3 April 2003 External T.I. 2002-0160155 - CRITICAL ILLNESS WHETHER A TAX BENEFIT

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 premiums paid by an employer under a group critical illness insurance policy constitute a taxable benefit to its employees under paragraph 6(1)(a).

Position: Depends on the particular situation. Question of fact and law.

Reasons:

Based on the terms of this particular critical illness insurance policy and the relevant provincial insurance legislation, it is our view that the policy qualifies as a group sickness or accident insurance plan. Pursuant to subparagraph 6(1)(a)(i), employer-paid premiums to a group sickness and accident plan are not taxable benefits. Accordingly, the premiums paid by the employer in respect of coverage for its employees under this particular group critical illness insurance policy are not taxable benefits.

XXXXXXXXXX 							2002-016015

April 3, 2003

Dear XXXXXXXXXX:

Re: Group Critical Illness Insurance Policy

This is in reply to your letter of August 9, 2002 to the Trust Accounts Division, which has been forwarded to us for reply. You have asked for our views on whether the premiums paid by XXXXXXXXXX (the "employer") in respect of coverage for its employees under a group critical illness insurance policy issued by the XXXXXXXXXX would constitute a taxable benefit to its employees.

It is our understanding that the group critical illness insurance policy in question is a stand-alone policy without any provision for life insurance coverage. The employer pays 100% of the premiums for the basic group critical illness insurance for its employees. Employees who apply for the optional group critical illness insurance are responsible for the premiums in respect of the optional coverage. The plan essentially provides that if an insured employee is diagnosed with a named medical condition or event such as blindness, cancer, dismemberment and heart attack and survives for 30 days after the date of diagnosis, the insurer will pay a lump-sum benefit to the insured employee. There is no provision for a refund of all or a portion of the premiums paid on termination of the policy or on death of the insured employee.

Our comments

The value of any benefit received by an employee by virtue of, or in respect of, their employment must be included in the employee's income under subsection 6(1) of the Income Tax Act (the "Act") unless such benefit is otherwise specifically excluded from the employee's income such as in the case for group sickness and accident insurance plans and private health services plans ("PHSPs"). A determination as to whether a particular plan constitutes a group sickness and accident insurance plan or a PHSP can only be made on a case by case basis after taking into consideration the terms and conditions of the plan as well as the relevant provincial insurance legislation.

A PHSP is defined in subsection 248(1) of the Act. Generally, coverage under a PHSP must be for medical expenses that qualify under subsection 118.2(2) of the Act when determining the medical expense tax credit. Since the payment of the critical illness benefit under the particular policy does not appear to depend on, require or otherwise relate to the incurrence of any hospital or medial expense, or any combination of such expenses, by the insured employee, it is our view that the plan would not meet the conditions to be a PHSP.

With regard to group sickness and accident insurance plans, the term "sickness and accident insurance" is not defined in the Act. We therefore need to consider the definitions in the insurance legislation of the applicable jurisdictions to determine whether a particular policy can be characterized as a sickness and accident insurance policy. In this particular case, we have referred to the Insurance Act of Alberta since the employer is located in Alberta and its employees are presumed to reside in Alberta. Based on our review of the relevant definitions in the Insurance Act of Alberta and the terms and conditions of the particular group critical illness insurance policy, it is our view that this policy would qualify as a group sickness and accident insurance plan with the result that the employer-paid premiums to this plan would not be a taxable benefit to its employees by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch