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: Where an employee-pay-all disability plan becomes a plan in which the employer makes 100% of the contributions, how are disability benefits taxed?
Position: If an employee is in receipt of benefits at the time the employee-pay-all plan is converted, the employee may continue to receive non-taxable benefits in such amount and for such length of time as may have been specified in the plan when benefits commenced.
If an employee's benefits commence after the conversion, the benefits will be included in income pursuant to paragraph 6(1)(f) of the Act. Contributions made by the employee to the prior plan cannot be deducted from benefits received from the new plan.
Reasons: Converting a plan from employee-pay-all to employer-pay-all results in a new plan.
XXXXXXXXXX Renée Shields
November 22, 2006
Re: Taxation of benefits from employer's disability plan
This is in response to your letter of May 29, 2006 inquiring about the taxation of benefits received by an employee from an employer's disability 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 income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings." Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the Canada Revenue Agency ("CRA") website at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
You have described a situation in which prior to XXXXXXXXXX had their own disability plans for employee XXXXXXXXXX. On XXXXXXXXXX disability plan was negotiated between XXXXXXXXXX employers (the "Common Plan"). Under the prior plans the employees paid 100% of the premiums. Under the Common Plan the benefit coverage is the same but employers pay 100% of the premiums. A new contract with a new policy number was created with the same insurer as before. You have asked whether employees in receipt of benefits from the Common Plan can deduct contributions made to the predecessor employee-pay-all plan of their employer.
The CRA's views on disability insurance plans (and similar arrangements) are contained in Interpretation Bulletin IT-428, "Wage Loss Replacement Plans." Generally speaking, under subparagraph 6(1)(f)(ii) of the Act, amounts received in respect of the loss of employment income pursuant to a disability insurance plan to which an employer has made contributions are included in income as an employment benefit. The amount of the taxable benefit is reduced by any employee contributions to the plan that have not already been deducted from benefits previously received.
Where a plan is entirely employee funded, paragraph 6(1)(f) of the Act is inapplicable and no amount is included in income.
It sometimes happens that a plan is modified with respect to the contribution obligations of the employees or the employer. It is our view that a plan conversion from employee-pay-all to employer funded is a change of sufficient significance to result in a new plan. At ¶21 of IT-428 we discuss the tax implications of such a change in the context of an employee already in receipt of benefits at the time of conversion. This discussion may be relevant to your question if there are employees currently in receipt of disability benefits that commenced prior to XXXXXXXXXX. If an employee were receiving non-taxable benefits from an employee-pay-all disability plan prior to it being converted to one that is employer funded, the individual may continue to receive the same benefits on a non-taxable basis in such amount and for such period as may have been specified in the prior plan's terms when the benefits commenced.
Employees whose disability benefits commence subsequent to the conversion to a plan that is entirely employer funded would be receiving benefits from a new plan. Accordingly the disability benefit would be included in income pursuant to paragraph 6(1)(f) of the Act. Employee contributions made to a prior plan cannot be deducted from benefits received from the new plan.
We trust these comments will be of assistance.
Business and Personal Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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