3 November 2000 External T.I. 2000-0050685 - LTDP IS AN EMPLOYEE-PAY-ALL 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 wage loss replacement plan is an employee-pay-all plan where the employer's benefits policy is to pay 50% of the total group insurance plan (consisting of a medical, dental, accidental death and dismemberment, life and long-term disability plans) for their employees. The employer arbitrarily allocates the reported payments among the plans so that the employees' portion of long-term disability plan premiums is shown at 100% while the employees' portion of premiums to the other plans is reported at less than 50%. When viewed from the perspective of total premiums paid, the 50-50 split between employer and employee contributions is maintained.

Position: Not an employee-pay-all plan.

Reasons: The existence of an employee-pay all plan is not determined by looking at the manner in which payments are made or reported, but rather it is determined by ascertaining who is contractually obligated to pay the premiums. If the legal obligation for paying the disability plan premiums is split 50-50 between the employer and the employee, an employee would be subject tax on any benefits received under the plan pursuant to paragraph 6(1)(f) to the extent that they exceed the deduction under subparagraph 6(1)(f)(v) in respect of employee contributions..

XXXXXXXXXX 	J. Gibbons, CGA
		2000-005068
Attention:  XXXXXXXXXX 

November 3, 2000

Dear XXXXXXXXXX:

We are replying to your letter of October 4, 2000, concerning the income tax treatment of long-term disability benefits where the employer's benefits policy is to pay 50% of the total group insurance plan for their employees.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

You describe a situation in which an employer provides 5 different plans consisting of a medical, dental, accidental death and dismemberment, life and long-term disability plans. As we understand it, the employer arbitrarily allocates the reported payments among the plans so that the employees' portion of long-term disability plan premiums is shown at 100% while the employees' portion of premiums to the other plans is reported at less than 50%. When viewed from the perspective of total premiums paid, the 50-50 split between employer and employee contributions is maintained. However, since the records show that the employees pay the full premium for the long-term disability plan, the employer is of the view that any benefits received by employees from this plan are non-taxable. In your letter, you provided the following example:

					Employee's	Employer's
Coverage		Premium	Portion       	Portion     

Medical		$ 30.00	0		$30.00
Dental			$ 30.00	0		$30.00
Accidental Death
and Dismemberment	$ 20.00	0		$20.00
Life			$ 20.00	$10.00		$10.00
Long-term disability	$ 80.00	$80.00		0
  Total			$180.00	$90.00		$90.00

The income treatment of disability plan benefits is as set out in Interpretation Bulletin IT-428, "Wage Loss Replacement Plan." The term "wage loss replacement plan" is used in the bulletin to refer to a sickness, accident disability or income maintenance plan. As indicated in paragraph 17 of this bulletin, it is a question of fact whether an employee-pay-all plan exists, with the implication that, if an employee-pay-all plan does exist, any benefits received from it by the employees will be tax-free in their hands. (See paragraph 16 for a discussion of employee-pay-all plans.)

To determine whether an employee-pay-all plan exists, one must look at the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the plan carrier, the employment contract or other similar document, places upon the employees the legal obligation to pay 100% of the premiums (although the employer may still be responsible for remitting the employees' premiums on their behalf). If such an obligation exists, the plan will be considered an employee-pay-all plan provided such an arrangement was in place at the time contributions to the plan were made. However, as indicated in paragraph 17 of IT-428, the Agency will not accept a retroactive change to the income tax status of a plan. For instance, an employer cannot change the income tax status of a plan by adding its contribution to the plan to the employees' income at the end of the year. Where, however, an employee-pay-all plan exists and provides for the employer to pay the employees' premiums to the plan and to account for them in the same manner as wages or salary, the result is as though the premiums had been withheld from the employees' wages or salary.

In summary, the existence of an employee-pay all plan is not determined by looking at the manner in which payments are made or reported, but rather it is determined by ascertaining who is legally obligated to pay the premiums. In regard to the particular situation described in your letter, it appears that the legal obligation for paying the disability plan premiums is split 50-50 between the employer and the employee. Accordingly, an employee would be subject tax on any benefits received under the plan pursuant to paragraph 6(1)(f) of the Income Tax Act to the extent that they exceed the deduction under subparagraph 6(1)(f)(v) in respect of employee contributions. Paragraph 25 of IT-428 provides an example of the calculation of an employee's benefit under paragraph 6(1)(f), showing also the deduction under subparagraph 6(1)(f)(v) for employee contributions. You can obtain a copy of IT-428, as well as other Agency interpretation bulletins, on our 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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