8 February 1993 External T.I. 9238025 F - Assignment of Disability Policies to Employees

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.

XXXXXXXXXX 

Dear XXXXXXXXXX

RE:  Wage Loss Replacement Plan

Your letter of December 11, 1992 addressed to Jane Dyck of the Edmonton District Office has been referred to us for reply. Reference is made to our telephone conversations of December 18, 1992 and January 25, 1993 (XXXXXXXXXX/Humenuk).

You have asked for confirmation of the tax implications of the conversion of an employer-paid wage loss replacement plan to an employee-paid plan as described in paragraph 21 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" both generally and in relation to a specific plan with which you are concerned.

Confirmation of the tax consequences of proposed transactions relating to a specific fact situation will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 dated September 28, 1990 and the related Special Release dated September 28, 1992, copies of which are attached.

If your enquiries relate to a specific disability plan already in place, you should forward the plan document and other pertinent information to your local district taxation office for review. Please note that many of the relevant issues to be considered in determining the tax consequences to either the employer or employee are questions of fact which can only be decided upon a review of all the relevant facts and documentation. Consequently, even if a particular arrangement between employer, employee and insurance company includes the factors listed below, there may be additional circumstances not in evidence that may cause the comments which follow not to apply in their entirety.

The situation with which you are primarily concerned has been described to your clients by insurance salesmen as follows:

1.     The employer corporation has a disability plan for its employees. The implication seems to be that each employee is covered under a separate policy.

2.     Some of the employees are shareholders.

3.     The annual premiums required on the policies for the first 10 years are in excess of what is required to insure the employees. Such excess is called the "unearned premium value". As a result of paying a higher premium in the first 10 years, the policy requires no premiums after year 10.

5.     The corporation pays the premiums due on the policies for the first 8 or 9 years of the policy.

6.     In year 8 or 9, the employer assigns the disability policy to the employees.

Representation has been made to your client that the premiums referred to in 5. above do not result in a taxable benefit to employees on the basis that subparagraph 6(1)(a)(i) of the Income Tax Act would exempt any benefit from taxation and that any benefits payable under the policy which commence after the policy has been assigned to the employee will not be taxable to the employee be reason of paragraph 6(1)(f) of the Act.

The exemption in paragraph 6(1)(a) of the Act for an employer's contribution to a disability plan on behalf of its employees applies only to a plan which is a group sickness or accident insurance plan. Paragraph 2 of Interpretation Bulletin IT-85R2 states that the Department generally accepts that an employer's contribution to a sickness, accident, disability or income maintenance (also known as salary continuation) plan qualifies as a contribution to a "group sickness or accident insurance plan" as described in subparagraph 6(1)(a)(i), provided that the particular plan is both a group plan and an insured plan.

A group plan means a plan under which a number of employees are insured either under a single contract between the insurer and an employer contracting with the insurer or under individual contracts but pursuant to a common plan. It is a question of fact as to whether a collection of individual contracts can be considered to be issued pursuant to a common plan established by the employer to insure its employees. In this regard, we refer you to the comments in paragraph 8 of Interpretation Bulletin IT-428. Since it is not clear from your letter whether or not the plan in question is a group plan, we have provided comments on both scenarios.

In the instance where the disability coverage is offered to the employees through a group plan, the employees will not be required to include in income any benefit arising solely as a result of the employer's contribution to the plan. The outlay by the employer from his own funds is deductible under paragraph 18(1)(a) of the Act subject to the provisions of subsection 18(9) of the Act. Subsection 18(9) of the Act prohibits the deduction of insurance premiums which can reasonably be considered to be incurred in respect of future periods.

It is a question of fact as to whether the group disability plan winds up at the time the policies are assigned to the employees. For example, if the policies are assigned to the employees at a time when no further premiums are required in respect of such policies, it is our view that the group plan would still be in existence and any benefits received by the employee under the policy so assigned would still be considered to be received pursuant to a plan to which the employer has made contributions. As a result, any employee receiving benefits under the policy would be required to include such amounts in income to the extent required by paragraph 6(1)(f) of the Act despite the fact that the policy had been assigned to the employee.

If, however, the facts support the conclusion that group disability plan has been wound up when the policies are assigned to the respective employees, the employees would be required to include in income for that year the value of any policy so assigned to the extent that the employer is not reimbursed by the employee. The comments in Interpretation Bulletin IT-420 concerning the conversion of an employer-paid plan to an employee-pay-all plan do not apply when the policy has been assigned directly to the employee.

If, on the other hand, the plan is not considered a group plan, any payment of premiums by the employer is considered to be a payment of a personal expense on behalf of the employee and the value of the premium is added to the employee's income as a taxable benefit in the year the payment is made. Moreover, since the Department takes the position that the payment by the employer is not a "contribution" by the employer to the plan, paragraph 6(1)(f) will not apply to require the employee to include in income any benefits received by him pursuant to the plan as no employer contributions are considered to have been made. These comments are expressed in paragraph 20 of Interpretation Bulletin IT-428.

Note as well that while the employer can generally deduct the cost of premiums paid for employees to the extent permitted by subsection 18(9) of the Act, no deduction is permitted if the coverage is provided to a shareholder/employee in his capacity as a shareholder. Paragraph 6(1)(f) of the Act does not apply to any benefits received by a shareholder pursuant to a plan for shareholders. Rather, the amount of the premiums or contributions paid by the corporation in the year and attributable to the shareholder is included in income in the year the contribution was made as a shareholder benefit under subsection 15(1) of the Act.

These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70- 6R2, these opinions do not constitute an advance income tax ruling and are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch