5 July 1990 Ruling 59631 F - Income Replacement 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.

Attention: 19(1)

July 5, 1990

Dear Sirs:

Re:   Income Replacement Benefits

We are replying to your letter of February 14, 1990, concerning the taxation of income replacement benefits.

You have requested confirmation:

(1)     that the benefits received from an employee-pay-all plan would be tax free to the recipient,

(2)     that a plan would be considered an employee-pay-all plan if the employer increased the employee's earnings by the amount of the premium and then deducted the premium from the amount paid to the employee and

(3)     that the plan would also be considered to be an employee-pay-all plan if the employer treated the premium as a taxable benefit.

It is your opinion that the effect on the employee, employer, and the government is the same in the two situations you describe in (2) and (3) above and that the tax consequence should therefore be the same in both cases.

Paragraphs 16-21 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" outlines the Department's position on employee-pay-all plans.  Benefits received out of an employee-pay-all plan are not taxable whereas benefits received out of a plan to which the employer has made a contribution are included in the employee's income under paragraph 6(1)(f) of the Income Tax Act (Act).

It is a question of fact as to whether or not any particular plan is an employee-pay-all plan which can only be determined upon review of all relevant information and documentation.  If you have concerns about the status of a particular plan, you may wish to obtain an advance income tax ruling as described in the attached Information Circular 70-6R "Advance Income Tax Rulings" in respect of a proposed transaction or you may wish to contact your local district taxation office in respect of an existing plan. Please note that the current rate for an advance income tax ruling is $80 per hour and the minimum fee has been replaced by a $400 deposit.

However, we would like to provide the following general comments on the issues you have raised.

The manner in which the payments are remitted to the carrier of the plan does not by itself answer the question of whether or not an employee-pay-all plan exists.  Such a determination can only be made by looking at the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the carrier, the employment contract or some other document places upon the employees the legal obligation to pay 100% of the premiums (although the employer may still be responsible for remitting the premiums).  Provided the actual documentation of the plan indicates that:

a.     the employees are required to pay 100% of the cost of the plan,

b.     the premium which is remitted by the employer is added to the employee's income in the manner of salary and wages and

c.     the plan is set up as an employee-pay-all plan at the time the premium is paid,

a plan such as that described in (2) above will be considered an employee-pay-all plan and any benefits received therefrom will not be included in the employee's income.  However in the absence of such documentation, a plan such as that described in (3) above would be presumed to be a plan to which the employer has contributed.

Where the employer is legally obligated to contribute the premiums to the plan, it is not permissible for an employer to add the value of a premium to an employee's taxable employment income since paragraph 6(1)(a) of the Act specifically states that an employer's contribution to a group sickness or accident insurance plan is not included in employment income. Consequently for an employee who does not make a claim under the plan there is a difference between the two types of plans, in that an employee-pay-all plan is paid for with after-tax dollars whereas a plan to which the employer contributes is not. 

Clearly then, the effect on the employee, employer and the government will vary with the type of plan established.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch