9 May 2006 Roundtable, 2006-0174121C6 - CALU 2006 Conference Questions and Answers

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: Questions regarding group wage loss replacement plans, draft IT-85R3, post retirement health benefits funded by a trust, the meaning of insurance plan for purposes of wage loss replacement plans, and health benefits provided to employees who are shareholders.

Position: See Attached

Reasons: See Attached

May 9, 2006

Question 9

Wage Loss Replacement Plans

In a recent technical interpretation (Document No. 2005-0148221E5, dated November 21, 2005), the CRA provided comments with respect to a situation where a corporation was considering the purchase of insurance policies to provide salary protection to its two employees, the sole shareholder and his son. The following statement appears at the end of the letter:

Finally, we would like to note that there is no requirement under the Act that different insurance policies that provide wage loss benefits coverage to employees be "grouped" together to qualify as a wage loss replacement plan for purposes of paragraphs 6(1)(a) and 6(1)(f).

It is not apparent what is meant by this statement, particularly as it applies with respect to paragraph 6(1)(a). The relevant part of that paragraph is the reference in subparagraph 6(1)(a)(i) to a "group sickness or accident insurance plan".

Questions:

(a) Would the CRA clarify what is meant by this statement as it applies with respect to paragraph 6(1)(a)?

(b) Has the CRA changed its position as to what is required for an arrangement to be considered a group plan when the arrangement involves the employer acquiring individual insurance policies in connection with the provision of sickness or accident benefits to employees? If so, what is now required for such an arrangement to be considered a group plan?

Agency's Response

Our reply is based on the CRA's longstanding position that an employer can provide group benefits under a plan via a single contract with an insurer or under individual contracts. For a particular plan to be considered a group plan it must provide benefits to more than one employee. Further, where there is more than one policy under a plan we would expect that the policies provide similar benefits to employees and that employee entitlements under the policies are documented; otherwise it may not be reasonable to consider that the benefits provided under each policy are under the umbrella of a single plan.

Question 10

Update on Proposed IT-85R3

Could the CRA provide an update on the status of IT-85R3, the proposed Interpretation Bulletin on health and welfare trusts? Also, does the CRA have any comments with respect to CALU's submission of October 13, 2005 to Mr. Phil Jolie regarding the proposed Interpretation Bulletin?

Agency's Response

In 2005, we provided a copy of draft IT-85R3 to CALU and to the CICA-CBA Joint Committee on Taxation. Since the Committee's public release of its submission on the draft, we have received numerous others. We appreciate all the comments, but given their volume and the various issued raised, we are not in a position to comment publicly. At this point we are taking a fresh look at IT-85R3 and will take into account all the submissions before the bulletin is released in its final form.

Question 11

Trust Used to Fund Post-Retirement Benefits

Where an employer provides post-retirement health and dental insurance benefits to retired employees, the employer may establish a trust for this purpose. The employer would make contributions to the trust, and the trust would pay all benefits.

It appears that such an arrangement is a retirement compensation arrangement (RCA) unless it falls within one of the exclusions. The only exclusion that is potentially applicable is for a group sickness or accident insurance plan. Since health and dental benefits are generally benefits payable as a result of sickness or accident, a group plan that provides such benefits should be considered a group sickness or accident insurance plan, notwithstanding that the plan is also a private health services plan (PHSP) for purposes of the Act.

In a letter dated May 5, 2005 (Document No. 2005-0121151E5) the CRA stated that a plan that provides health and welfare benefits to retired employees would not be considered an RCA. However, the CRA did not provide a rationale for this position.

Question:

Could the CRA confirm that an arrangement of the sort described above is a group sickness or accident insurance plan and hence is not an RCA?

Agency's Response

We agree that the concept of a group sickness or accident insurance plan would not specifically exclude a PHSP. However, whether a particular PHSP is a group sickness or accident insurance plan would depend upon the terms and conditions of the particular plan.

It is also a question of fact whether a particular arrangement would be an "RCA". In general, a qualifying health and welfare trust that provides post-retirement health and welfare dental benefits under a plan of insurance would not be subject to the RCA rules.

