An Insurance Law Email Alert
On February 25, 2005, the Supreme Court of Canada rendered its decision in Tsiaprailis v. Canada,  S.C.J. No. 9.
The plaintiff, Tsiaprailis, was badly injured in a motor vehicle accident and received longterm disability benefits under her employer's insurance policy.
After eight years, the insurer terminated her benefits. Tsiaprailis sued the insurer for a declaration that she was entitled to a continuation of these benefits. Tsiaprailis and the insurer settled and Tsiaprailis received a lump sum payment of $105,000 after signing a release in which the insurer denied all liability.
The Minister of National Revenue reassessed Tsiaprailis to include the full settlement amount as income. The Tax Court of Canada, however, set aside the Minister's decision, and held that the lump sum settlement was not taxable. The Federal Court of Appeal allowed the Minister's appeal on the basis that the portion of the lump sum payment attributable to benefits arrears was made to replace monies "payable ... on a periodic basis ... pursuant to a disability insurance plan" and was therefore taxable under s.6(1)(f) of the Income Tax Act.
Tsiaprailis appealed the Federal Court of Appeal's decision. She argued that the payment was not made pursuant to a disability plan; rather, that it was made pursuant to an agreement that settled a disputed obligation.
The majority of the Supreme Court of Canada dismissed Tsiaprailis' appeal. The majority held that the taxability of settlement monies will depend on the nature of the settled interest. The test to be employed is twofold:
1. What was the payment intended to replace?
2. Would the replaced amount have been taxable in the recipient's hands?
In this case, the evidence was clear that part of the settlement monies was intended to replace past disability payments and such payments, had they been paid to Tsiaprailis, would have been taxable under s.6(1)(f).
This update is a general overview of the subject matter, and cannot be regarded as legal advice. Please contact Don Dear in Calgary at firstname.lastname@example.org, David Risling in Edmonton at email@example.com, or any member of our Insurance Law Practice Group for further information on this or any other insurance law topic.