13 February 2006 External T.I. 2005-0156311E5 - wage loss replacement plan; long-term disability

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 one or two wage loss replacement plans.

Position: General comments

Reasons: Question of fact whether one plan or two plans.

XXXXXXXXXX 						Denise Dalphy, LL.B
							2005-015631
February 13, 2006

Dear XXXXXXXXXX,

Re: Group "Top-Up" Long Term Disability Plan

We are writing in response to your letter dated October 26, 2006 wherein you requested our opinion on the income tax consequences concerning one of two new long term disability insurance ("LTD") plans to be created by an employer. You stated in your letter that the employer is considering establishing a mandatory employer paid core LTD plan where the employer will pay 100% of the premiums, as well as a "top-up" LTD plan where employees could purchase, on a voluntary basis, additional LTD coverage that would provide them with some inflation protection should they remain on an LTD claim for a number of years. Employees would pay 100 % of the premiums on the "top-up" LTD plan.

We have considered the situation outlined in your letter and have provided some comments below. However, confirmation of the tax implications of particular proposed transactions is given by way of an advance income tax ruling only where the request is submitted in the manner set out in Information Circular IC 70-6R5. Thus, our comments are of a general nature only.

In order to determine the income tax consequences relating to the "top-up" LTD plan, it is necessary to determine whether the core plan and the "top-up" plan are, in fact, two separate wage loss replacement plans. In this regard, it is our general view that there would be two wage loss replacement plans in existence provided that there is no cross subsidization between the two plans, and the level of benefits, premiums rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other. If the taxpayer can establish that the top-up plan is separate from the core plan based on the criteria discussed above and that it is an employee-pay-all plan, any benefits received under this new top-up plan will be received by employees tax-free while the benefits paid under the core plan would continue to be subject to tax in the employees' hands to the extent provided in paragraph 6(1)(f) of the Income Tax Act.

We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett,
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch