22 August 2001 External T.I. 2001-0086325 - CONV. TO 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:

Does adding the premiums that the company pays on the employee's behalf for the LTD as a taxable benefit on the employee's T4 make the payments received non-taxable?

Position TAKEN
NO

Reasons FOR POSITION TAKEN

Past position and whether the wording of the plan gives the legal obligation to pay to the employer or the employee.

XXXXXXXXXX 	C. Tremblay, CMA
		2001-008632
August 22, 2001

Dear XXXXXXXXXX:

This is in reply to your letter of May 31, 2001, in which you mentioned that XXXXXXXXXX has a Group Employee Benefit Plan that contains a Long-term disability (LTD) plan that is fully funded by the company and pays a benefit to an employee who is totally disabled for 119 days or longer. You asked our opinion on whether the LTD plan could become a non-taxable plan if the company adds the premiums it pays on behalf of an employee as a taxable benefit on the employee's T4.

Our Comments

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R4. Thus, our comments are of a general nature only.

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 Interpretation Bulletin, IT-428, the Canada Customs and Revenue Agency (the "CCRA") 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.

The ultimate determination of the taxation of benefits received by an employee out of a disability plan will depend on the type of plan in effect at the time of the event that gave rise to the benefits and any changes in the plan subsequent to that date. The shift in the payment of premiums to employees, by itself, to an existing taxable disability plan will not result in the creation of a new plan that is an employee-pay-all plan where an employer has previously made contributions to that plan. However, the question of whether or not a new plan is created when a plan is changed remains one of fact. Paragraph 21 of IT-428 provides some guidance where the status of a plan does change and the onus of establishing the status of a plan as an employee-pay-all plan rests with the employer.

In general where the original funding which was contributed by the employer still exists in the plan, as may be the case in a self-insured arrangement, the plan will be considered to be a continuation of the old plan and paragraph 6(1)(f) of the Income Tax Act (the "Act") will continue to be applicable to future benefits received out of the plan. In the case of a plan, which is funded through an insurance policy, it is a question of fact as to whether the employer funding still exists in the plan. Where the premium rate under the policy which is to provide benefits under a proposed new plan is based on the existence of the previous plan, the original funding will be considered to exist in the proposed new plan and any benefits will continue to be taxable to the extent provided by paragraph 6(1)(f) of the Act.

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 the responsibility of the employer. 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 employee contributions. Paragraph 25 of IT-428 provides an example of the calculation of an employee's benefit under paragraph 6(1)(f) of the Act, showing also the deduction under subparagraph 6(1)(f)(v) of the Act for employee contributions. You can obtain a copy of IT-428, as well as other CCRA interpretation bulletins, on our website at www.ccra-adrc.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

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