Case information

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The Appellant was injured in a motor vehicle accident in 1984. After receiving long term disability benefits from 1985 to 1993 under an insurance policy carried and paid for by her employer, the insurer stopped paying the Appellant, claiming she was no longer totally disabled. The Appellant sued the insurer and after negotiations a lump sum settlement of $105,000 was paid to her in 1996, which represented her entitlement to past benefits, 75% of the present value of her future benefits, and an amount for costs, disbursements and taxes. The insurer issued and delivered a T4-A to the Appellant without her knowledge or consent. The Appellant filed a T1 Adjustment Request reporting the settlement proceeds and claiming legal expenses. In a notice of reassessment, the Minister of National Revenue reassessed the Appellant for the 1996 taxation year to include the amount of $105,000 in income, but not allowing the legal expenses. A reassessment later allowed the deduction of $18,069 from income for legal expenses. The issue litigated was whether the amounts received by the Appellant from the insurer are properly taxable as income by virtue of either paragraph 6(1)(f) or 6(1)(a) of the Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.) (the "Act").

The Tax Court of Canada gave judgment for the Appellant on the basis that the lump sum payment could not come under paragraph 6(1)(f) of the Act dealing with periodic payments. It held that the general provision of paragraph 6(1)(a) could not be used by the Respondent to circumvent the limitation in paragraph 6(1)(f). The majority of the Federal Court of Appeal allowed the appeal on the basis that the portion of the lump sum payment which represented payments already due was made to replace monies payable on a periodic basis, and was therefore taxable under paragraph 6(1)(f). Evans J.A., dissenting, would have dismissed the appeal.