2018-0757561R3 Payment in lieu of continued WLRP payments

Principal Issues: (1) Whether a lump sum payment out of a health and welfare trust in lieu of continued wage loss replacement plan benefits is required to be included in income? (2) Whether an additional lump sum payment out of the trust representing the distribution of remaining assets, if any, in the trust is required to be included in income?

Position: (1) No, consistent with established jurisprudence in respect of such settlement payments. (2) Yes, as the payment represents a taxable benefit from employment.

Reasons: See reply.

Author: XXXXXXXXXX
Section: 5(1); 6(1); 6(1)(f); 6(3)

XXXXXXXXXX                                                    2018-075756

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling Request
         XXXXXXXXXX XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX, in its capacity as representative counsel of the Disabled Employees (as such term is defined below) and XXXXXXXXXX, in their capacity as the trustees of the Long Term Disability Plan for the Employees of XXXXXXXXXX. We also acknowledge the additional information provided in your email dated XXXXXXXXXX.

We understand that, to the best of your knowledge and that of XXXXXXXXXX, none of the proposed transactions or issues involved in this advance income tax ruling request are the same or substantially similar to transactions or issues that are:

(i)   in a previously filed tax return of a Disabled Employee or a related person and:

A.    being considered by the Canada Revenue Agency (the “CRA”) in connection with such return;

B.    under objection by a Disabled Employee or a related person; or

C.    the subject of a current or completed court process involving a Disabled Employee or a related person; or 

(ii)  the subject of a ruling previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter, the following terms have the meanings specified:

“Actuary” means the XXXXXXXXXX;

“Benefits” means the benefits paid or payable to Disabled Employees or to which they are entitled under the Plan;

XXXXXXXXXX

XXXXXXXXXX

“Court” means the XXXXXXXXXX;

“Custodian” means XXXXXXXXXX, and its successors;

“Disabled Employees” means all Canadian employees or former employees of Parentco (i) who have a vested right, at the time of this letter, to receive long-term disability income under the LTDP Fund, and (ii) who are entitled to receive one or more payments out of, and in respect of the termination of, the LTDP Fund in accordance with the XXXXXXXXXX. An individual member of such group is hereinafter referred to as a Disabled Employee;

“LTDP Fund” means the Long Term Disability Plan for the Employees of XXXXXXXXXX governed by the Plan and that was originally established on XXXXXXXXXX by the Trust Agreement;

“Parentco” means XXXXXXXXXX;

“Plan” means the Long Term Disability Plan for the Employees of XXXXXXXXXX;

“Residual Beneficiaries” has the meaning given to it in paragraph 20. An individual member of such group is hereinafter referred to as a Residual Beneficiary;

“Termination Date” has the meaning given to it in paragraph 15;

“Trust Agreement” means the trust agreement between XXXXXXXXXX collectively as trustees, and dated XXXXXXXXXX, for the establishment of a trust fund created for the purpose of funding the Plan, as more fully described in paragraphs 4 to 8, as amended in accordance with paragraph 9.d; and

“Trustees” mean XXXXXXXXXX.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1.    Parentco is XXXXXXXXXX governed by the XXXXXXXXXX. It is a taxable Canadian corporation. Parentco’s Business Number is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Parentco is a direct and indirect wholly owned subsidiary of XXXXXXXXXX.

2.    Parentco filed for and obtained protection under the XXXXXXXXXX by order of the Court dated XXXXXXXXXX.

3.    On XXXXXXXXXX was appointed representative counsel for the Disabled Employees.

4.    The LTDP Fund was established by the Trust Agreement for the purpose of funding the Plan. The trust account number for the LTDP Fund is XXXXXXXXXX. The LTDP Fund has a XXXXXXXXXX taxation year-end and deals with the XXXXXXXXXX Tax Services Office.

5.    Under former article XXXXXXXXXX of the Trust Agreement (i.e., as it read prior to the amendments noted in paragraph 9.d), Parentco agreed to remit contributions to the LTDP Fund in the manner provided under the Plan in such amounts, and as may be required from time to time on actuarial advice, such that the funds in the LTDP Fund are calculated to be sufficient to meet anticipated claims under the Plan based on insurance principles. Under former article XXXXXXXXXX of the Trust Agreement, Parentco was responsible for the adequacy of the LTDP Fund to meet and discharge any and all payments and liabilities under the Plan.

6.    Under article XXXXXXXXXX, the Trust Agreement may be amended with the consent of the Trustees; however, no amendment shall divert the LTDP Fund or any part thereof to a purpose other than the provision of Benefits under the Plan and the Trust Agreement.

7.    Under former article XXXXXXXXXX, the LTDP Fund may be terminated at any time by Parentco upon XXXXXXXXXX days’ prior written notice to the Trustees. Upon expiry of the XXXXXXXXXX days, Parentco is relieved of its obligations to continue to make contributions to the LTDP Fund in respect of Benefits under the Plan (the “Notice of Termination”). Within XXXXXXXXXX days following the Notice of Termination, or as soon thereafter as practicable, the Trustees shall determine and satisfy all expenses, claims and obligations arising under the Trust Agreement and the Plan up to the Notice of Termination. Parentco is responsible for paying to the Trustees sufficient funds to satisfy such expenses, claims and obligations.

