12 July 1994 External T.I. 9411015 - REMOVAL OF A DISABILITY POLICY FROM EMPLOYER PLAN

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:

are benefits received under a disability policy taxable to a former employee where ownership of the policy has been transferred to him/her upon the termination of employer UNDER THE TERMS OF THE WAGE LOSS REPLACEMENT PLAN

Position TAKEN:

question of fact -if it is under the terms of the wlrp & thus coverage under the plan, yes. If not & future benefits are not dependant upon prior participation in the employer sponsored plan, no but ... any benefit derived from the transfer of ownership of the policy will give rise to a taxable benefit

Reasons FOR POSITION TAKEN:

distinguish between the employer's plan and the policy through which the benefits are funded. Depending on the link(s) between the employer's plan and the policy as held by the former employee (whether through the plan or the policy), the employee may be taxable either on the benefit derived from the conversion to a personal policy or under 6(1)(f) if and when benefits are received.

				Rulings Directorate

XXXXXXXXXX		A. Humenuk
				941101

Attention: XXXXXXXXXX

July 12, 1994

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plans

We are replying to your letter of April 19, 1994 concerning a disability income policy the ownership of which has been transferred from the employer to the employee upon the termination of the individual's employment.

In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").

In the scenario you describe, an employer provides a wage loss replacement plan for its employees by means of grouped individual disability income insurance policies. Upon the termination of an individual's employment, the individual is entitled to convert the policy applicable to that individual into a non-grouped disability income insurance policy. The individual becomes the owner of the policy and is responsible for all future premiums required under the policy. In the event that the individual becomes entitled to income maintenance under the policy after the policy has been converted to a personal policy, you ask whether such payments would be taxable under paragraph 6(1)(f) of the Act.

We do not confirm the tax implications resulting from proposed transactions except by way of an advance income tax ruling as described in Information Circular 70-6R2 "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto dated September 30, 1992. However, we are prepared to offer the following general comments which may be of assistance to you.

In addressing your question, it is important to distinguish between the plan under which an employer agrees to provide benefits to its employees and the insurance policy or policies which may be used by the employer to provide such benefits. It is a question of fact as to whether or not the benefits payable under a particular policy are derived from participation in an employer-provided plan. Where a disability plan which was funded in whole or in part by the employer provides for continued benefits under the plan after the termination of the individual's employment, any benefits received under the plan will be taxable under paragraph 6(1)(f) of the Act. The amount to be included in income is reduced by the amount of any contributions made by the employee or former employee.

If, on the other hand, the transfer of ownership of the policy to the former employee is as a result of the discontinuation of coverage under the employer's plan, any future benefits received under the policy would not be required to be included in income under paragraph 6(1)(f) of the Act provided that such benefits were not in any way conditional upon coverage under the policy during the period of participation in the employer's plan. However, the former employee would be required to include in income any benefit arising as a result of the transfer of the ownership of the policy. Such a benefit would arise where the level of benefits or amount of premium payable for the policy is favourable in relation to that which the individual could purchase separately.

Please note that these comments are general in nature only and are not binding with respect to any specific plan or arrangement.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch