18 June 1993 External T.I. 9306715 F - Short 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.

XXXXXXXXXX

Dear XXXXXXXXXX

RE:  Short Term Disability Plans Health and Welfare Trusts

This is in reply to your letter of March 1, 1993 and subsequent correspondence with enclosures. We also refer to our telephone conversation of June 2, 1993, (XXXXXXXXXX/Larochelle) regarding your enquiry concerning the tax treatment to be accorded amounts received by unnamed taxpayers out of a short-term disability plan. We regret the delay in providing a response.

To summarize, the circumstances of your enquiry, as we understand them, are as follows:

1.     A client of yours recently received information from a consulting firm indicating that sick leave benefits could be paid to employees in a manner that would exempt the employer from paying statutory deductions to Unemplyment Insurance premiums, Canada Pension Plan contributions, Workers Compensation contributions and the Ontario Employer Health Tax.

2.     It appears the consulting firm is using the Employee Benefit Trust as the vehicle through which the employer would pay the sick leave thus saving a substantial amount (11% to 12%) of the sick leave paid and because the funds were disbursed in this manner the benefits would not be subject to the various statutory deductions.

3.     You have reviewed the various Interpretation Bulletins that refer to Employee Benefit Trusts and can find no specific indication that the Trust can be used to avoid payment of these statutory deductions.

4.     Included with your submission was a letter from the Ontario Ministry of Revenue which has caused you some concern as it infers that if funds are paid out of an insurance plan or a trust set up to administer short term sick leave benefits such payments are not subject to the statutory deductions mentioned above.

Based on the above facts you have asked us to comment on the following:

Would it be possible to avoid U.I premiums, C.P.P. contributions, W.C.B. contributions and E.H.T., if employers pay employees their regular salary while on short-term sick leave through an employee benefit trust and thus avoid payment of the statutory deductions.

Our Comments:

At the outset, we assume that your reference to an "Employee Benefit Trust" is a reference to a health and welfare trust as discussed in Interpretation Bulletin IT-85R2.

Whether the benefits received by the employee would be taxable under Sections 5, 6(1)(a) or 6(1)(f) would involve a finding of fact that could only be determined from a review of the plan documents and other related information. However, if the situation to which you refer involves mainly short-term sick benefits which, in fact, is sick leave with pay to which the employee is entitled under the terms of an employment contract or collective agreement and the plan or trust is set up specifically for this purpose, benefits received by an employee would normally be considered to be ordinary salary or wages and the usual deductions for U.I.C. and C.P.P would be applicable.

The use of an independent third party such as an insurance company to adjudicate the entitlement to a benefit under the terms of a plan does not, in our view, alter the status of the plan if the employer is involved in the administration of the plan. As stated in paragraph 6 of Interpretation Bulletin IT-85R2, a particular arrangement will only be considered a health and welfare trust if the trustees act independently of the employer. In a plan where the employer is the agent who pays the claims and would thus be involved in the administration of the plan, such a plan would not be a health and welfare trust and the payments by the employer to the employees would be included in income under subsection 5(1) of the Income Tax Act, notwithstanding any arrangement the employer might have with the trustees for reimbursement of the amounts so paid to the employees.

We would refer you to paragraphs 5 to 10 in Interpretation Bulletin IT-428 which discusses the meaning of a "wage loss replacement plan".

Please note that any enquiry relating to an actual taxpayer, or a factual situation involving completed transactions should be submitted along with all relevant facts and documentation to the local District Taxation office for their views in this regard.

As explained in our telephone conversation, this Department is responsible only for the Federal Acts relating to payroll deductions for U.I.C., C.P.P., and Income Tax; therefore, the above comments relate solely to the various acts administered by this Department and thus we are not commenting on the implications of deductions with respect to Employer Health Tax or Workmen's Compensation as these Acts come under provincial jurisdiction.

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