8.    The Custodian holds custody of the assets of the LTDP Fund.

9.    Pursuant to the XXXXXXXXXX,

a.    the Plan was terminated and any and all obligations of Parentco arising under, in connection with or related to the Plan and the LTDP Fund (other than any deficiency in the LTDP Fund’s ability to satisfy any claim of a Disabled Employee under the Plan or the LTDP Fund existing as at XXXXXXXXXX) were terminated with effect from XXXXXXXXXX;

b.    the Actuary was to prepare a report quantifying the net present value of each of the Disabled Employees’ future entitlement to Benefits under the Plan as at the Termination Date;

c.    the original trustees of LTDP Fund resigned or were removed as trustees of the LTDP Fund and the Trustees were appointed as replacement trustees of LTDP Fund to fill vacancies for the purpose of administering the wind-up of the LTDP Fund;

d.    the LTDP Fund was amended to remove all references to obligations, duties and powers of Parentco under the Trust Agreement, to confirm that the Trustees are the trustees of LTDP Fund, to limit the liability of the Trustees and to make certain other amendments that are consequential to the XXXXXXXXXX;

e.    the LTDP Fund shall continue until it is terminated and wound-up by the Trustees;

f.    payment of Benefits are to continue to be made to the Disabled Employees by the Custodian from the LTDP Fund until the Custodian is instructed by the Trustees to cease or otherwise modify the payments;

g.    the Custodian was to provide monthly reports detailing all payments made from the LTDP Fund within XXXXXXXXXX days of the end of each month;

h.    XXXXXXXXXX was authorized to proceed with this advance income tax ruling request; and

i.    following receipt of this advance income tax ruling, the Trustees shall proceed with the proposed transactions described below.

10.   At the time of writing, there were XXXXXXXXXX Disabled Employees.

11.   The Disabled Employees are individuals resident in Canada for purposes of the Act. The Disabled Employees are the only people entitled to Benefits under the Plan.

12.   The Trustees have caused the Custodian to continue to make all payments of Benefits to the Disabled Employees out of the LTDP Fund that are required to be made under the Plan, in accordance with paragraph 9.f.

13.   The Custodian has reported the payments of Benefits on form T4A issued to the Disabled Employees.

PROPOSED TRANSACTIONS

The proposed transactions will occur in the order that they appear below, unless otherwise indicated.

14.   The LTDP Fund will continue to make all required payments of Benefits until the payments described in paragraph 18 are made.

15.   Following receipt of this advance income tax ruling, the Trustees will determine the date to terminate and wind-up the LTDP Fund (the “Termination Date”).

16.   The Actuary will prepare the report described in paragraph 9.b for the Trustees quantifying the net present value of each of the Disabled Employees’ future entitlement to Benefits under the Plan as at the Termination Date;

17.   The Trustees will direct the Custodian to conduct a final reconciliation of the assets in the LTDP Fund as at the Termination Date.

18.   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 equal to the amount shown in the Actuary’s report described in paragraph 16 in respect of such Disabled Employee.

19.   The Trustees will direct the Custodian to pay all administrative expenses, including legal and actuarial fees of Parentco and XXXXXXXXXX associated with the termination of the Plan and the LTDP Fund.

20.   If following the payments described in paragraphs 18 and 19 there are assets remaining in the LTDP Fund, the Trustees will equitably allocate the remaining assets to the beneficiaries of the LTDP Fund who were entitled to benefits thereunder as of XXXXXXXXXX (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.

21.   The LTDP Fund will be wound up.

PURPOSE OF THE PROPOSED TRANSACTIONS

22.   The purpose of the proposed transactions is to wind-up the LTDP Fund under the Parentco XXXXXXXXXX proceedings in accordance with the XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purposes of the proposed transactions, the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, we rule that:

A.    The payments to a Disabled Employee, as described in paragraph 18, 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, as described in paragraph 20, 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 in accordance with subsection 153(1) of the Act. The payor is required to file an information return in prescribed form in respect of the payment in accordance with subsection 200(1) of the Income Tax Regulations.

CAVEATS

Except as expressly provided herein, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, or made any determination in respect of any tax consequences relating to the facts, the proposed transactions, or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above. For greater certainty, the CRA has not confirmed or made a determination in respect of whether the Plan is a disability insurance plan as described in paragraph 6(1)(f) of the Act.

The above advance income tax rulings are based on the Act and Income Tax Regulations in their present form and do not take into account any proposed amendments thereto. The rulings are subject to the general limitations and qualifications set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations, dated April 23, 2019, and are binding on the CRA provided that the proposed transactions are completed within XXXXXXXXXX months of the date of this letter.

Yours truly,

XXXXXXXXXX
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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