28 June 1991 Ruling 910681 F - Worker Compensation - Tax Treatment of Types of Payments

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.

19(1)

Dear Sirs:

This is in reply to your letter of March 1, 1991 asking for our comments on the tax treatment of certain types of payments which are similar to those made under The Workmen's Compensation Act (Alberta) and will be made to individuals who are residents of Canada for the purposes of the Income Tax Act (the Act).

You have provided us with the following fact situation:

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2.                       24(1)

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6.                       24(1)

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With respect to the above situation, you have asked a number of questions relating to the tax treatment of amounts received by the Employees under the Coverage and whether they receive taxable benefits as a result of the payment of the Premiums. While you have indicated that the payments will mirror those that would be paid by the Alberta Worker's Compensation Board (the "Board"), it is our view that this fact cannot be used as a basis for establishing a specific fact scenario from which the tax treatment of the issues you raised can be determined. In this regard, it is apparent that the terms of your documentation would be different because a public statute is not involved and, under the Worker's Compensation Act (Alberta)(the "Alberta Act"), the Board has broad discretionary powers concerning the making of the payments under that act. Accordingly, the specific tax consequences of your situation can only be determined by reviewing the relevant documentation related to your situation. If your situation involves a completed transaction, you should contact the Calgary District Taxation Office. On the other hand, you may wish to consider the submission of an advance income tax ruling request if proposed transactions are involved. The procedures for submitting such a request are outlined in Information Circular 70-6R2. We are, however, making the following general comments which we hope will be of assistance to you.

The Alberta Act provides for a number of different types of payments which are made to workers and/or dependents as a result of accidents in the workplace and occupational diseases.  For the purposes of answering your queries, we are providing comments that relate to all of the payments as well as comments that relate to certain types of payments. In commenting on the various types of payments, we have categorized them as being Disability Payments, Medical Aid, Payments Following The Death Of The Worker, and Rehabilitation Expenses.

With respect to all of the payments referred to above that are made pursuant to an insurance policy, one consideration is whether an "employee benefit plan" or an "employee trust" exists pursuant to the definitions of these terms in subsection 248(1) of the Income Tax Act (the Act). If such is the case, the Act sets out rules on payments received under either of the two arrangements. The Department's general position on these types of arrangements is set out in Interpretation bulletin IT-502 entitled "Employee Benefit Plans and Employee Trusts".  However, where payments such as these outlined above are made solely under an insurance arrangement with an arm's length insurer which is not part of any other arrangement, the Department will not ordinarily consider the arrangement to be an employee benefit plan or an employee trust. The following comments are made on the assumption that an employee benefit plan or an employee trust does not exist.  As a further comment, we have assumed that the arrangement you have in mind is not a "retirement compensation arrangement" pursuant to the definition of this term in subsection 248(1) of the Act on the basis that your situation would involve an insurance policy.

A second consideration is whether deductions in respect any of the payments can be claimed under subparagraph 110(1)(f)(ii) of the Act. In order for an amount to qualify for a deduction under this provision, an amount must be "compensation received under an employee's or workmen's compensation law of Canada or a province in respect of an injury, disability or death.  In circumstances where payments are made by a private insurance company, it is our view that no deduction may be claimed under that subparagraph.

Before commenting on the various types of payments, we are mentioning that since                    24(1)                     we have limited our comments to the Canada U.S. Income Tax Convention. If you have specific queries on any other tax treaty, we would be pleased to consider them.

Our comments on the various types of payments are set out below.

Disability Payments

Under subparagraph 6(1)(a)(i) of the Act, an employee is not subject to tax in respect of his employer's contributions to a group sickness or accident insurance plan (wage loss replacement plan). However, where an employee receives periodic payments under such a plan, they are fully taxable under paragraph 6(1)(f) of the Act where the employer makes all the contributions thereto. The Department's general position on this type of plan is set out in Interpretation Bulletin IT-428 entitled "Wage Loss Replacement Plans". We also refer you to paragraph ll of IT-428 which indicates that a lump sum made in lieu of periodic payments will be considered to be income under paragraph 6(1)(f) of the Act.

The comments set out below relate to payments that can regarded as being a part of a wage loss replacement plan and that all contributions to the plan are made by the employer.

With respect to a wage loss replacement plan, sections 51 to 63 of the Alberta Act provide that payments be made to an individual in certain circumstances where he becomes disabled as a result of sickness or an accident. Paragraphs 51(1)(a) and (b) of the Alberta Act provide that periodic payments are to be made on a bi-weekly or a monthly basis in respect of certain compensation. In addition, paragraph 51(1)(c) of that act provides that payments may be made on some other basis if the Board considers it appropriate to do so. Since section 42 of the Alberta Act includes specific provisions for the commutation of periodic payments to a lump sum, we assume that the payments referred to under paragraph 51(1)(c) would also be made on a periodic basis.

If a wage loss replacement plan were to provide that periodic payments such as those referred to above would be made and that periodic payments could be commuted to a lump sum payment in certain circumstances, the payments (including a lump sum payment) out of or under the plan would be taxable under paragraph 6(1)(f) of the Act.

Another type of disability payment is described in section 63 of the Alberta Act. Under this provision, a lump sum payment or periodic payments may be made in certain circumstances as additional compensation where a worker is seriously injured or permanently disfigured. In our view, periodic payments and a lump sum payment, to the extent that it represents a commutation of periodic payments, are required to be included in income pursuant to paragraph 6(1)(f) of the Act. However, if a lump sum payment did not represent a commutation of periodic payments, it is our view that it would be non-taxable.

