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.
What is the tax treatment of amounts paid by an employer for the cost of post retirement group benefits when it is part of an early retirement incentive plan?
Provided general comments.
The determination of whether an amount is taxable is a question of fact.
I. Landry, M. Fisc.
June 29, 2009
Subject: Post Retirement Benefits
This is in response to your letter of November 6, 2008 in which you requested our comments regarding the tax treatment pursuant to the Income Tax Act (the "Act") of amounts paid by an employer for the cost of post retirement group benefits when it is part of an early retirement incentive plan.
We understand from the situation described in your letter that an employer is contemplating offering an early retirement plan (the "Plan"). Basically, the Plan will provide that once retired, individuals will have all health benefits paid up to a limit of $20,000 of the expense(s) incurred. This amount will be used on a monthly basis until all funds are exhausted to pay for a medical and dental plan as well as for a group term life insurance. Presently, retiree benefits are fully paid by the retired employee.
Unless otherwise stated, all statutory references in this letter are references to the provisions of the Act.
The particular situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. 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 tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
Our general comments are based on the assumption that the medical and dental care benefits which the employer contemplates offering as an early retirement plan are offered through a contract of insurance that is a private health services plan ("PHSP"). We also have assumed that the amount of $20,000 is not refundable at any time to the retiree.
Subject to certain exclusions, it should be noted that a PHSP is defined in subsection 248(1) as a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or a medical care insurance plan or hospital care insurance plan or any combination of such plans.
Paragraph 6(1)(a) includes in a taxpayer's income, the value of most benefits that are received or enjoyed in respect of, in the course of, or by virtue of an office or employment. However, contributions paid by an employer in respect of a PHSP or group term life insurance policy on behalf of an employee are excluded from the employee's income from an office or employment by virtue of subparagraph 6(1)(a)(i).
It is our general position that where an employer extends to former employees, those benefits which are otherwise non-taxable to current employees by virtue of subparagraph 6(1)(a)(i), the benefits so described will also not be taxable to the former employees.
However, in the case of a group term life insurance policy, subsection 6(4) could apply to include a benefit in computing the employee's or former employee's income. The term "group term life insurance policy" is defined in subsection 248(1) 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, in the course of or because of, his or her office or employment or former office or employment and policy dividends or experience rating refunds. Whether a particular policy qualifies as a group term life insurance policy is a question of fact that can only be determined on a case-by-case-basis. For information on calculating the benefit for group term life insurance policies please refer to Chapter 3 of T4130, "Employers' Guide: Taxable Benefits."
On the other hand, any other payment made by the employer to a former employee could qualify as a retiring allowance which would be included in income pursuant to subparagraph 56(1)(a)(ii). A "retiring allowance" is defined in subsection 248(1) to mean an amount received by a taxpayer on or after retirement from an office or employment in recognition of the taxpayer's long service or in respect of a loss of office or employment of a taxpayer.
In the situation you have described, we are unable to comment more specifically as all the relevant facts and documents must be examined to determine the tax consequences that may arise. Accordingly, we would be prepared to deal with your request in the context of an advance income tax ruling request.
We trust that these comments will be of assistance.
Louise J. Roy, CGA
for acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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