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 a disability insurance plan is an employee-pay-all plan
Position: Question of fact. Status of plan can only be determined by reviewing all of the documentation including the contract with the plan carrier, and the employment contract.
Reasons: For a plan to be an employee-pay-all plan, the employees must be legally responsible for paying all of the premiums, notwithstanding that the employer may withhold the premiums from the employees' wages and remit them on behalf of the employees.
XXXXXXXXXX Wayne Antle, CGA
July 31, 2002
Re: Tax Treatment of Long Term Disability Plan
This is in response to your letter of December 20, 2001, concerning whether benefits provided to employees under a disability insurance plan would be taxable if the premiums paid by the employer to the plan were included in the employees' gross wages. We apologize for the delay in responding to your letter.
You have summarized the facts as follows:
Employees of the Corporation XXXXXXXXXX (the "employer") are covered by a long-term disability insurance plan. The employer pays the employees' premiums under the plan through its accounts payable system. This amount is included in the employees' employment income as a taxable benefit. However, the insurance company considers any disability benefits paid to recipients under the plan to be taxable, and withholds income tax from these benefits. The employer is proposing to change the method in which premiums are paid by increasing the employees' gross wages by the amount of the premiums, and withholding these amounts from the employees' wages as source deductions. You have asked us to consider whether this change would result in the disability benefits being non-taxable to the recipients.
The particular situation presented in your letter appears to be a factual one involving specific taxpayers. As explained in Information Circular 70-6R5, 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. However, we are prepared to offer the following general comments, which may be of assistance.
The income tax treatment of disability insurance plans is set out in Interpretation Bulletin IT-428, Wage Loss Replacement Plans. The taxability of disability insurance benefits does not depend on the manner in which premiums are accounted for by the employer, and paid to the plan carrier. The taxation of disability benefits, as well as the tax treatment of premiums paid by the employer to the plan, is dependant upon whether the plan is an "employee-pay-all plan".
An "employee-pay-all plan" is a wage loss replacement plan in which employees are required to pay all of the premium cost of the plan. 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 the onus is on the employer to prove that such a plan exists. In order to determine if a plan is an "employee-pay all plan", it is necessary to ascertain who is contractually obligated to pay the premiums under the plan. This can only be established by reviewing all of the plan documents including the policy with the plan carrier, and the employment contracts. If the employees have the legal obligation to pay 100% of the premiums, notwithstanding that the employer may pay the premiums to the plan carrier on the employees' behalf, then the plan would be an "employee-pay-all" plan.
If an "employee-pay-all" plan exists, then benefits received under the plan will not be subject to income tax. On the other hand, the employees would not be able to reduce their employment income by the premiums paid to the plan carrier. Where the employer pays the employees' premiums directly to the plan carrier without withholding them from gross salary, then the premiums would be included in the employees' income as a taxable benefit.
If the plan is not an "employee-pay-all" plan, then benefits received by employees will generally be taxable pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act"). However, the taxable amount of the benefits may be reduced if the employees have also contributed to the plan. The calculation of the amount of benefits to be reported is illustrated in paragraph 25 of IT-428. Contributions that an employer is required to make to such a plan should not be included in the income of employees in accordance with paragraph 6(1)(a) of the Act.
With respect to the situation presented in your letter, we do not have enough information to establish whether the disability insurance plan is an "employee pay-all" plan. The key issue to be resolved involves whether the employer's contributions to the plan were, under the terms of the plan, required to be made by the employer, or were, in fact, paid on behalf of the employees. As noted above, this can only be determined by reviewing all of the facts and documentation to ascertain who is contractually obligated to pay the premiums under the plan.
It appears that the insurance company does not consider the particular disability insurance plan to be an employee-pay-all plan. If this is the case, then the contributions made by the employer to the disability insurance plan should not be included in the income of the employees. You may wish to contact the Trust Accounts section of your local tax services office, and provide them with all of the relevant documentation so that the correct tax treatment for both the employer contributions to the plan, and disability benefits paid under the plan can be determined.
You can obtain a copy of IT-428 from our website at www.ccra-adrc.gc.ca or from your local tax services office.
We trust that our comments will be of assistance.
John Oulton, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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