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: A group of corporations would like to establish a sickness and accident plan. How would the premiums and benefits be treated for tax purposes? Will the plan cause the corporations to be associated? Will the corporations be considered to be personal services corporations?
Position: The resolution to each of the issued raised is determined by the facts of any given situation.
Reasons: The tax treatment of the premiums and benefits will be determined by the relationship between the corporations party to the sickness and accident plan.
Paragraphs 251(1)(b) and 256(1)(b) of the Act will determine whether the corporations are dealing at arm's length and whether the corporations are associated.
The requirements in the definition of "personal services business" in subsection 125(7) of the Act will determine the status of each corporation.
XXXXXXXXXX 2000-004755
A. Seidel
Attention: XXXXXXXXXX
December 19, 2000
Dear Sir:
Re: Sickness and Accident Plan
This is in reply to your letter dated September 14, 2000 in which you requested our comments with respect to the establishment of a sickness and accident plan.
The particular circumstances in your letter on which you have asked for our views relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
The tax treatment of premiums paid and benefits received from a sickness and accident plan is dependent on the type of plan that exists. Interpretation Bulletin IT-428 discusses "wage loss replacement plans", Interpretation Bulletin IT-85R2 discusses "health and welfare trusts" and Interpretation Bulletin IT-502 discusses "employee benefit plans and employee trusts". Whether or not one of these arrangements exists between an employer and an employee, or a corporation and a shareholder, can only be determined by reviewing all agreements relating to the plan and the terms and conditions of the plan itself.
The determination of whether a benefit is received by an employee-shareholder in his/her capacity as an employee or as a shareholder involves a finding of fact. Furthermore, our general presumption is that an employee-shareholder receives a benefit by virtue of his or her shareholdings in those situations where the shareholder, or shareholders, can significantly influence business policy. When the benefit is being derived by participation in a "group" plan, and each member of the group is a shareholder as well as an employee, the same presumption could apply. Exceptions to this presumption would be a situation where the benefit is available to all employees of the corporation or a situation where 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.
In examining a particular case, a negative answer to one or more of the following queries would suggest that the benefits are provided to the recipient in his or her capacity as a shareholder:
(a) Is participation in the plan made available to all employees, including those who are neither a shareholder nor related to a shareholder? If not, is there a logical reason to exclude some employees?
(b) Are the benefits available under the plan the same for all employees of the business, in their nature, quantum and cost-sharing ratio?
(c) When all participating employees are also shareholders, is the benefit coverage similar to coverage given to non-shareholder employee groups for similar size businesses who perform similar services and have similar responsibilities?
In the situation where participation in a plan is restricted to individuals who are both shareholders and employees, the related benefits are presumed to have been conferred by reason of the individuals' shareholdings.
Whether or not one corporation is associated with another corporation in a taxation year is a question of fact. The rules in subsection 256(1) of the Income Tax Act (the "Act") will be applied to any particular situation to make such a determination.
Subsection 125(7) of the Act defines a "personal services business" for purposes of section 125 of the Act. Whether or not a corporation is considered to be carrying on a personal services business is a question of fact. A thorough review of the relationship between a specified shareholder and the corporation and the services performed by the specified shareholder on behalf of the corporation will be required to determine whether or not the corporation is carrying on a personal services business.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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