2 January 2007 Internal T.I. 2006-0214281I7 - Contribution Limit to a DPSP

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: When an employee is receiving long-term disability benefits from an insurance company sponsored by an employer group plan, can the employer still continue to make contributions to a DPSP on behalf of the employee?

Position: Yes, subject to the limitations of 147(5.1) and the terms of the wage loss replacement plan

Reasons: The term "compensation", as defined in subsection 147.1(1) of the Act, includes amounts in respect of an office or employment that are required by section 5 or 6 of the Act to be included in income. To the extent the benefits received under a wage loss replacement plan are taxable to the recipient under paragraph 6(1)(f) of the Act, these amounts would be included for purposes of calculating an employee's compensation for any year.

 								January 2, 2007

HEADQUARTERS						HEADQUARTERS
Registered Plans Directorate				Income Tax Rulings
		  Directorate
	Attention:  Jeff Boxer				Kimberly Duval, CA
(613) 599-6054

								2006-021428

Contributions to a Deferred Profit Sharing Plan

This is in response to your e-mail correspondence of November 10, 2006, requesting our comments as to whether an employer can contribute to a deferred profit sharing plan ("DPSP") on behalf of an employee who is receiving benefits from an insurance company under an employer's long-term disability plan. Specifically, you are inquiring whether the reference to the term "compensation" in subsection 147(5.1) of the Income Tax Act (the "Act") would include such benefits.

Our Comments

The income tax treatment of disability benefits received under disability insurance plans is set out in Interpretation Bulletin IT-428, Wage Loss Replacement Plans. The taxability of disability insurance benefits is dependant upon whether the plan is an "employee-pay-all plan", the determination of which is ultimately a question of fact. If an "employee-pay-all" plan exists, then benefits received under the plan will not be subject to income tax; however, where the employer pays the employees' premiums to the plan, any benefits subsequently received by employees will generally be taxable pursuant to paragraph 6(1)(f) of the Act.

The term "compensation" is defined in subsection 147.1(1) of the Act for purposes of registered pension plans. Pursuant to paragraph (a) of that definition, compensation of an individual from an employer means amounts in respect of an individual's office or employment that are required (or would be required but for paragraph 81(1)(a) as it applies with respect to the Indian Act) by section 5 or 6 to be included in computing income for the year, except for amounts specifically excluded by subparagraphs 147.1(1)(a)(iii) or (iv). For purposes of paragraph (a) of the definition, amounts are not required to be paid by the employer - only that the amounts are in respect of employment and are taxable by virtue of section 5 or 6 of the Act.

As such, it is our view that to the extent amounts received by an individual are subject to tax pursuant to 6(1)(f) of the Act, these amounts would form part of the individual's compensation. However, where amounts are received from an employee-sponsored plan such that amounts received by the individual are not subject to tax or if the amounts were received out of a plan that was subject to tax by virtue of a subsection 56(1); these amounts would not constitute compensation and would be excluded from the determination of compensation for purposes of the calculation in subsection 147(5.1) of the Act.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch