5 September 2000 Internal T.I. 2000-0035427 - WAGE LOSS REPLACEMENT VS. SALARY CONTINUANCE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a plan is a sickness plan or a salary continuance plan.

Position: It is a salary continuance plan.

Reasons: Paragraph 7 of IT-428 indicates that a sickness plan must be an "insurance" plan, and therefore paragraph 6(1)(f) does not apply to uninsured employee benefits such as continuing wage or salary payments based on sick leave debits. These latter type of payments are included in income under paragraph 6(1)(a).

		September 5, 2000

	Terry D. Bailey	HEADQUARTERS
	Programs Officer	J. Gibbons
	CPP/EI Eligibility Division	957-2135

2000-003542

XXXXXXXXXX (the "Taxpayer") - Sickness Plan

We are replying to your facsimile dated July 4, 2000, in which you requested our views on whether the sickness plan (the "Plan") for the Taxpayer is a "wage-loss replacement plan" or a salary continuance plan.

The facts are as follows:

• The employees do not contribute to the Plan.
• The Plan is self-insured, but claims are adjudicated by an insurance company.
• The insurance company is paid only an administrative charge for claims' certification and processing.
• Funds are not accumulated for the purpose of paying the benefits. Instead, the Taxpayer is billed monthly, in arrears, for all payments made to claimants plus the administrative charge.
• The insurance company has neither the right nor the obligation to collect annual contributions from the Taxpayer to fund any benefits payable.
• The availability, the amount and the duration of the benefits payable are linked to an employee's tenure with the Taxpayer.
• There is a qualifying period of 10 consecutive work days of illness/disability before the schedule of benefits commences.
• Written notification of a disability claim (i.e., proof of loss) must be provided to the insurance company within a specified period of time, one part completed by the employees and one part by the employer. Also required is the standard attending physician statement which provides general objective medical information that enables the insurance company to assess the claimant's ability or inability to return to their usual occupation. In some cases, they will contact the employee directly to obtain additional information to adjudicate the claim.
• If the claim is approved by the insurance company, a payment is made to the employee according to the formula specified in the schedule of benefits. The Taxpayer is then invoiced for the amount of the benefit plus the administrative fee. If the claim is not approved, the insurance company will explain the reasons for the denial to the taxpayer.
• The insurance company is not obliged to make the payment for any disability claim they feel is not justified, and the employee does not have any direct right of action against the insurance company for benefits. An employee's claim for benefits lies against the Taxpayer.
• If the illness or injury is specifically work-related, a claim is filed with the applicable Workers' Compensation Board. If the claim is due to pregnancy, a claim is made to the Employment Insurance Commission for sickness related benefits.

Our views

Our views on the meaning of the term "wage loss replacement plan" for purposes of paragraph 6(1)(f) of the Act are set out in paragraph 7 of IT-428. This paragraph indicates that such a plan must be an "insurance" plan, and therefore paragraph 6(1)(f) does not apply to uninsured employee benefits such as continuing wage or salary payments based on sick leave debits. These latter type of payments are included in income under paragraph 6(1)(a). Further, this paragraph states that, while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company; however, if insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. Thus, if an arrangement merely consists of an unfunded contingency reserve on the part of the employer, it would not be an insurance plan.

Based on the foregoing, it is our view that the Taxpayer's Plan is not a wage-loss replacement plan, since it is not based on insurance principles but instead is funded on an ongoing basis. Accordingly, payments made from the Plan would be taxed under paragraph 6(1)(a) of the Act.

We trust that these comments will be of assistance.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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