24 November 1993 External T.I. 9317965 F - Shareholders and Wage Loss Replacement Plans

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

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Wage Loss Replacement Plans

This is in reply to your letter of June 11, 1993 concerning group sickness or accident insurance plans which involve an individual who is both a shareholder and an employee. We also acknowledge our telephone conversation (XXXXXXXXXX\Eisner) in which we obtained clarification with respect to the situations set out in your letter. We apologize for the delay in responding.

The situation on which you have asked for our comments appear to relate to specific taxpayers and involve proposed transactions. Confirmation of the tax consequences of such transactions 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 and the related Special Release dated September 30, 1992. As a request for an advance income tax ruling has not been made, our comments set out below must be construed as being broad and general in nature rather than having been made in respect of a specific situation.

Our Comments:

At the outset, we caution that, in an actual situation, the tax consequences of the issues you raised involve questions of fact and can only be determined following a review of the relevant facts and documentation. Accordingly, the comments set out below may not be applicable to a particular set of circumstances.

You are concerned with two types of situations. In the first type of situation, a corporation carries on a small business operation. The owner (Employee/Shareholder) of the outstanding shares of the corporation is an employee of the corporation. In addition, the corporation employs the Employee/Shareholder's spouse as well as several other employees. The corporation establishes a wage loss replacement plan which can be regarded as being a group sickness or accident insurance plan for the purposes of subparagraph 6(1)(a)(i) of the Income Tax Act (the Act). Only the Employee/Shareholder and his or her spouse are covered by the plan as the intention of the arrangement was to exclude the other employees from participating in the plan.

With respect to the above situation, it is a question of fact whether benefits have been granted under the plan to the Employee/Shareholder and his or her spouse by virtue of the Employee/Shareholder's shareholdings or by virtue of their employment. However, it is the Department's general position that where participation in the plan is restricted to an individual who is both an employee and a shareholder and an individual who is related to the employee/shareholder, the related benefits are presumed to have been conferred by reason of the employee/shareholder's shareholdings. Accordingly, in the above situation, the benefits would be included in the income of the Employee/Shareholder under subsection 15(1) of the Act. We also note that, in the case of the benefit conferred on the Employee/Shareholder's spouse, such benefit would be included in the Employee/Shareholder's income under subsection 15(1) by virtue of subsection 56(2) of the Act. It is also our view that the fact that the excluded employees could be regarded as being in a class of employment which is different from that of the spouse and the Employee/Shareholder, would not have any effect on the above comments.

Two related tax consequences are that the corporation would not be entitled to a deduction in respect of the contributions made to the plan and paragraph 6(1)(f) of the Act would not apply to any benefits received pursuant to the plan.

In the second situation, a corporation (Opco) which operates a business pays the premiums in respect of a group sickness or accident insurance plan in respect of its employees. Opco's outstanding shares are owned by a holding company (Holdco). An individual, who owns Holdco's outstanding shares, as well as the individual's spouse are employed by Holdco. Holdco's employees provides managerial and administrative services to Opco. A group sickness or accident insurance plan has been established by Opco with respect to its employees. In addition, the employee/shareholder and his spouse are members of the plan. Opco pays the insurance premiums in respect of the plan.

In connection with the above situation, it is our understanding, pursuant to our telephone conversation, that Holdco would have a legal obligation to pay the premiums related to the two individuals it employs and that Opco would have a legal obligation to pay the premiums in respect of the individuals that it employs. It is also our understanding that Holdco would reimburse Opco for the premiums paid in respect of Holdco's two employees and that Holdco would be the policyholder in respect of the insurance policies that relate to its two employees and Opco would be the policyholder in respect of its two employees.

Other than the comments concerning a plan that is restricted to an employee/shareholder and his or her spouse, the comments made in connection with the first situation are relevant in respect of this situation. It is also our view that if the benefits provided to the employee/shareholder and his or her spouse were to be regarded as being taxable under subsection 15(1) of the Act, this would not preclude Opco from being entitled to deduct the premiums paid in respect of its own employees.

We also note that in an actual situation similar to that set out above, a particular concern would be whether an advantage or benefit over and above the benefits available to other employees has been provided to the employee/shareholder and his or her spouse. If this were to be the case, the Department would presume that the benefits provided to those two individuals were conferred by virtue of the employee/shareholder's shareholdings.

These comments represent our opinions of the law as it applies generally and as indicated in paragraph 21 of Information Circular 70- 6R2, are not binding on the Department. Nevertheless, we hope that our comments are of assistance to you.

Yours truly,

P.D. FuocoSection ChiefBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch