22 October 1992 External T.I. 9227665 F - EBP — Wage Loss Replacement Plan and Health and Welfare

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)

October 22, 1992

Dear 19(1)

This is in response to your letter of September 18, 1992, regarding the revised Sick Leave Trust Agreement ("Plan") of the School District and requesting our opinion as to the type of plan that it is.  In a previous letter, dated August 19, 1986, the Department expressed the view that the Plan was an employee benefit plan ("EBP"). 

An EBP is defined in subsection 248(1) of the Income Tax Act basically as an arrangement under which contributions are made by an employer to a custodian for the payments of benefits to employees, but it excludes plans listed in paragraph 6(1)(f) of the Act to which the employer has contributed.  These plans are not defined in the Act but are discussed in Interpretation Bulletin IT-428 and are referred to as Wage Loss Replacement plans. 

Paragraphs 5 to 7 of IT-428 define a Wage Loss Replacement plan and paragraph 7 indicates that insurance principles must be used in determining the amount of funds required to meet anticipated claims.  The funding for your Plan is determined annually by the Sick Leave Trust Committee ("Committee") and will be a percentage of salary however, it is not clear how this percentage will be determined.

A trust set up to fund a Wage Loss Replacement plan will, if other conditions are met, be considered to be a Health and Welfare trust which is discussed in Interpretation Bulletin IT-85R2.  Paragraphs 5 to 7 list the criteria needed for a Health and Welfare trust and it in unclear whether some of these criteria are met in your situation.  For example, the employer's contributions to a Health and Welfare trust must be enforceable by the trustees and not be gratuitous but your Plan indicates that the trustees merely recommend an amount to both parties.  Also, nothing in your Plan indicates that funds cannot revert back to the employer which is another requirement of a Health and Welfare trust.

When an employer makes contributions to an EBP or a Wage Loss Replacement Plan, whether or not the latter is funded through a Health and Welfare trust, there is no immediate benefit to the employee for tax purposes.  When benefits are paid from either such plans to an employee the amount of the benefit less the employee's contributions to the plan must be included in employment income pursuant to paragraph 6(1)(g) of the Act for EBPs and paragraph 6(1)(f) for Wage Loss Replacement plans.  Consequently, there will be no difference for an employee whether your Plan is an EBP or a Wage Loss Replacement plan funded through a Health and Welfare trust.

The major difference in these plans is the timing of the deduction for the employer's contribution.  For Wage Loss Replacement plans the employer deducts the contributions when paid, while employer contributions to an EBP are not deductible until benefits are paid to the employees.  Since school boards are not taxable this difference would be irrelevant to you.

Also, the taxation of trusts governed by EBPs and of Health and Welfare trusts would be very similar.  Benefits paid from an EBP trust can be deducted from its income pursuant to paragraph 104(6)(a.1) of the Act while benefits payable from a Health and Welfare trust are deductible pursuant to paragraph 104(6)(b) as explained in paragraph 12 of IT-85R2.

We trust these comments are useful.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate