While the above noted comments represent our opinion of the tax consequences associated with the transactions you describe, it does not constitute a ruling and is not binding on the Department.  Furthermore, our comments should not be construed as an acceptance of the proposed amendment to the pension plan.  As stated in paragraph 15 of Information Circular 72-13R8, amendments or revisions to a pension fund or plan should be referred to:

     Registered Pension and Deferred Income Plans Division Revenue Canada, Taxation Ottawa, Ontario KlA 0L8

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch

Enclosure

c.c.   Registered Pension and Deferred Income Plans Division