Question 12

Meaning of "Insurance Plan"

The CRA appears to have inconsistent positions regarding the meaning of "insurance plan". This term is used in the expression "group sickness or accident insurance plan" in subparagraph 6(1)(a)(i), in paragraph 6(1)(f), and in the definition of "private health services plan" in subsection 248(1).

According to paragraph 7 of IT-428 (Wage Loss Replacement Plans), which discusses the meaning of "insurance plan" for purposes of paragraph 6(1)(f), if insurance is not provided by an insurance company, the plan must be funded:

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.

On the other hand, IT-339R2, which discusses the meaning of "private health services plan" (PHSP), does not state that a plan must be funded in order to be an insurance plan that is a private health services plan. In fact, paragraph 7 of the Interpretation Bulletin makes it clear that funding is not required. According to that paragraph, an arrangement under which an employer is required to reimburse its employees for the cost of medical or hospital care can qualify as a PHSP.

The elements set out by case law that must be present for there to be insurance do not include funding. These elements, which are listed in paragraph 3 of IT-339R2, are the following:

(a) an undertaking by one person,

(b) to indemnify another person,

(c) for an agreed consideration,

(d) from a loss or liability in respect of an event,

(e) the happening of which is uncertain.

Question:

What is the basis for the CRA's position in IT-428 that a plan that does not involve a contract with an insurer must be funded in order to be considered an insurance plan?

Agency's Response

This question is similar to that asked at the 1995 TEI conference (Question 11). As noted then, distinguishing whether self-funded arrangements contain the requisite element of insurance presents a difficult challenge for the CRA. In that regard, the comments in IT-428 are intended to distinguish arrangements that are taxable under paragraph 6(1)(f) from self-funded arrangements that are arguably salary continuances. While we may consider a certain arrangement under which an employer reimburses its employees for the cost of qualifying PHSP expenses to be a plan of insurance, we are not prepared to extend similar treatment to self-funded group sickness or accident insurance plan.

Question 13

Benefits Provided by Virtue of Shareholding or Employment

Where an individual is both a shareholder and an employee of a corporation, the tax treatment of certain benefits provided to the individual depends on whether the benefits are provided by virtue of the individual's status as a shareholder or an employee. For example, health and dental benefits are tax-free if regarded as employment benefits but not if regarded as shareholder benefits. Furthermore, the cost of providing the benefits is deductible to the corporation only if the benefits are employment benefits. The determination of whether benefits are provided by virtue of employment or shareholding is often difficult to make.

In a number of technical interpretation letters, the CRA has made general statements regarding this determination. However, the statements are not entirely consistent with each other, with the result that the CRA's position is unclear.

In Document No. 2003-0034505, the CRA states that there is a presumption that an employee-shareholder receives a benefit by virtue of his or her shareholding:

When a benefit is provided to a taxpayer who is both an employee and a shareholder of the corporation, there is a presumption that the benefit is made to the individual in his or her capacity as a shareholder. ... On the other hand, if it can be shown that the benefits are conferred on the shareholder-employee in his or her capacity as an employee, subsection 15(1) will not apply and the taxability of the benefits will generally be determined under the provisions applicable to employees.

This position establishes a high threshold for treating benefits provided to an employee-shareholder as employment benefits. Often, there will be nothing to show that benefits are conferred because the individual is an employee. There will merely be the fact that the benefits are conferred.

Other letters take a more pragmatic approach. These letters accept that, in cases where the only employees are shareholder-employees, benefits will be regarded as employment benefits if they are part of a reasonable remuneration package (see, for example, Document No. 2005-0115691E5).

Question:

What is the CRA's current position as to when benefits provided to shareholder-employees will be regarded as employment benefits, if all employees are shareholders or related to shareholders?

Agency's Response

In and by itself, the fact that an individual is the only employee and shareholder of a corporation does not mean a benefit is received qua shareholder. We agree that a pragmatic approach to the determination is warranted and, generally, if it is reasonable to conclude that the benefit has been provided as part of a reasonable employee remuneration package we will consider it to be received qua employee.