17 October 2008 External T.I. 2008-0278501E5 - Taxable Benefits

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: Various questions concerning how the wage loss replacement plan benefits and life insurance proceeds would be taxed.

Position: General information provided. However, generally life insurance proceeds would not be subject to tax when received by a beneficiary if they are received as a consequence of the death of the insured individual.

Reasons: The law.

XXXXXXXXXX 							2008-027850
								Michael Cooke
October 17, 2008

Dear XXXXXXXXXX :

Re: Taxable Benefits - Life Insurance and Long Term Disability Insurance

This is in response to your correspondence of May 12, 2008, regarding the taxability under the Income Tax Act (the "Act") of benefits received by an employee in various scenarios involving a long-term disability insurance policy and a life insurance policy.

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 request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Canada Revenue Agency ("CRA") Tax Services Office. However, we offer the following general comments.

Our Comments

Subject to certain exceptions, paragraph 6(1)(a) of the Act requires that the value of any benefits received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment be included in the taxpayer's income from employment. The broad wording of this provision means that a taxable benefit may exist where there is any connection between the particular payment or benefit and the particular office or employment.

Wage Loss Replacement Plans

Subparagraph 6(1)(a)(i) of the Act provides an exception to the general rule described above for benefits derived from an employer's contributions to a "group sickness and accident insurance plan". A "group sickness or accident insurance plan" is not defined in the Act but paragraph 14 of Interpretation Bulletin IT-428, "Wage Loss Replacement Plans" indicates that this exception would apply to any of the three types of plans described in paragraph 6(1)(f) of the Act (i.e. a sickness or accident insurance plan; a disability insurance plan; or an income maintenance insurance plan and collectively referred to as "wage loss replacement plans") as long as the particular plan is a group plan. A "group" must consist of more than one employee. Where the plan is a group sickness or accident insurance plan, such as a group long term disability plan, any premium contributions made by an employer to an insurer for its employees would not be taxable under paragraph 6(1)(a) of the Act.

Paragraph 6(1)(f) of the Act describes the tax implications of benefits paid to an employee from a group wage loss replacement plan to which the employer has made a contribution. Generally speaking, the employee must include in income the total of all amounts received in the year that were payable on a periodic basis as benefits under the group wage loss replacement plan. However, this income inclusion is reduced by the total amount of any contributions made by the employee to the particular plan before the end of the year and to the extent that such employee contributions have not already reduced the amount of benefits previously received by the employee. This means that benefits paid from an "employee-pay-all" plan are not taxable. We note that paragraph 14 of IT-428 clarifies that an employer is not considered to have made a contribution to a wage loss replacement plan if the employer merely deducts an amount from an employee's gross salary or wages and remits that amount on the employee's behalf to the insurer.

The income tax consequences of non-group wage loss replacement plans are discussed in paragraph 20 of IT-428. As indicated therein, where an employer pays the premium under a non-group plan wage loss replacement plan, the payment of the premium is regarded as a taxable benefit to the employee under paragraph 6(1)(a) of the Act. However, the payment of the premiums by the employer in these circumstances are not viewed by the CRA as a "contribution" by the employer under the particular non-group wage loss replacement plan. Accordingly, paragraph 6(1)(f) of the Act would not apply to tax any benefits received by an employee under such a plan.

Life Insurance

Because your letter refers to the payment of "premiums," we have assumed that your question relates to a benefit derived from a life insurance policy and not to the payment of a death benefit. For more information on death benefits, please refer to Interpretation Bulletin IT-508R, "Death Benefits." This publication and other CRA publications may be accessed at our website at: http://www.cra-arc.gc.ca.

The taxation results for an employee whose employer provides life insurance coverage depends on the nature of that coverage.

An employee whose life is insured under a "group term life insurance policy" by his or her employer is required by subsection 6(4) of the Act to include a benefit in income. The amount to be included is prescribed by sections 2700-2705 of the Income Tax Regulations. For information on calculating this benefit, you may refer to Chapter 3 of T4130, "Employers' Guide: Taxable Benefits."

The term "group term life insurance policy" is defined in subsection 248(1) of the Act to mean a group life insurance policy under which the only amounts payable by the insurer are amounts payable on the death or disability of an individual whose life is insured in respect of, because of, or in the course of his or her office or employment. This means that a life insurance policy that insures the life of only one employee or the lives of the employee's spouse or other dependants (whether or not in conjunction with the life of the employee) would not be a group term life insurance policy for the purposes of the Act. As such, any premiums paid by an employer for such a life insurance policy would be required to be included in the particular employee's income under paragraph 6(1)(a) of the Act as a taxable employment benefit. Whether a particular policy qualifies as a group term life insurance policy is a question of fact that must be determined on a case-by-case-basis.

Generally speaking, the proceeds received by a beneficiary under a life insurance policy as a result of the death of the person whose life was insured are not taxable. This would be the case regardless of whether the employee or employer paid the premiums under the particular life insurance policy and regardless of whether such premiums were included in an employee's income as a taxable benefit.

For additional information on the above-described topics please refer to paragraphs 1 and 9 of Interpretation Bulletin IT-85R2, "Health and Welfare Trusts for Employees" and paragraph 20 of Interpretation Bulletin IT-529, "Flexible Employee Benefit Programs".

We trust the above comments are of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch