2 April 2001 External T.I. 2001-0072305 - WLRP-WHETHER AN EMPLOYEE-PAY-ALL

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: The income tax treatment in the situation where the employer pays for the cost of the plan premiums on behalf of the employee.

Position: Question of fact.

Reasons: 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 some other 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 as collected from gross salary withholdings). 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.

XXXXXXXXXX 	J. Gibbons, CGA
		2001-007230
April 2, 2001

Dear XXXXXXXXXX:

We are replying to your facsimile dated February 28, 2001, regarding the income tax treatment of disability insurance plans. In particular, you wish to know the income tax treatment in the situation where the employer pays for the cost of the plan premiums on behalf of the employee.

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 70-6R4. Thus, our comments are of a general nature only.

The income tax 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 to refer to a sickness, an accident, a disability or an income maintenance plan. As indicated in paragraph 17 of that 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 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 some other 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 as collected from gross salary withholdings). 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, we will not accept a retroactive change to the income tax status of a plan. For instance, the paragraph states that 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. This also applies to any provincial sales taxes imposed on the disability insurance premiums and paid by the employer on behalf of the employees. Since the amounts paid by the employer are part of the employees' wages or salary, they should be reported in box 14 of the T4 slip.

In summary, the existence of an employee-pay-all plan is not determined by merely 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. You can obtain a copy of IT-428 on our website at www.ccra-adrc.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

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

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