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.
Principal Issues: Whether paragraph 6(1)(f) of the Act will apply to a wage loss replacement plan that has changed to an employee-pay all plan.
Position: No.
Reasons: The plan has been purified in that at the beginning of the plan year in which the changes become effective, all previous employer-related contributions have been utilized and such benefits included in employment income. Further, all future contributions will be made by employees.
XXXXXXXXXX 2004-009868
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request - XXXXXXXXXX ("Trust XXXXXXXXXX ")
This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the tax treatment of benefits paid from the above-noted long-term disability plan.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:
(i) is in an earlier return of a taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of a taxpayer or a related person;
(iii) is under objection by a taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a ruling previously issued by the Canada Revenue Agency (hereafter, the "CRA").
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
1. XXXXXXXXXX.
2. XXXXXXXXXX.
3. "XXXXXXXXXX Members" are individuals who are members of the XXXXXXXXXX and employed by the various hospitals and health care facilities that are represented by the XXXXXXXXXX.
4. XXXXXXXXXX.
5. "Province" means Her Majesty The Queen in Right of the Province of XXXXXXXXXX.
6. "Collective Agreement" means a collective agreement between XXXXXXXXXX and XXXXXXXXXX .
7. "LTD Benefits" means long-term disability benefits.
Facts
8. Trust XXXXXXXXXX is a trust resident in XXXXXXXXXX established for the purpose of providing LTD Benefits to disabled XXXXXXXXXX Members.
9. Trust XXXXXXXXXX's trust account number is XXXXXXXXXX. Trust XXXXXXXXXX deals with the XXXXXXXXXX TSO and files its tax returns with the XXXXXXXXXX Taxation Centre.
10. At the time of collective bargaining between the XXXXXXXXXX and the XXXXXXXXXX in XXXXXXXXXX , LTD Benefits were provided to XXXXXXXXXX Members from a trust fund established in XXXXXXXXXX and known as XXXXXXXXXX (hereafter, "Trust XXXXXXXXXX ").
11. In connection with the XXXXXXXXXX round of collective bargaining, XXXXXXXXXX issued recommendations for settlement, including recommendations regarding the payment of LTD Benefits (hereafter, the "LTD Recommendations").
12. The LTD Recommendations included a recommendation that a new trust and plan be established, in accordance with the terms set out in the LTD Recommendations, to provide LTD Benefits for XXXXXXXXXX Members who become disabled on or after XXXXXXXXXX.
13. The LTD Recommendations were reflected in a Memorandum of Understanding between XXXXXXXXXX and XXXXXXXXXX (hereafter, the "MOU"), which was included as Appendix XXXXXXXXXX of the Collective Agreement covering the period XXXXXXXXXX.
14. The MOU contained many of the terms for a new LTD Benefits plan for XXXXXXXXXX Members. This Appendix was included as Appendix XXXXXXXXXX of the subsequent Collective Agreement covering the period XXXXXXXXXX.
15. In order to implement the LTD Recommendations relating to XXXXXXXXXX Members, Trust XXXXXXXXXX was established by a trust agreement (hereafter, the "Trust Agreement") made as of XXXXXXXXXX between XXXXXXXXXX, the Province, and the initial trustees of Trust XXXXXXXXXX (hereafter, the "Trustees").
16. Section XXXXXXXXXX of the Trust Agreement authorizes and directs the Trustees to establish a plan for the payment of LTD Benefits, subject to the approval of the Province before the Trustees can adopt it. Section XXXXXXXXXX requires the plan to be consistent with the Trust Agreement and any Collective Agreement. One requirement imposed by the Trust Agreement is that the LTD Benefits must be in accordance with the LTD Recommendations.
17. In accordance with section XXXXXXXXXX of the Trust Agreement, the Trustees have established a LTD Benefits plan (hereafter, the "Current Plan"). The terms of the Current Plan are set out in a draft plan text that has been submitted to the Province for approval. LTD Benefits are currently being paid from Trust XXXXXXXXXX in accordance with the terms of the Current Plan.
18. The terms of the Current Plan regarding the payment of LTD Benefits include the following:
(a) A XXXXXXXXXX Member who becomes disabled (as defined in the Current Plan) on or after XXXXXXXXXX, and whose disability continues for XXXXXXXXXX months, is entitled to receive monthly benefit payments.
(b) The monthly benefit payable to the disabled XXXXXXXXXX Member is the greater of
(i) XXXXXXXXXX% of pre-disability monthly earnings up to a specified amount ($XXXXXXXXXX for disabilities that occur in XXXXXXXXXX ), and XXXXXXXXXX % of pre-disability monthly earnings in excess of this amount, and
(ii) XXXXXXXXXX% of pre-disability monthly earnings.
