9 May 2013 Internal T.I. 2013-0485831I7 - Disability benefits received by former employees

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a former employee would be subject to tax under paragraph 6(1)(f) of the Act on periodic long term disability insurance benefits he or she continues to receive after his or her employment has been terminated.

Position: Yes

Reasons: An amount received on a periodic basis from an employer funded disability insurance plan in respect of the loss of all or any part of the individual's income from employment is required to be included in the individual's employment income under paragraph 6(1)(f) of the Act. Since the words "in respect of" have broad meaning, there only needs to be a connection at some time between the periodic long term disability insurance benefit and the loss of employment income for paragraph 6(1)(f) of the Act to apply.

DATE May 9, 2013

TO Legislative Policy & Regulatory FROM Income Tax Rulings
À Affairs Branch Directorate
Legislative Policy Directorate DE P. Waugh
CPP/EI Rulings Division 905-721-5221
Policy Section

Attn : Maria Fazio-Archer FILE 2013-048583
DOSSIER

SUBJECT: Disability Insurance Benefits

PURPOSE

We are writing in response to your email dated April 17, 2013, concerning the taxation of long term disability ("LTD") benefits. More specifically, you have enquired whether a former employee would be subject to tax under paragraph 6(1)(f) of the Income Tax Act (the "Act") on periodic LTD benefits he or she continues to receive after his or her employment has been terminated.

OUR COMMENTS

Our understanding is that an individual began receiving periodic LTD benefits from an employer funded LTD plan while employed by the employer. The individual's employment was terminated by the employer after the individual started to receive the periodic LTD benefits. The LTD plan does not require that an individual remain as an employee throughout the disability period in order to continue receiving the LTD benefits. The LTD plan further provides that an individual would continue to receive periodic LTD benefits until age 65 or death. The employer funded LTD plan is self-insured and administered through an administrative services only ("ASO") arrangement with an insurance company. It is assumed that the self-insured ASO plan is based on insurance principles and therefore qualifies as a disability insurance plan under paragraph 6(1)(f) of the Act.

As you are aware, under paragraph 6(1)(f) of the Act, an amount received on a periodic basis from an employer funded disability insurance plan in respect of the loss of all or any part of the individual's income from employment is required to be included in the individual's income as income from employment. The courts have determined that the words "in respect of" have the widest meaning possible and that there only needs to be a connection to employment. As long as the LTD benefits were connected to the loss of employment income at some point, paragraph 6(1)(f) of the Act will apply. Therefore, it is our view that these periodic LTD benefits that continue to be received, after employment has been terminated, by the individual are taxable under paragraph 6(1)(f) of the Act as employment income.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch