8 May 1991 Ministerial Letter 911068 F - Payments to Disabled Employees from an Insured Long-Term Disability 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.

We are writing in reply to your letter of January 17, 1991, wherein you requested clarification of the income tax implications of monthly benefit payments made to disabled employees from an insured Long Term Disability (LTD)  Plan.  Specifically, you requested our confirmation of your understanding of the circumstances whereby the monthly payments received by a disabled employee would not attract income tax.

As we understand it, it is your view that the source of the premium which originally funded the LTD plan is the determining factor in establishing whether or not the benefits would be taxable in the hands of the plan beneficiaries.  For example, where the employee pays the entire premium the benefits paid would not attract income tax.  In this regard, it is also your view that any contribution made by the employer, however small, would make the LTD plan a taxable plan.

Our Comments

For purposes of the ensuing discussion, we are assuming that your references to a taxable plan relates to an "employer pay-all" wage loss replacement plan and to tax free benefits, relates to benefits paid out of an "employee pay-all" plan as discussed in interpretation Bulletin IT-428 (copy attached).

Whether or not a particular LTD plan is an employee pay-all plan would involve a finding of fact that can only be determined after reviewing the terms of the plan and any related documents.  In the absence of such facts and documentation our comments will be of a general nature.

The prime factor in determining whether or not an employee pay-all plan exists is dependant upon the existence of a requirement, either in the policy of insurance or an employee's contract of employment, that places upon the employee the legal obligation to pay one-hundred percent of the required premiums.  The source of the original funding of the LTD plan would not, in and by itself, determine whether or not the plan is an "employee pay-all" plan.  For further discussion of the factors to be considered in making such a determination, please refer to the comments in paragraph 17 of IT-428.

With respect to your queries regarding "retention financial accounting", the employer's obligation to pay any LTD plan deficits, coupled with the apparent entitlement to a refund of LTD plan surpluses would, in our view, indicate that the LTD plan would be and probably always was, an employer pay-all plan. As a consequence it is our view that all benefits paid out of the LTD plan would have been taxable and would continue to be taxable, in the hands of the beneficiaries.

Even if the employees made all of the premium payments under the plan and the deficit is funded (even on a voluntary basis) by the employer that payment would taint the plan such that the benefits paid to the beneficiaries would be taxable in their hands.

In response to the questions posed at the bottom of page two of your letter, it is our view that any employer contribution to a plan would taint the plan and render the benefits paid out of the plan taxable in the hands of the recipients.  Such benefits, minus any employee contributions, would become taxable in the year in which the plan ceased to be an employee pay-all plan.

Should you have a factual situation involving an actual taxpayer that you wish to have considered, you should forward all relevant facts and documentation to the appropriate district taxation office for their consideration.

We apologize for the long delay in replying to your enquiry and trust that our comments will be of assistance to you .

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.     c  L. Pulcine Enquiries and Taxpayer Assistance Division Assessing and Enquiries Directorate