23 September 1999 External T.I. 9912445 - DISABILITY INSURANCE 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: Whether a LTDP plan in a specific fact situation considered an employee payall plan?

Position: Doubtful this proposed plan would be considered an employee payall plan.

Reasons: Question of fact.

Xxxxxxxxxx 991244

Wm. P. Guglich

Attention: xxxxxxxxxx

September 23, 1999

Dear Sirs:

Re: Long Term Disability Plan ("LTDP")

This is in reply to your letter of May 10, 1999, requesting our views regarding proposed changes to a LTDP.

You described the following situation:

An employer sponsors a self-insured LTDP for its employees. The LTDP requires the payment of premiums by the employees to fund claims and anticipated claims and provides for the periodic payment of benefits to employees who suffer a loss of employment income due to disability. This is an employee pay-all plan with the employee contributing the full premium cost so that the benefits are not taxable.

The employer also contributes to a second LTDP which is an employer-funded program and the benefits are taxable.

It has been recognized that, notwithstanding the ongoing premiums to the arrangement, the LTDP reserves are insufficient to fund its current liabilities. To resolve this issue, the employer proposes to make a contribution to fund these liabilities.

Proposal

The employer proposes to amend the employee pay-all plan to change the nature of the plan from an employee pay-all plan to a taxable arrangement. This would permit the employer to make a contribution to the program to fund the unfunded liabilities, thus ensuring the security of benefits for existing recipients.

For active members currently participating in the employee pay-all plan, the current arrangement would be wound-up and a new arrangement established, which would retain its nature as an employee pay-all plan. Neither the amount of the benefit or the payment period will change. No change to the employer funded plan is anticipated.

You requested our comments regarding the following points:

1. The existing employee pay-all plan, can be amended to become a taxable plan;

2. Current recipients of benefits from the employee pay-all plan would continue to receive benefits on a non-taxable basis;

3. A new arrangement for active members of the employee pay-all plan can be established, which could operate as an employee pay-all plan; and

4. The employer funded plan would be unaffected by the changes to the employee pay-all plan.

In your letter, you have outlined an actual fact situation related to an actual proposed transaction and, therefore, we bring to your attention Information Circular 70-6R3, dated December 30, 1996, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers (i.e., the employer and the employees) will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. In considering such a request, we would require a complete description of all the relevant facts, information and proposed transactions. Nevertheless, we can offer the following general comments.

Our Comments

An employee pay-all plan may be amended permitting the employer to make a contribution, in which case the benefits received by the employees would, as stated in paragraph 14 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans, be subject to tax under paragraph 6(1)(f) of the Income Tax Act (the "Act"). However, as stated in paragraph 21 of IT-428, when an employee pay-all plan is changed and becomes a new taxable plan, an employee who was receiving benefits at the time of the change may continue to receive them tax-free thereafter but only in the amount and for the period specified in the plan as it was before the change.

If a new arrangement for active members of the employee pay-all plan is established, it will be, as stated in paragraph 17 of IT-428, a question of fact whether or not an employee pay-all plan exists and the onus is generally on the employer to prove the existence of such a plan. Taking into consideration the series of transactions in the hypothesis described in your letter (i.e., insufficient reserves to fund the current liabilities, the contribution by the employer, the establishment of a new plan), there is some doubt that such a new plan would be considered an employee pay-all plan, because there is likely no impediment to the employer subsidizing future shortfalls in the new plan.

As the employer funded plan will remain unchanged with the employer continuing to make contributions, the benefits received by the employees under this plan will be subject to tax under paragraph 6(1)(f) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton
Manager
Business, Property and Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch