15 May 2003 External T.I. 2003-0003295 - WAGE LOSS REPLACEMENT PLANS

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 ISSUE:

1. Can an employee, who is not a shareholder, be the sole trustee for a wage loss replacement plan?

2. If, instead of paying benefits out of the trust account, the trustee directs the employer's third party payroll service to pay the amounts out of the employer's bank account, will the plan still be a wage loss replacement plan?

3. Will the payments be subject to CPP and EI?

Position TAKEN:

1. Possibly, but probably not.

2. Payments taxable to employees when received. General information provided.

3. Yes.

Reasons:

1. The trustee must deal at arm's length with employer. In our view, it is unlikely that the employee could, in fact, be independent of employer.

2. Insufficient information to determine nature of plan.

3. The payment is being made by the employer.

XXXXXXXXXX T. Young, CA
2003-000329
May 15, 2003

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plans:

We are writing in response to your letter of February 14, 2003, regarding the wage loss replacement plans. We also acknowledge our conversations (Young/XXXXXXXXXX) of April 11 and 17.

The questions you raised relate to paragraph 7 of IT-428, Wage Loss Replacement Plans, which states, in part:

It is to be noted that, while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. If, however, insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. If the arrangement merely consists of an unfunded contingency reserve on the part of the employer, it would not be an insurance plan.

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 ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office. However, we are prepared to provide the following comments, which may be of assistance to you.

Specifically, you asked us the following questions:

1. Can a corporation have an employee act as the trustee for a wage loss replacement plan? The employee would not be a shareholder of the employer.

Our Comments

It is our view that the trust must act independently of the employer such that the trustee is able to enforce the required contributions to the wage loss replacement plan. It is a question of fact whether or not this is the case. We have a general concern the employer would, in fact, control the trust due to the control an employer is able to exercise over its employees. We can only provide a more definitive response in the context of an advance income tax ruling request and a consideration of all the facts and other related documentation.

2. Assume that the trust account has been properly funded by the employer. Does the trustee have the option to direct the employer (or the company providing payroll services to the employer) to issue the benefit cheques to the disabled employees?

Our Comments

Without all of the relevant documentation, we cannot provide definitive comments on the arrangement involving the funding of a trust account and the payment of benefits by the employer or a third-party payroll administrator. In order for a Health and Welfare Trust to be established, it must meet the criteria set out in IT-85R2, Health and Welfare Trust for Employees. Based on the information you provided, we are unable to comment on whether the plan would be a Health and Welfare Trust. Further, we are unable to determine if a wage loss replacement plan would exist. Nonetheless, in our view, benefits payable under the plan would be taxable to the employees when paid. The employer would be able to deduct the expenses as they are incurred (subject to subsection 18(9) of the Act), but would not be able to deduct the contributions to the trust account.

3. Providing the arrangement described in the previous question would still be a wage loss replacement plan, would the benefits paid out of the plan be subject to Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums?

Our Comments

As stated in Chapter 5 of the Guide, Employers' Guide: Payroll Deductions (T4001), wage loss replacement plan benefits are subject to CPP contributions and EI premiums where the employer pays the benefits directly to an employee and where the employer funds any part of the plan. Since the payments would be made from the employer's bank account (or an account held in trust for the employer), in our view, the payments would be made by the employer and subject to CPP and EI deductions.

The documents referred to above may be found on our web site at www.ccra.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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