16 January 2001 External T.I. 2000-0060005 - 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.

Principal Issues: Whether payments received pursuant to a "wage loss replacement plan" are taxable in the hands of the recipient.

Position: Question of fact..

Reasons: Paragraph 6(1)(f) of the Act will determine the taxable portion of any benefits received pursuant to a "wage loss replacement plan".

XXXXXXXXXX 2000-006000
A. Seidel, CMA
Attention: XXXXXXXXXX

January 16, 2001

Dear Sir:

Re: Wage Loss Replacement Plans

This is in reply to your letter dated December 4, 2000 in which you requested our views with respect to the application of paragraph 6(1)(f) of the Income Tax Act (the "Act") to long term disability benefits received by an employee.

The particular situation in your letter on which you have asked for our views appears to be a factual one 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 tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

You have described a situation where employees contribute, by payroll deduction, a portion of the premiums related to a long term disability plan and life, accident, health and dental plans. Although the plan documents suggest that the long term disability plan is 100% employee paid, in actual fact the employer withholds 50% of the premiums in respect of all of the above plans and remits a cheque for the total premiums to the insurer on a monthly basis. Originally, the employees' 50% share of the premiums was equal to or higher than his/her long term disability premium. However, due to premium rate fluctuations and employees opting out of some of these plans, the employees' 50% payroll deduction is, in some cases, no longer sufficient to pay the premium in respect of the long term disability plan. You are concerned as to what impact this will have on the long term disability plan.

The income treatment of disability plan benefits are discussed in Interpretation Bulletin IT-428 ("IT-428"), "Wage Loss Replacement Plans". The term "wage loss replacement plan", as used in IT-428, and in this letter, refers to any sickness, accident, disability or income maintenance plan between an employer and the employees thereof.

A wage loss replacement plan in which employees pay all of the premium cost of the plan is referred to as an "employee-pay-all plan". Benefits received from an employee-pay-all plan are not included in computing taxable income of the recipient. Paragraphs 16 through 21 of IT-428 discuss "employee-pay-all" wage loss replacement plans. As stated in paragraph 17 of IT-428, whether or not a particular wage loss replacement plan is an employee-pay-all plan is a question of fact and that the onus is on the employer to prove that such a plan exists. Where an employer has a plan that is in part a wage loss replacement plan and in part a plan that provides for other types of benefits, the employer must be prepared to identify that part of any premiums paid to each type of benefit included in the plan and, similarly, the part of the employees' contributions, if any, that relate to the wage loss replacement part of the plan. This information is required to determine whether the wage loss replacement plan is one to which the employer has contributed and the relevant amount of an employee's contribution for purposes of subparagraph 6(1)(f)(v) of the Act.

The existence of an employee-pay all plan is not determined by looking at the manner in which benefits are paid or reported by the recipient, but rather, it is determined by ascertaining who is contractually obligated to pay the premiums under the plan. The determination of who is obligated to pay the premiums under a particular plan would include a review of the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the plan carrier, an employment contract or some other document, places upon the employees the legal obligation to pay 100% of the premiums in respect of the plan. Where this employee obligation exists, the plan will only be considered to be an employee-pay-all plan where such an arrangement was in place at the time that contributions to the plan were made. As indicated in paragraph 17 of IT-428, retroactive changes to the income tax status of a plan are not permitted. Furthermore, an employer cannot change the income tax status of a plan by adding contributions to the plan and including such amounts in the employees' income/T-4's at the end of the year. However, having the employer withhold premiums from employees' gross salary and remitting these employees' premiums to the insurer would not cause a plan to lose its status as an employee-pay-all plan.

In regard to the particular situation described in your letter, it would appear that the legal obligation for paying the premiums in respect of all of the plans, including the long term disability plan, is split 50-50 between the employer and the employee. If this is in fact the case, and notwithstanding the fact that the 50% employee contributions exceeded the premiums in respect of the long term disability plan, the long term disability plan would never have qualified as an employee-pay-all plan. Accordingly, an employee would be subject to tax on any benefits received under the plan pursuant to paragraph 6(1)(f) of the Act to the extent that they exceed the deduction under subparagraph 6(1)(f)(v) of the Act in respect of the recipient's contributions.

A copy of IT-428 is available at your local tax services office or may be obtained from our Internet web site www.ccra-adrc.gc.ca.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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