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.
An employer will establish two long term disability plans. The employer makes all contributions to the first plan and it is intended that employees will make all the contributions to the second plan. In the first year, the premium rate for a member of either plan will be identical. Can two separate plans be considered to be in existence? In view of the manner in which the premiums are determined, would the employer be regarded as having made a contribution to the second plan?
The Department has established criteria for determining whether each plan can be considered to have a separate existence. It would appear that the fact that the premium in the first year will be identical for a member of either plan would not, in and by itself, result in the existence of two plans. However, in the case of the second issue, if the employer premiums to the first plan would be lower in circumstances where the premiums of each plan were to be determined independently, the employer would be considered to have made a contribution to the second plan.
Reasons FOR POSITION TAKEN:
The manner in which the premiums are determined is not considered to of sufficient significance with the result that this fact would not result in the existence of one plan. In the case of the second issue, the excess premiums paid by the employer would be regarded as contributions made to the second plan.
XXXXXXXXXX M. Eisner
June 22, 1994
Re: Long Term Disability Plans
This is in reply to your letter of April 18, 1994 in which you requested our comments on the tax treatment of two co-existing disability insurance plans.
The situation on which you have asked for our comments appears to relate to specific taxpayers and involves 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 ruling has not been made as set out therein, our comments set out below must be construed as being of a general nature.
In our response, unless otherwise stated, statute references are to the Income Tax Act 1970-71-72, c.63 as amended, consolidated to June 10, 1993.
You are concerned with the type of situation where an employer wishes to establish two long term disability insurance plans for its employees. The related premiums would be paid to an insurance company. Each employee would have the choice of becoming a member of either plan. The employer would pay the premiums in respect of the first plan and it is intended that the employees would pay the premiums for the second plan. The premium for an employee of either plan would be the same for the initial year. In future years, the premiums for an employee will be based on participation in the plan to which the employee belongs.
In the above circumstances, the concern is whether the benefits that will be received out of the second plan will be non-taxable. In order for this to occur, two plans must be considered to be in existence for the purposes of paragraph 6(1)(f) of the Income Tax Act (the Act). In addition, the employer cannot be regarded as having made a contribution to the second plan.
It is the Department's general position that two disability plans would be regarded as being in existence provided that there is no cross subsidization between the two plans, and the level of benefits, premiums rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other plan. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other. On the basis of the above information, it seems that the determination of the premiums for the first year in the manner set out above may not, in and by itself, result in the existence of only one plan for the purposes of paragraph 6(1)(f) of the Act. However, in an actual situation, it is necessary to review all the relevant facts and documentation before a final determination can be made.
With respect to the issue of whether the employer is considered to have made a contribution to the second plan in the circumstances, we have noted that the premium in respect of the first year for an employee of either plan is the same. In our view, this might result in the employer being considered to have made a contribution to the second plan. For example, it may be that the premiums paid by the employer should be lower on the basis that there are a greater number of employees in the first plan. There may also be other factors which might result in the employer's premiums being lower if the premiums were to be determined on an independent basis. If this were to be the case, it is our view that the excess premiums paid by the employer would be regarded as being a contribution made by the employer to the second plan. It would follow that paragraph 6(1)(f) of the Act would apply to the benefits paid out of the second plan as well as the first plan.
These comments represent our opinion of the law as it applies generally and, as indicated in paragraph 21 of Information Circular 70-6R2, are not binging on the Department. Nevertheless, we hope that our comments will be of assistance to you.
Business and General Division
Legislative and Intergovernmental
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