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.
Principal Issues:
1. can a group sickness & accident plan be funded by a group policy for most employees and an individual policy for those employees whose earnings are too high to be covered by the group policy
2. are there any limitations on coverage for employee-shareholders
Position TAKEN:
1. yes
2. question of fact as to whether a benefit is paid qua employee or qua shareholder. The 6(1)(a) exemption does not limit the application of 15(1)-for example, benefits calculated with reference to dividends or corporate profits would be taxed under 15(1)
Reasons FOR POSITION TAKEN:
1. the important consideration is the plan not the policy -As long as the benefits are payable under the plan, the method of funding the plan is not relevant
2. Notwithstanding the comments in Silden re 15(2), the capacity in which a 6(1)(a) exempt benefit is received is important because the 6(1)(a) exemption only exempts the employment benefit. If a shareholder-employee receives a benefit in the capacity of a shareholder it will be taxed under 15(1). If the benefit is not different from anything the other employees are getting as part of the employment contract, it can be argued that it is not a "shareholder benefit" & thus not taxed under 15(1).
A. Humenuk
XXXXXXXXXX 941258
Attention: XXXXXXXXXX
August 4, 1994
Dear XXXXXXXXXX:
Re: Wage Loss Replacement Plans
We are replying to your letter of May 6, 1994 concerning the manner is which a wage loss replacement plan is funded by an employer.
In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
In your letter, you advise that benefits payable to an employee under group disability insurance policies offered by your company are usually limited to $XXXXXXXXXX per month. Where an employer wishes to provide employees with disability coverage of 80% or more of their gross wages, such a policy will not generate sufficient funds to provide an employee who earns an annual wage in excess of $XXXXXXXXXX with such benefits (i.e. XXXXXXXXXX). Where the coverage under the group disability policy is insufficient for a particular employee, your company recommends that the employer purchase a separate individual disability policy to cover that employee and a group policy to cover the remainder of the employees. You ask whether benefits payable under the individual policy can be considered as part of the benefits under the group plan.
In providing our response, it is important to distinguish between the plan under which an employer agrees to provide benefits to its employees and the insurance policy or policies which may be used by the employer to fund such benefits. It is a question of fact as to whether or not the benefits under a particular policy are derived from participation in an employer-provided plan. In order to determine whether a particular benefit is derived from participation in a particular plan one must look to whether the amount received out the insurance policy is paid on account of the employer's liability as stated in the employer's group sickness or accident insurance plan (referred to as a "wage loss replacement plan" in Interpretation Bulletin IT-428). An employee will be considered to be covered under a group plan where the level of benefits and ratio of contributions to the plan shared by the employer and employee is the same as for other employees covered by the same plan.
In your letter you state that the insurance industry recommends a lower percentage of income replacement for employees earning in excess of $50,000 than it does for employees earning less than $50,000. While the net amount payable to employees under a group plan may vary in the actual percentage of income replacement because of ceilings placed on monthly benefits available under the plan, insurance coverage will not form part of an employer's group sickness and accident insurance plan where the rate of income protection for a particular employee is negotiated separately from that for other employees covered by the group plan.
You also ask whether an employee's shareholdings in a corporation would affect his or her ability to be covered under the employer's group sickness and accident insurance plan. While the employment-related benefit arising from an employer's contribution to a group sickness or accident insurance plan by an employee-shareholder is limited to amounts which are taxable under paragraph 6(1)(f) of the Act, an employee-shareholder may be required to include the value of the premium in income under subsection 15(1) of the Act where it is determined that the benefit has been conferred on that person by reason of his or her shareholdings. However, subsection 15(1) will not apply where the insurance coverage is provided through a group sickness and accident insurance plan and the level of benefits and ratio of contributions to the plan shared by the employer and employee-shareholder is the same as for other employees covered by the same plan.
As discussed by telephone on July 29, 1994 (XXXXXXXXXX/Humenuk), it is our view that where the benefits payable to an employee-shareholder are determined with reference to dividends or corporate profits, the coverage will not be considered as payable under a group sickness or accident plan and the payment by the corporation for such coverage will be a taxable benefit by reason of subsection 15(1) of the Act. Where subsection 15(1) of the Act requires an amount to be included in the income of a shareholder, the amount expended by the corporation for the benefit is not deductible in computing its income.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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