14 January 1993 Income Tax Severed Letter 9234185 F - Tax Consequences of an Individual Accident 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.

923418 XXXXXXXXXX 

Dear XXXXXXXXXX

RE:  Group Sickness or Accident Insurance Plans

We are replying to your letter of October 2, 1992 wherein you asked us to confirm the tax consequences relating to an individual sickness or accident insurance plan as opposed to a group sickness or accident insurance plan.

With respect to a group sickness or accident insurance plan for employees, no amount is included in the employees' income on account of the employer's contribution to the plan by virtue of the exception in subparagraph 6(1)(a)(i) of the Income Tax Act (the Act). In this regard, it should be noted that, in addition to a plan under which the employees are insured under a single contract between an insurer and the employer, a group plan can include a plan under which the employees are covered by individual insurance contracts but pursuant to a common plan. Refer to paragraph 8 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" for further details on what is meant by a common plan.

Furthermore, under a group plan the employees are required to include in income any benefits received out of the plan to the extent required by paragraph 6(1)(f) of the Act. The employer is entitled to a deduction in computing business income for the annual premiums paid in respect of its employees provided that the amount is reasonable in the circumstances and does not constitute a prepayment on account of future periods.

As you note in your letter, a plan which covers less than two employees is not considered to be a group plan. Accordingly, under a plan which covers less than two employees (an individual plan), a taxable benefit in respect of the employer's contribution to the plan arises when the contribution is made. While the outlay by the employer will ordinarily still be deductible by the employer, the payment will not be viewed as an "employer's contribution" to the plan. Hence the employee will not be required to include in income any benefits received in the future out of or under the plan as explained in paragraph 20 of the above noted bulletin.

However, while the employer is usually still entitled to a deduction in respect of the outlay made in respect of a non-group plan for an employee, such a deduction will not be permitted if the payment is made in respect of an employee-shareholder and the benefit is being conferred on that employee-shareholder by reason of that individual's shareholdings rather than employment.

The determination of whether the benefit has been conferred on the employee-shareholder qua shareholder or qua employee involves a finding of fact. However, where a benefit is granted to an individual who is both an employee and a shareholder (or is related to a shareholder of the employer), the benefit will be presumed to have been conferred upon that shareholder by reason of the shareholdings unless the benefit is available to all employees of that corporation or the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.

In your letter you also mention health and welfare trusts. While not defined in the Act, the term "health and welfare trust" is used in Interpretation Bulletin IT-85R2 "Health and Welfare Trusts" (copy attached) to describe a trust which has been set up exclusively to provide employees with one or more of the following benefits:

-     group sickness or accident insurance plan,

-     a private health services plan and

-     a group term life insurance policy.

The treatment described in the bulletin is similar to the treatment that would be available if contributions for coverage under the above- noted insurances were paid for directly by the employer. Where an employer provides non-group insurance coverage of the type described above, to an employee through a trust, the trust will not be given the treatment described in Interpretation Bulletin IT-85R2 and the employee will be required to include the value of the benefit from the employer's payment of the premium in income for the year in which the premium is paid.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch