2 September 1993 Income Tax Severed Letter 9321345 - Sales Tax on Insurance Premiums

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           932134
XXXXXXXXXX                                 J.A. Szeszycki
                                           (613) 957-2135

September 2, 1993

Dear XXXXXXXXXX

Re: Ontario Retail Sales Tax on Insurance Premiums

This is in reply to your facsimile transmission dated July 21, 1993 addressed to Mr. Eric Hammond of Head Office - Source Deductions Division as supplemented by transmissions dated July 22 to Mr. Claude Paquette of that Division and August 10 addressed to Mr. Paul Fuoco of this Division. Your submission requests clarification as to Revenue Canada's position on the tax effects of the employer's payment of the proposed 8% provincial retail sales tax on certain insurance premiums.

In your initial submission you have set out several scenarios and have asked us to confirm the correct tax treatment in each case. We will respond to your enquiries in the order submitted.

A) When premiums are paid by the employer on behalf of the employee for long term disability (LTD) coverage, does the amount paid as premiums constitute a taxable benefit to the employee? (Assume the premiums are not subject to any provincial sales tax) Would the benefits from the plan be taxable in the hands of the employee?

Comments: An employer's contribution for LTD coverage provided under a "group sickness or accident insurance plan" does not give rise to a taxable benefit in the hands of an employee by virtue of the exception in subparagraph 6(1)(a)(i) of the Income Tax Act (the Act). For the purpose of this response we will assume that the LTD coverage you refer to is provided under such a plan. Paragraph 6(1)(f) of the Act provides, however, that any amount received by the individual on a periodic basis from a sickness or accident insurance plan to which the employer has made a contribution is required to be included in the individual's income.

B) In provinces where the premiums for LTD coverage are subject to provincial sales tax and if this sales tax is paid by the employer on behalf of the employee, does the amount of sales tax paid constitute a taxable benefit to the employee? If that employer had also paid the premiums, would the benefits be taxable in the hands of the employee?

Comments: To the extent that the funding arrangement between the employer and employees requires the premiums for LTD coverage to be paid by the employer, and therefore exempt from inclusion in income as a taxable benefit, the payment by the employer of the additional 8% sales tax will not be considered a taxable benefit in the hands of the employee either. Where the arrangement requires that a portion of the premiums be funded by the employee and the employer opts to pay the sales tax levy on the total premium, the payment of that portion of the sales tax related to the employee-required premium contribution will be considered a taxable benefit in the hands of the employee.

Regardless of the arrangement made with respect to the payment of the sales tax, where the premium contribution to the LTD plan is made by the employer, as noted in A) above, the benefits received by the employee under the terms of the plan would be taxable in that individual's hands.

C) Where the employee pays the premium for the LTD coverage and the related provincial sales tax on that premium (if applicable), are the benefits subject to tax in the hands of the employee?

Comments: Where the arrangement requires the employee to pay the full amount of the premium (referred to as an "employee-pay-all" plan) the benefits received by the employee under the plan would not be taxable in the hands of the employee, regardless of the payment arrangement with respect to the provincial sales tax.

D) If the employee pays the premium for the LTD coverage and the employer pays the related provincial sales tax due on the premiums, where applicable, (i) does the sales tax paid by the employer constitute a taxable benefit to the employee? and (ii) are the plan benefits taxable in the hands of the employee?

Comments: Where the full amount of the premium is required to be paid by the employee but the sales tax is paid by the employer, the payment by the employer of the employee's liability for the 8% sales tax will constitute a taxable benefit to the employee. Regardless of who pays the provincial sales tax, the employee-pay-all nature of the plan itself will not be altered and therefore the benefits would not be taxable in the hands of the employee when received, as noted in response to C) above.

E) If the employer pays the premiums for the LTD coverage and the employee pays the provincial sales tax on the premiums, (i) are the premiums paid by the employer a taxable benefit to the employee? and (ii) are the plan benefits taxable in the hands of the employee?

Comments: Please refer to our earlier comments in A) above concerning the taxability of both the amount of the premium and the subsequent benefits under an LTD plan in the hands of the employee.

Our comments in C), D) and E) are based on the premise that the sales tax is distinct from the underlying insurance premium. Subparagraph 6(1)(a)(i) of the Act exempts from inclusion as an employee benefit the employer's "contribution to or under...a group sickness or accident insurance plan...". Paragraph 6(1)(f) provides that the amount of the benefits received out of the plan that is required to be included in income is reduced by the amount of employee contributions to the plan. It is the Department's view that the payment of the 8% provincial sales tax does not constitute a contribution to or under the plan for the purposes of these provisions.

You have further requested that we confirm how the positions outlined above apply to the other types of plans referred to in subparagraph 6(1)(a)(i) of the Act; namely, private health services plans, group term life insurance plans and other group sickness and accident insurance plans.

As far as the employer paid premiums are concerned and their treatment as non-taxable benefits from employment, the same general rules will apply. The only exception to note is in respect of group term life insurance plan premiums. To the extent that the employer-paid premium relates to group term life insurance coverage in excess of $25,000 the amount of that excess premium will be included in the employee's income as a taxable benefit. The employer payment of the 8% sales tax will be treated in the same manner.

The benefits from private health services plans (i.e., medical or dental plans) and group term life insurance plans are not required to be included in the employee's income. Benefits from any group accident insurance plan to which the employer has contributed are required to be included in income under paragraph 6(1)(f) of the Act.

To the extent that the payment of a premium to a private health services plan, and its related sales tax, is required to be included in the income of the employee as a taxable benefit, it can be utilized in the computation of the medical expense tax credit by virtue of paragraph 118.2(2)(q) of the Act as a "premium, contribution or other consideration to a private health services plan...".

The tax treatment of the proposed 8% sales tax, as outlined in the previous paragraphs, is consistent with the position taken by the Department with the introduction of a similar sales tax in the province of Quebec.

In the course of responding to other enquiries on the subject, reference has been made to the 2% premium tax on insurers and questions have been raised as to the income tax effects, if any, from the proposed extension of the premium tax to uninsured benefit arrangements. It is our understanding that the liability to pay the tax rests with the insurer or, in the case of uninsured arrangements, the administrator of the plan/payer of the benefits. Consequently, the payment of the premium tax has no effect on the employees covered under such plans or arrangements.

We trust the above information will be of assistance.

Yours truly,

P.D. Fuoco for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. Source Deductions Division Client Assistance Directorate Assessment of Returns Directorate