2 February 2005 External T.I. 2004-0109131E5 - Fraternal Benefit Society

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 changes to a long-term disability plan administered by a fraternal benefit society would result in a change in the fraternal benefit society's status.

Position: Question of fact. In this case, no.

Reasons: The only change to the existing plan is a change to the provision dealing with beneficiaries.

2004-010913
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
February 2, 2005

Dear XXXXXXXXXX:

Re: Fraternal Benefit Society

We are writing in response to your December 22, 2004 letter in which you request confirmation that changes to a long-term disability plan, administered by a fraternal benefit society, within the meaning thereof in paragraph 149(1)(k) of the Income Tax Act (the "Act"), will not change the status of the fraternal benefit society.

You describe a situation in which an existing employee pay-all long-term benefit plan (the "Current Plan"), that has been accepted as a fraternal benefit society by the Canada Revenue Agency ("CRA"), will be replaced by a new employer-funded plan (the "New Plan"). The New Plan will not be administered by the fraternal benefit society. The Current Plan has beneficiaries entitled to long-term disability benefits but there is a funding shortfall in the Current Plan. These beneficiaries will continue to get their benefits under the Current Plan. All members of the Current Plan will continue to be members of the Current Plan for the purposes of funding the current deficit in the Current Plan, thereby retaining its status as an employee pay-all plan. However, there will be no new beneficiaries under the Current Plan. The Current Plan will cease to exist when there are no more beneficiaries. You query whether the Current Plan will continue to retain its status as a fraternal benefit society until there are no more beneficiaries and the Current Plan ceases to exist.

Those members of the Current Plan that are not entitled to receive benefits on the date that the New Plan is commenced will never be entitled to benefits under the Current Plan. Their right to long-term disability benefits will be restricted to those benefits provided under the New Plan. Those members of the Current Plan that are currently entitled to long-term disability benefits thereunder will not be entitled to benefits under the New Plan.

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. To the extent that you require confirmation of the tax consequences of proposed transactions involving a specific taxpayer, we bring to your attention Information Circular 70-6R5, Advance Income Tax Ruling ("IC 70-6R5"). To the extent that your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. Nevertheless, we are prepared to offer the following general comments which may be of assistance.

Provided that the only change to an employee-pay-all long-term disability plan is that there will be no new beneficiaries thereunder after a new plan is put in place, it is our view that such a change, in and of itself, would not result in a fraternal benefit society losing its status as a tax-exempt person under paragraph 149(1)(k) of the Act.

For additional comments, we refer you to Interpretation Bulletin IT-428 - Wage Loss Replacement Plans ("IT-428"), and in particular paragraphs 14 through 21, which discuss employee-pay-all plans and whether or not the benefits an employee receives under a plan are required to be included in his income subsequent to any changes in a plan. Furthermore, as stated in paragraph 18 of IT-428, benefits received by an employee under the New Plan will be subject to tax under paragraph 6(1)(f) of the Act. IT-428 is available on our website at www.cra-arc.gc.ca.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch