6 November 1989 Administrative Letter 58546 F - Taxation of Disability Income 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.

November 8, 1989

Dear Sirs:

Re:  Taxation of Disability Income Benefits Health and Welfare Plan

We are responding to your letter of August 17, 1989, concerning the taxation of disability income benefits received from a health and welfare trust.

As we understand the situation you present, a health and welfare trust administers three separate plans for three separate groups of employees (bargaining units).  The plan which covers one bargaining unit is intended to be an employee pay-all wage loss replacement plan as described in Interpretation Bulletin IT 428 "Wage Loss Replacement Plans".  The contribution level for this plan was inadvertently set too low and as a result, the plan is presently in a deficit position.  No information was provided concerning the other two plans.  We will assume that all three plans are self-insured wage loss replacement plans and that the trust documents do not prohibit the trustees from advancing funds from one plan to another.

You have asked whether the disability income benefits will remain non-taxable if the funds are advanced from the accounts held to the credit of the other bargaining units to pay benefits and expenses of the members whose account is in a deficit position.  You have also asked whether the benefits would remain non-taxable if the funds were advanced from the employer's account and the transaction was clearly established to be an interest bearing loan.

Paragraph 17 of IT 428 makes the statement that it is a question of fact as to whether or not an employee pay-all plan exists and the onus is generally on the employer to prove the existence of such a plan.  Whether or not such a plan exists involves a finding of fact in each particular situation.  As a consequence, we are reluctant to express an opinion about a contractual obligation without having access to the specific contracts, agreements and other relevant documentation concerning the arrangement.  However,we would like to provide the following general comments concerning wage loss replacement plans.

As stated in paragraph 18 of IT 428, a plan will not be considered to be an employee pay-all plan for those employees who must make all the contributions for themselves if the employer is making contributions on behalf of other employees covered by the same plan.  The three plans described in your letter will not be considered separate plans if there is any cross-subsidization between the plans or if the level of benefits, premium rates, qualifications for membership or other terms and conditions of each plan are dependent upon the existence of another plan.  Consequently, if the plans are cross-subsidized and one plan in the group is a plan to which the employer contributes, the benefits derived from any of the plans in the group will be taxable under paragraph 6(1)(f) of the Income Tax Act (the Act).

However, in the unique situation described in your letter, we would be prepared to consider that the advance was not a form of subsidization provided that;

1)     the situation arose inadvertently,

2)     the advance was in fact, a genuine loan in which bona fide arrangements were made at the time the loan was made for repayment within a reasonable time, and

3)     the contribution level for the plan in the deficit position is reset to a level which would adequately fund the plan.

Paragraph 12 of IT 119R3 and paragraph 8 of IT 258R2 (copies enclosed) have additional comments concerning the Department's position on genuine loans.

As you did not provide us with sufficient detail concerning the nature of the "employer's account", we are unable to comment directly on your second question.  However, if the employer were to lend the plan the necessary funds, we would not consider" the loan to be a contribution by the employer provided that the above noted conditions applied.

We caution that this opinion is not binding on the Department.  Should you have a factual situation, you may wish to obtain an advance income tax ruling as outlined in the attached Information Circular 70-6R "Advance Income Tax Rulings" if the transaction is proposed or consult the local district taxation office if the transaction has been completed.  Please note that the current rate for advance income tax rulings is $65 per hour and that the minimum fee has been replaced by a $325 deposit.

We trust our comments will be of assistance to you.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosure