18 February 1997 External T.I. 9640485 - WAGE LOSS REPLACEMENT PLANS

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.

		964048
XXXXXXXXXX	Jacques E. Grisé
(613) 957-2059

Attention: XXXXXXXXXX

February 18, 1997

Dear Sirs:

Re: Wage Loss Replacement Plans

This is in reply to your letter of November 8, 1996 requesting our opinion on the tax implications relating to certain wage loss replacement plans.

The questions you have asked appear to relate to specific taxpayers and involve proposed transactions. Confirmation of the tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling following a review of all the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R3, dated December 30, 1996. As a request for an advance income tax ruling has not been made, our comments set out below must be construed as being broad and general in nature rather than having been made in respect of a specific situation.

As discussed in Interpretation Bulletin IT-428, a wage loss replacement plan is any arrangement between an employer and employees under which provision is made for indemnification of an employee, by means of benefits payable on a periodic basis, if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident. Where two or more employees are covered under such a wage loss replacement plan, it will normally meet the requirement of a "group sickness or accident insurance plan". Any benefit derived by an employee from the contribution by his or her employer to or under a group sickness or accident insurance plan is not a taxable benefit pursuant to subparagraph 6(1)(a)(i) of the Income Tax Act. The employer contributions to such a plan are usually deductible and any payments to the employees from such a plan would be required to be included in income pursuant to paragraph 6(1)(f) of the Act.

In the case where an individual is both an employee and a shareholder, it is a question of fact whether a benefit has been conferred on the individual in the capacity of a shareholder or in the capacity of an employee. However, where a benefit is granted to such an individual, the benefit will be presumed to have been conferred upon him or her by reason of being a shareholder, unless the benefit is available to all employees of that corporation or the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.

Where a benefit is conferred on an individual in his or her capacity as a shareholder, those benefits would be taxed in the individual's hands pursuant to subsection 15(1) of the Act and the exception under subparagraph 6(1)(a)(i) of the Act would not apply. In addition, the related expense would not be deductible in computing the corporation's income since the payment is not incurred by the corporation for the purposes of gaining or producing income from a business or property as required under paragraph 18(1)(a) of the Act.

You are also concerned with a situation where an employer wishes to establish two wage loss replacement plans with respect to all of its employees. The first plan to be paid by the employer would provide benefits to age 65. The second plan would be paid entirely by the employees. The second plan would provide for additional coverage for any employees who want to purchase benefits to cover the elimination period.

In order to determine the tax consequences of the above situation, it is essential to determine whether there are, in fact, two wage loss replacement plans. In this regard it is our general view that two wage loss replacement plans would be regarded as being in existence provided that there is not cross subsidization between the two plans, and the level of benefits, premiums rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other plan. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other.

If it is established that two separate plans do exist, the benefits paid in respect of the first plan would be taxable pursuant to the provisions of paragraph 6(1)(f) of the Act while the benefits out of the second plan would be non-taxable. The premiums paid by the employer with respect to the first plan would be deductible by the employer and would not be taxable benefits to the employees.

A wage loss replacement plan can include the situation under which employees are covered under individual insurance contracts but pursuant to the plan. Such individual insurance contracts need not be purchased from the same insurer nor must the contract provisions and elimination periods be identical in every policy to qualify under the plan. However, each policy must be within the parameters of the wage loss replacement plan.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch