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 an employer may split a long-term disability plan into two plans - one for unionized staff and one for non-unionized staff. The non-unionized staff would pay XXXXXXXXXX % of the premium while the employer would pay XXXXXXXXXX % of the premium in the plan for unionized staff.
Position: If the Taxpayer can establish that the new plan is separate from the existing plan and that it is an employee-pay-all plan, any benefits received under this new plan will be received by employees tax-free while the benefits paid under the old plan would continue to be subject to tax in the employees' hands to the extent provided paragraph 6(1)(f) of the Act. However, where an employee is receiving benefits under the taxable plan at a time when the new employee-pay-all plan is instituted, the benefits he or she continues to receive, to the extent that they were provided for in the old plan, will remain of an income nature because they continue to flow from the old taxable plan.
Reasons: In order to determine the income tax consequences where an employer has two wage loss replacement plans, it is essential to determine whether there are, in fact, two 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 no 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. Additionally, the administration of the plans must indicate that each plan can be regarded as being separate from the other.
XXXXXXXXXX J. Gibbons
2000-001583
Attention: XXXXXXXXXX
May 19, 2000
Dear XXXXXXXXXX:
We are replying to your letter, which was faxed to us on March 22, 2000, in which you requested a "ruling" with respect to a proposal by XXXXXXXXXX (the "Taxpayer") to create a separate "Long Term Disability Plan" (LTD plan) for its non-unionized staff. You explained in your letter that currently all eligible staff (union and non-union) participate in the same LTD plan and that the employees pay XXXXXXXXXX% of the premium and the employer pays XXXXXXXXXX% of the premium. Under the new plan for non-unionized staff, the employees would pay XXXXXXXXXX% of the premium.
As requested, we have considered the situation outlined in your letter and have provided some comments below. However, confirmation of the tax implications of particular proposed transactions is given by way of an advance income tax ruling only where the request is submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.
The Agency's views with respect to disability insurance plans, as well as sickness, accident and income maintenance insurance plans, are set out in IT-428, "Wage Loss Replacement Plan." (As in the bulletin, we will refer to these plans as "wage loss replacement plans.") Where a wage loss replacement plan is one to which the employer has contributed, any benefits received by the employee will be subject to tax in his or her hands pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act"). However, where an employee has also contributed to the particular plan, the amount of benefits to be included in the employee's income may be reduced by some or all of the employee's contributions pursuant to subparagraph 6(1)(f)(iv). On the other hand, benefits received by an employee under an employee-pay-all plan will generally be received tax-free.
In order to determine the income tax consequences where an employer has two wage loss replacement plans, it is essential to determine whether there are, in fact, two 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 no 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. Additionally, the administration of the plans must indicate that each plan can be regarded as being separate from the other.
In regard to the Taxpayer's proposal for a new employee-pay-all plan, the onus is on the employer to establish the fact that it is an employee-pay-all plan. (See paragraph 17 of IT-428.) If any of the Taxpayer's previous funding exists in the "new" plan, as may be the case in a self-insured arrangement, the plan will be considered to be a continuation of the old plan and paragraph 6(1)(f) of the Act will continue to be applicable to future benefits received out of the plan. In the case of a plan which is funded through an insurance policy, it is a question of fact as to whether the employer funding still exists in the plan. Where the premium rate under the policy which is to provide benefits under the proposed new plan is based on the existence of the previous plan, the original funding will be considered to exist in the proposed new plan and any benefits will continue to be taxable to the extent provided by paragraph 6(1)(f) of the Act.
If the Taxpayer can establish that the new plan is separate from the existing plan and that it is an employee-pay-all plan, any benefits received under this new plan will be received by employees tax-free while the benefits paid under the old plan would continue to be subject to tax in the employees' hands to the extent provided in paragraph 6(1)(f) of the Act. However, where an employee is receiving benefits under the taxable plan at a time when the new employee-pay-all plan is instituted, the benefits he or she continues to receive, to the extent that they were provided for in the old plan, will remain of an income nature because they continue to flow from the old taxable plan. (See 21 of IT-428. You can find income tax bulletins, including IT-428, on the Agency's website at www.ccra-adrc.gc.ca.)
We trust that these comments will be of assistance.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
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