10 March 2010 External T.I. 2009-0347621E5 - Wage loss replacement plan

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: Whether the employer has a wage loss replacement plan which qualifies as an employee-pay-all plan.

Position: No

Reasons: Facts as provided. The plan is part of a plan operated by a group of employers.

									2009-034762
XXXXXXXXXX 								Rita Ferguson
									519-645-5261
March 10, 2010

Dear XXXXXXXXXX :

Re: Wage Loss Replacement Plan

This is in response to your letter of October 30, 2009 inquiring about the taxability of benefits received by your client under a long-term disability insurance plan (the "Plan").

The Plan provides coverage under an insurance policy ("the Policy") between the XXXXXXXXXX (the "Insurer") and the XXXXXXXXXX . which covers the employees working for the XXXXXXXXXX in Canada (the "Employer Group"). In keeping with the terms of the Policy, most of the other employers in the Employer Group pay the premiums for the Policy without recovering the amounts from their respective employees. Your client's particular employer, however, adopted a practice whereby the premiums for long-term disability insurance coverage are employee-paid. You wish to know if the benefits can be considered to be paid from an "employee-pay-all" plan so that they would be non-taxable

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Our Comments

Paragraph 6(1)(f) of the Income Tax Act ("the Act") applies to include in employment income any benefits paid to an employee from a sickness or accident insurance plan, a disability insurance plan, or an income maintenance insurance plan (generally referred to as a "Wage Loss Replacement Plan") under which the employer has made a contribution. Pursuant to subparagraph 6(1)(f)(v) of the Act, the amount of the benefit included in income is reduced by the amount of contributions made by the employee under the particular plan. Where the entire premium cost of a Wage Loss Replacement Plan is paid by the employees, benefits out of such a plan are not taxable because an employee-pay-all plan is not a plan within the meaning of paragraph 6(1)(f) of the Act.

As noted in Interpretation Bulletin IT-428, "Wage Loss Replacement Plans," if an employer makes contributions for some employees, but not all, the Wage Loss Replacement Plan will not be considered to be an employee-pay-all plan, even for those employees who must make all contributions themselves. Where a group of employers establishes a Wage Loss Replacement Plan with one insurance contract between the insurer and the group of employers, there is considered to be one plan. However, in some cases separate divisions under the umbrella of the single policy or separate components of the plan may qualify as separate plans, each of which may then be examined to determine if it qualifies as an employee-pay-all plan.

In making this determination, it should be borne in mind that in order for two or more Wage Loss Replacement Plans that are covered by the same insurance policy to be considered separate plans, the administration of the plans must demonstrate that they are in fact separate. This would be the case where there is separate accounting for claims, premiums and administrative charges. Additionally, there must not be cross-subsidization between the plans and the level of benefits, the premium rates, the qualifications for membership, and the other terms and conditions of each of the plans must not be dependent upon the existence of any of the other plans.

In this case, the Policy specifications in the documentation provided to us, its administration by the Insurer, and the manner in which the Policy has been implemented by the various employers in the Employer Group, are all strong factors indicating that the Policy covers a single long-term disability plan which does not qualify as an employee-pay-all plan. That being the case, the benefits your client receives are taxable under paragraph 6(1)(f) of the Act. However, as noted above, since your client has made contributions to the Plan, the benefits may be reduced by some or all of the contributions pursuant to subparagraph 6(1)(f)(v) of the Act.

We trust that these comments have been of assistance.

Yours truly,

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