I have a question in this regard. From your reply, I gather that settlement lump sum in-lieu of future LTD payments wont’ be taxable irrespective of whether the LTD monthly payments are taxable or not.
I want to make sure for my scenario below as tax payable will significantly affect my lump sum.
- Primary LTD plan – Monthly amount taxable and No Cost of living adjustment (COLA) (Tax is deducted monthly and T4A slip is issued)
- Secondary LTD plan - Monthly amount Non-taxable and COLA adjusted yearly (Tax is not deducted monthly and T4A slip is NOT issued)
I have been offered a settlement and I am planning to accept it. Settlement is in lieu of future LTD payments covering both primary and secondary plans. This settlement does not involve any past payments.
I got the following reply from the insurer on my question if the lump-sum is taxable.
Q: I want to know the tax implication on the settlement amount. I gather that as lump sum settlement is in lieu of future monthly payments (and not past payments), no tax need to be deducted by for CRA. Is this a valid understanding?
A: The Canada Revenue Agency takes the position that settlements, like this one, do not need to be reported for federal income tax purposes. is not required to issue and therefore will not be issuing a tax information slip for this settlement. However, we recommend that you consult a professional tax advisor in order to discuss your own situation.
From this and the settlement offer there is no reference tax deduction at source by the Insurer for CRA and the full offer amount is mentioned. From this, I gather that there will not be any tax to be paid to CRA even if CRA queries about this settlement in future.
I am confused about the statement from the insurer “However, we recommend that you consult a professional tax advisor in order to discuss your own situation.”.
I am not sure what this means. I understand that they are trying to safeguard themselves with this statement. I understand that any income generated from this settlement will be taxable and will be applied to my individual income calculation. But, if the insurer is not going to issue any tax slip and won’t be deducting tax from the settlement, I am assuming there is not tax to be paid from my end on the settlement amount when I file tax for 2020 in 2021. Am I missing something from the insurer’s statement. Could you please share your inputs on this.
Thanks very much for all the help.