(c) Every XXXXXXXXXX years after a XXXXXXXXXX Member becomes disabled, a calculation is made of the benefit that would be payable if he or she had remained in the same job and became disabled in that future year. The actual benefit is increased to this recomputed amount if it is larger.
(d) A disabled XXXXXXXXXX Member's monthly benefit is reduced by any other income to which he or she is entitled as a result of the disability, except income from a private or individual disability plan.
(e) A disabled XXXXXXXXXX Member's benefits continue until he or she ceases to be disabled, or attains age XXXXXXXXXX if earlier.
19. The Province agreed to contribute $XXXXXXXXXX to Trust XXXXXXXXXX to provide the initial funding for the LTD Benefits. The Province actually contributed $XXXXXXXXXX to Trust XXXXXXXXXX in XXXXXXXXXX.
20. The MOU requires XXXXXXXXXX Members to make contributions to pay for their LTD Benefits. The MOU required XXXXXXXXXX Members to continue paying contributions to Trust XXXXXXXXXX until it was fully funded, following which their contributions were to be paid to Trust XXXXXXXXXX. XXXXXXXXXX Member contributions commenced to be paid to Trust XXXXXXXXXX in XXXXXXXXXX.
21. No contributions have been made to Trust XXXXXXXXXX other than the contribution made by the Province referred to in paragraph 19 above and contributions made by XXXXXXXXXX Members referred to in paragraph 20 above.
22. T4A slips have been issued to XXXXXXXXXX Members in respect of the LTD Benefits received under the Plan that are taxable under section 6 of the Act.
23. For the period from its inception until XXXXXXXXXX, Trust XXXXXXXXXX 's aggregate financial experience has been as follows:
Contribution by the Province
$XXXXXXXXXX
Contributions by XXXXXXXXXX Members
XXXXXXXXXX
Investment income
XXXXXXXXXX
Less:
LTD Benefits paid
XXXXXXXXXX
Expenses
XXXXXXXXXX
Net unrealized losses
($XXXXXXXXXX )
Proposed Transactions
24. The Trustees are proposing, subject to the consent of the Province, to amend the Trust Agreement to:
(a) remove the Province as a party to the agreement;
(b) delete the requirement that LTD Benefits be in accordance with the LTD Recommendations; and
(c) delete all requirements for obtaining consent of the Province.
25. After the amendments referred to in paragraph 24 above are made, the Trustees are proposing to amend the Trust Agreement to permit the Trustees to discontinue the Current Plan and replace it with a new LTD Benefits plan (hereafter, the "New Plan").
26. XXXXXXXXXX and XXXXXXXXXX have tentatively agreed to a new Collective Agreement for the period covering XXXXXXXXXX. The tentative Collective Agreement does not specify the terms of the New Plan for XXXXXXXXXX Members, as did the prior Collective Agreement. Instead, the tentative Collective Agreement contains a term that provides for the Trustees to determine the terms of the New Plan at their discretion.
27. After the Trust Agreement is amended as described in paragraphs 24 and 25 above, and the tentative Collective Agreement is ratified, the Trustees are proposing to terminate the Current Plan and to replace it by the New Plan, effective XXXXXXXXXX.
28. The main difference between the Current Plan and the New Plan will be in the LTD Benefits formula. Under the New Plan, the monthly LTD Benefits payable to a disabled XXXXXXXXXX Member will equal XXXXXXXXXX% of the first $XXXXXXXXXX of pre-disability monthly earnings, plus XXXXXXXXXX% of the next $XXXXXXXXXX of such earnings, plus XXXXXXXXXX% of the remainder of such earnings.
29. The New Plan will govern all LTD Benefits paid from Trust XXXXXXXXXX on or after XXXXXXXXXX.
30. The Province will not contribute any further funding to Trust XXXXXXXXXX.
Purpose of the Proposed Transactions
31. The proposed transactions are intended to ensure that the New Plan is an "employee pay-all plan", as described in Interpretation Bulletin IT-428, Wage Loss Replacement Plans, issued by the CRA on April 30, 1979, thereby ensuring that the LTD Benefits that are paid to XXXXXXXXXX Members from Trust XXXXXXXXXX on or after XXXXXXXXXX are non-taxable.
Rulings Given
Provided that:
(a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
(b) The proposed transactions are completed in the manner described above;
(c) There are no other transactions, which may be relevant to the ruling requested; and
(d) At all future times the entire cost of maintaining the New Plan is paid through contributions to Trust XXXXXXXXXX by the XXXXXXXXXX Members,
our ruling is as follows:
A. LTD Benefits paid to XXXXXXXXXX Members from Trust XXXXXXXXXX under the New Plan on or after XXXXXXXXXX, will not be included in the income of the XXXXXXXXXX Members under paragraphs 6(1)(a) or 6(1)(f) of the Act.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided the proposed transactions are carried out on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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