15 February 1994 External T.I. 9329835 F - Conversion of an LTD 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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Conversion of an Long Term Disability (LTD) Plan

This is in reply to your letter of October 6, 1993 concerning a situation involving a conversion of an employee-pay-all LTD plan (the Initial Plan) to a plan (the Second Plan) under which an employer makes all the contributions. We apologize for the delay in responding.

With respect to your concern, you have referred to certain comments made in the tax service "Window on Taxation" that relate to a letter which was issued by this directorate and is identified as being file number 9223635. While comments were made in that letter on a number of situations, you have referred to the situation where an individual with a degenerative disorder began to receive LTD benefits subsequent to the conversion as the individual did not become disabled until after the conversion occurred.

On the basis that the terms of the Initial Plan were carried forward into the Second Plan, the Department considered whether the disability benefits were received by the individual "pursuant to" a plan "to or under which his employer has made a contribution" for the purposes of paragraph 6(1)(f) of the Income Tax Act (the Act). While the determination of this issue is a question of fact, the Department indicated that the benefits would likely be taxable under paragraph 6(1)(f) of the Act.

However, you have indicated that the above position may not be consistent with comments made in the tax service in relation to paragraph 21 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" and have requested our comments thereon.

Paragraph 21 of IT-428 is set out below:

"Whether or not the benefits an employee receives under a plan are required to be included in his income is governed by both the type of plan in effect at the time of the event that gave rise to them and any changes in the plan subsequent to that time. When a pre- June 19,1971 plan, or an employee-pay-all plan, is changed and becomes a new taxable plan, an employee who was receiving benefits at the time of the change may continue to receive them tax-free thereafter but only in the amount and for the period specified in the plan as it was before the change. Where the new taxable plan provides any increase in benefits, whether by increases in amounts or through extension of the benefit period, the additional benefits must be included in income since they flow from the taxable plan."

In relation to paragraph 21 of IT-428, the Department stated the following in the letter:

"With respect to the above excerpt, our first observation is that the opening sentence of paragraph 21 addresses the type of situation where an employee is receiving benefits under one plan and that plan might be converted to a different plan (e.g., a non- taxable employee-pay-all plan is converted to a new taxable plan).

Accordingly, the sentence should not be construed as setting out interpretative comments on circumstances where an individual has a degenerative disease but is not in a disabled condition while one plan is in effect and who subsequently becomes disabled following a conversion. It also follows that the event referred to in the first sentence of paragraph 21 can generally be regarded as being the physical or mental condition of an individual in respect of which benefits may be paid. Furthermore, the comments in the second sentence of the excerpt have been made with respect to the quantum of certain benefits that would be regarded as continuing to flow from the old plan following a conversion on the assumption that where insurance premiums were charged by an insurer prior to the conversion, those premiums would normally have been charged on the basis that benefits being paid at the time of the conversion would continue subsequent to the conversion even though the old plan ceases to exist. As a consequence of these two points, where an individual was receiving benefits at the time of the conversion of a non-taxable plan to a taxable plan, the benefits paid subsequent to the conversion would be non-taxable in the amount and for the period specified in the non-taxable plan on the basis that those benefits, (to the extent that they are non-taxable), would be considered to have flowed from the non-taxable plan rather than having been paid "pursuant to" a plan "to or under which his employer has made a contribution" for the purposes of paragraph 6(1)(f) of the Act."

In view of the foregoing, we believe that the comments set out in the letter (file 9223635) in respect of paragraph 21 of IT-428 are consistent with the position set out in respect of the individual with the degenerative disorder.

We trust that the above comments clarifies the Department's position on the matter you have raised.

Yours truly,

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