21 May 2002 External T.I. 2002-0135205 - SHORT TERM DISABILITY 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether or not an employee short term disability plan is being accounted for correctly for purposes of the Act.

Position:

General comments provided.

Reasons:

Insufficient information provided to determine if the plan was a wage loss replacement plan.

XXXXXXXXXX 2002-013520

Randy Hewlett, B.Comm.

May 21, 2002

Dear XXXXXXXXXX:

Re: Short Term Disability Plan

We are writing in response to your letter dated April 6, 2002, forwarded to us by the XXXXXXXXXX Tax Services Office, wherein you requested an opinion on whether or not your company's employee "short term disability plan" is being accounted for correctly for purposes of the Income Tax Act (the Act). You indicate that you have consulted several sources of information published by the Canada Customs and Revenue Agency (CCRA), but cannot determine the tax implications of your plan under any specific provisions of the Act.

The purpose of your plan is to provide employees with income when they are unable to work in cases of illness, injury, or the death of a family member. The cost is shared equally between the employees and the company, and employees have the option whether or not to participate. For a fee, a third party administers the determination of benefit entitlements. You also indicated that the company does not calculate source deductions on the gross income of the employees, but on their gross pay less their contributions to the plan. At the end of each calendar year, each employee may receive a refund of a portion of his or her contributions. The amount of a refund will depend upon various factors, such as the amount of benefits paid out to employees.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where 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 IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments.

The Act contains many specific provisions that determine the tax status of arrangements providing employment related benefits, such as "wage loss replacement plans". The first step is to determine whether or not your plan is a "wage loss replacement plan". The CCRA's general views on "wage loss replacement plans" are contained in Interpretation Bulletin IT-428 Wage Loss Replacement Plans, dated April 30, 1979. Based on the information provided, however, we are unable to determine definitively if your plan is a "wage loss replacement plan". For example, it is uncertain whether your plan is an "insurance plan" - an essential requirement to be considered a "wage loss replacement plan". A plan of insurance generally contains the following basic elements: (1) an undertaking by one person, (2) to indemnify another person, (3) for an agreed consideration, (4) from a loss or liability in respect of an event, (5) the happening of which is uncertain. As well, generally with an insurance plan, the funds are paid to a trust account or trustee. As noted in paragraph 7 of IT-428, if the employer merely accounts for the plan as an unfunded contingency reserve, it is not an insurance plan, and consequently, would not be considered a "wage loss replacement plan".

With a "wage loss replacement plan", the employer's contribution is specifically excluded from the employee's income pursuant to subparagraph 6(1)(a)(i) of the Act. The employee's contribution, however, is employment income that is taxable under subsection 5(1) of the Act. Accordingly, for each pay period source deductions must be calculated on the employee's gross pay, not on the gross pay less the contribution to the plan. When an employee receives a payment from the plan the amount received, less the employee's contribution, is included in employment income under paragraph 6(1)(f) of the Act. In general terms, an employer is entitled to deduct its contribution to a "wage loss replacement plan" in the taxation year the expense is incurred.

If your plan is not covered by any specific provision of the Act, such as those dealing with "wage loss replacement plans", the general provisions of the Act would determine the tax implications for employees and the employer. Unfortunately, we are unable to provide further information on what the tax implications of your plan may be without a complete understanding of all the facts. We do suggest, however, that consideration be given to consulting professional legal or accounting advice since your situation may involve an interpretation of numerous and relatively complex provisions of the Act.

The interpretation bulletin noted above can be found on our website at http://www.ccra-adrc.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

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