Sections 64 to 71 of the Alberta Act provide for the payment of benefits to certain survivors of a deceased worker. As indicated in paragraph 22 of IT-428, paragraph 6(1)(f) of the Act is not applicable to such payments. However, pursuant to other comments included in that paragraph, it is our view that the payments would be included in the survivor's (or survivors') income as a death benefit to the extent they exceed the exemption provided in the definition of death benefit in subsection 248(1) of the Act. With respect to these types of payments, you may also wish to refer to Interpretation Bulletin IT-508 entitled "Death Benefits Calculation".

In connection with the above payments, we note that Article XVIII of the Canada-United States Income Tax Convention deals with pensions and defines "pension" to include amounts paid under a sickness, accident or disability insurance plan (Such a plan would generally include a wage loss replacement plan.). This article sets out the maximum rate of withholding tax with respect to certain pension payments that arise in the U.S. and that if a pension payment is sourced in the U.S. and would be exempt from taxation in that country if the recipient were a resident thereof, it is exempt from taxation for Canadian income tax purposes. Where income, which is exempt from taxation in Canada pursuant to this article is required to be included in a recipient's income for Canadian income tax purposes, the exemption is effected by claiming a deduction under subparagraph 110(1)(f)(i) of the Act.  However, if a deduction is claimed under that subparagraph by a taxpayer, he should be prepared to establish that the income is exempt under that article.

Under section 17 of the Alberta Act, payments may also be made to a worker in certain circumstances in respect of an action against a third party. In reviewing those provisions, we feel that they provide a mechanism for the sharing of amounts between the Board and the worker. If a similar provision were to be included in a wage loss replacement plan, it is, accordingly, our view that the related payments would not be regarded as having been received out of a wage loss replacement plan and that reference would have to be made to other provisions of the Act to determine whether or not they are taxable.

Amongst other things, a payment made under that provision may relate to pain and suffering. As indicated in paragraph 2 of Interpretation Bulletin IT-365R2 entitled "Damages, Settlements and Similar Receipts" compensation for pain and suffering are generally considered by the Department to be a non-taxable receipt. While the nature of any other amount would depend on the facts of the case, other general comments in paragraph 2 of that interpretation bulletin may be of assistance to you. We also note that under paragraph 4 of IT-365R2, the interest element (or a part thereof) of an award for personal injury or death may be taxable.

Where a person makes payments under a wage loss replacement plan, it is not necessary that tax be withheld although as indicated in paragraph 23 of IT-428, an information return is required to be filed.

As a final comment, we are mentioning that if an employer has a plan that is in part a wage loss replacement plan and in part a plan that provides for other types of benefits, the employer must be prepared to identify that part of any premiums or other contributions paid by him to the wage loss replacement plan in view of the specific tax consequences set out in the Act which are different from those where other types of benefits arise.

Payments Arising From The Death of A Worker

Section 72 of the Alberta Act provides that a sum shall be paid to defray costs resulting from death and\or certain funeral costs, including the cost of transporting the body. In our view, if an insurance policy were to include similar terms, the payment of the related premium by an employer in respect of its employees would result in taxable benefits to them under paragraph 6(1)(a) of the Act. It is also our view that these taxable benefits would be subject to the withholding tax provisions of subsection 153(1) of the Act and the related regulations. However, if payments were made to individuals by the insurer pursuant to such terms, it is our view that they would be non-taxable.

Medical Aid

Under sections 73 to 82 of the Alberta Act, the Board may provide certain medical aid to qualified individuals. If similar terms which constituted a health plan were to be included in an insurance policy, a consideration would be whether a "private health insurance plan" exists for the purposes of subparagraph 6(1)(a)(i) of the Act as contributions by an employer to a private health services plan do not result in taxable benefits to employees in respect of whom the contributions were made. In addition, payments made out of or under a private health services plan are nontaxable. The Department's general position on this type of plan is set out in Interpretation Bulletin IT-339R2 entitled "Meaning of Private Health Services Plan".

As indicated in paragraph 4 of IT-339R2, coverage under a private health services plan must be in respect of expenses which normally qualify as a medical expenses under subsection 118.2(2) of the Act. In relation to these comments, the relevant provisions of the Alberta Act are broad and general and appear to include payments not described in subsection 118.2(2) of the Act. In addition, payments such as those described in section 74 of the Alberta Act in respect of clothing clearly are not described in subsection 118.2(2) of the Act. Accordingly, any contribution made by the employer to such a health plan would result in taxable benefits to the related employees which are subject to the withholding tax provisions of subsection 153(1) of the Act. However, payments made out of this type of plan in respect of employees would be non-taxable.

In view of the foregoing, it would appear that a consideration would be whether it is possible to establish a private health services plan that can be regarded as a separate plan within an insurance policy. As a further comment, we note that the premiums related to such a plan would have to be clearly identified.

Rehabilitation Expenses

Under section 83 of the Alberta Act, amounts may be paid by the Board in respect of qualifying individuals for rehabilitation. If similar terms were to be included in an insurance policy, it is our view that the premiums paid by an employer in respect of rehabilitation would give rise to taxable benefits to the related employees which are subject to the withholding tax provisions of subsection 153(1) of the Act and the related regulations. However, where payments are made by the insurer under the policy in respect of rehabilitation, they would be non-taxable.

We trust that the foregoing comments will be of assistance to you.

Yours truly,

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