27 November 2002 External T.I. 2002-0165695 - EMPLOYEE GROUP INSURANCE 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: Taxability of employment benefits from certain employer-sponsored insurance plans.

Position: General comments provided.

Reasons: See below.

XXXXXXXXXX 2002-016569

Randy Hewlett, B.Comm.

November 27, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request - Employee Group Insurance Plans

We are writing in response to your letter dated September 22, 2002, wherein you requested a technical interpretation with respect to the taxable benefits received or enjoyed by employees from certain employer-sponsored group insurance plans.

In your letter, you describe group insurance coverage which your company provides to its employees through a plan with XXXXXXXXXX. The plan has insurance for medical and dental expenses, accidental death and dismemberment, basic life, optional life (includes coverage for a dependent or spouse) and long-term disability. The company pays the premiums for the insurance, but recovers a portion from the employees through payroll deductions. You ask a number of questions with respect to the taxable benefits derived from the plan by employees of your company.

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 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). However, we are prepared to provide the following comments.

Subparagraph 6(1)(a)(i) of Income Tax Act (the Act) excludes from an employee's income the value of benefits derived from the contributions of an employer to certain employer-sponsored arrangements. These arrangements include, among others, a private health services plan, a group sickness and accident insurance plan, and a group term life insurance policy.

Private health services plan (PHSP)

The definition of a PHSP is contained 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 (e.g. amounts paid for prescription drugs or dental services). If a particular plan provides coverage for expenses other than those described in subsection 118.2(2) of the Act, the plan will not qualify as a PHSP. For further information on a PHSP see Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan".

Group sickness or accident insurance plan

As noted above, employer-paid premiums with respect to a group sickness or accident insurance plan is not a taxable benefit under paragraph 6(1)(a) of the Act. However, paragraph 6(1)(f) of the Act applies to include in employment income any benefits paid to an employee from a sickness, accident, disability or income maintenance insurance plan where the employer pays all or part of the premiums for the plan (a "wage loss replacement plan"). The amount of the benefit included in income is reduced by the amount of any employee contributions. Where the employees are legally obligated to pay the entire premium cost of a wage loss replacement plan (an "employee pay-all plan"), no amount is required to be included in the employees' income under paragraph 6(1)(f) of the Act. The status of a plan as an employee pay-all plan is not affected because the employer actually pays the premium, provided the plan is set-up as an employee pay-all plan and the premium is recovered from the employees through payroll deductions. This can only be determined by reference to the plan documents. For more information on the tax implications of these plans, see Interpretation Bulletin IT-428, Wage Loss Replacement Plans.

Group term life insurance policy

While paragraph 6(1)(a) of the Act does not require an employer-paid premium for a group term life insurance policy to be included in income, subsection 6(4) requires an amount, if any, as prescribed under the Income Tax Regulations to be included in employment income. A group term life insurance policy is defined in subsection 248(1) of the Act. It means a group life insurance policy under which the only amounts payable by the insurer are (1) amounts payable on the death or disability of individuals whose lives are insured in respect of, in the course of or because of, their office or employment or former office or employment, or (2) policy dividends or experience rating refunds. Excluded from the definition of group term life insurance policy, are those policies that provide coverage for anyone other than an employee or former employee (e.g. an employee's spouse or dependent). More information is contained in The Employers' Guide: Payroll Deductions (Basic Information) 2001-2002.

Shareholder Benefits

In general terms, the above comments apply to those employees who may also be shareholders of a company, provided their treatment under the plan is the same as other employees of the company.

To determine the status of your company's plan, the plan documents would have to be reviewed. Given the somewhat complex nature of your inquiry, consideration should be given to consulting professional tax advice and/or your plan administrator. As noted above, assistance may also be obtained from your local TSO. The publications noted above are available at any TSO or can be found on our website at 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

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