9 May 2001 External T.I. 2001-0081335 - WAGE LOSS REPLACEMENT 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 conversion from 100% employee pay all to 100% employer pays all results in a new plan (and precludes deductions in 6(1)(f)(v))

Position: yes

Reasons: "the plan" in 6(1)(f)(iv) refers to the same plan described in 6(1)(f)(iv)

		2001-008133
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 957-9231
May 9, 2001

Dear XXXXXXXXXX:

Re: Wage Loss Replacement

We are writing in reply to your facsimile transmission of April 24, 2001 wherein you enquired whether the amount of benefits received by employees who qualify for long term disability after XXXXXXXXXX that are subject to taxation is reduced by the premiums paid by them from XXXXXXXXXX.

Our understanding of the facts is as follows:

1. From XXXXXXXXXX, employees of the XXXXXXXXXX were responsible for paying 100% of benefit premiums for long term disability coverage with XXXXXXXXXX.

2. On XXXXXXXXXX, the insurance carrier was changed to XXXXXXXXXX Employees continued to pay 100% of the benefit premiums for long term disability coverage until XXXXXXXXXX.

3. Effective XXXXXXXXXX, the Employer became responsible for paying 100% of the premiums to XXXXXXXXXX for long term disability coverage.

OUR COMMENTS

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where 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. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

Where a group long term disability plan under which the employees pay all of the premiums (the "Initial Plan") is converted to a plan where the employer makes all of the contributions (the "Second Plan"), it is our view that the conversion would result in a different plan with the result that the members thereof could not apply contributions made under the Initial Plan against taxable benefits received pursuant to the Second Plan. In our view, the conversion would not be an "internal alteration" of the type referred to in paragraph 13 of Interpretation Bulletin IT-428 because the change results in a new plan.

It has come to our attention that a reason for converting an Initial Plan to a Second Plan may be that the former plan is in a deficit position (i.e., sufficient funds are not available for the subsequent payment of benefits that will be required to be made under the Initial Plan) which will be remedied by employer contributions made subsequent to the conversion. While we are not in a position to provide informative comments on this type of situation without a review of all the relevant facts and documentation, the problem is that benefits, which would otherwise be considered to have flowed from a non-taxable plan, would be provided as a consequence of contributions from the employer. In other words, those benefits could no longer be regarded as having been received solely in respect of contributions made by employees. Accordingly, we believe that an important consideration, inter alia, would be whether the old plan could be regarded as one under which an employer has made a contribution for the purposes of paragraph 6(1)(f) of the Income Tax Act (the "Act"). In the event that this were to be the case, all periodic payments made subsequent to the conversion, which would otherwise be considered to have flowed from a non-taxable plan, would be described in paragraph 6(1)(f) of the Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

Encl.