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 reimbursement by an insurance corporation to an employee claimant to fix an error is a taxable employment benefit under 6(1)(a); in particular, a reimbursement of income tax, interest, penalties and accounting fees. Whether it makes a difference if the plan is a formally-insured one, or an administrative services only one.
Position: The reimbursement of income tax, interest and penalties will generally result in a taxable benefit for an employee. With regards to the accounting fees, it is the general position of the CRA that the reimbursement of an expense that would otherwise be deductible under the Act does not result in a taxable benefit unless there is a specific provision that requires otherwise. The general views of the CRA are not dependent on the type of plan.
Reasons: Income tax, interest and penalties are personal expenses. While the accounting fees are a personal expense, there may be a deduction available for the employee under 60(o) of the Act.
CLHIA Roundtable - May 17, 2013
Reimbursement of Claimant by Insurance Corporation under Wage Loss Replacement Plan
On occasion, an insurance corporation may pay disability benefits to a claimant under a wage loss replacement plan on the mistaken assumption that no income tax is payable by the claimant on the benefits. The claimant's employer, as plan sponsor, typically provides the relevant information as to the taxability of benefits to the insurance corporation, including in particular whether the plan is employee-pay-all. When the mistake is detected and the claimant is assessed for the income tax liability on the disability benefits, if asked by the claimant and/or the claimant's employer, the insurance corporation may (if it considers itself at least in part responsible), reimburse the claimant for any or all of (1) the income tax payable on the benefits for past (not future) periods, (2) the accounting fees that may have been incurred by the claimant in order to obtain assistance regarding the error, and (3) the interest and penalties payable under the Income Tax Act ("Act").
Does the CRA consider the reimbursement of the income tax, accounting fees, and interest and penalties to be a taxable benefit for the employee claimant pursuant to paragraph 6(1)(a) of the Act or a non-taxable receipt, such as a gift? Does it make a difference if the plan is a formally-insured one (i.e. where there is a contract of insurance with the insurance corporation) or an administrative services only ("ASO") one (i.e. where there is no contract of insurance with the insurance corporation but the plan is based on insurance principles and the insurance corporation acts as agent for the plan sponsor)?
The reimbursement of income tax, interest, and penalties will generally result in a taxable benefit for an employee under paragraph 6(1)(a) of the Act because these are personal expenses. However, if the interest and penalties were incurred as a result of an error made by the employer, and if the employee had no knowledge, or could not have been expected to know that the amounts were taxable, an employee may apply to have the interest and penalties cancelled under the taxpayer relief provisions in the Act. The employee may use form RC4288, Request for Taxpayer Relief, to make his or her request for relief.
With regards to the accounting fees, it is the general position of the CRA that the reimbursement of an expense that would otherwise be deductible under the Act does not result in a taxable benefit unless there is a specific provision that requires otherwise. It is not clear from the information provided whether there would be a taxable employment benefit for the reimbursement of the accounting fees.
Finally, the general views of the CRA as expressed above are not dependent on the type of plan.
Prepared By: Kathryn McCarthy
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