24 February 1995 External T.I. 9426045 - 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.

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:

Whether a self-funded disability plan qualifies as a group sickness and accident insurance plan under which the employees can be considered to have made all the contributions in circumstances where the employer may be involved with the funding.

Position TAKEN:

No position was taken. Rather, general comments were provided.

Reasons FOR POSITION TAKEN:

Limited information was provided.

		942604
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

February 24, 1995

Dear Sirs:

Re: Long Term Disability Plans

This is in reply to your letter of October 7, 1994 in which you requested our views on a long-term disability plan. We apologize for the delay in replying.

You are concerned with the type of situation where employees are legally obligated to pay all the premiums in respect of an insured long-term disability plan that has been established. Benefits received out of the plan are non-taxable rather than being subject to the provisions of paragraph 6(1)(f). The employees now wish to discontinue the payment of premiums to the insurance carrier and establish a self-insured plan. It is intended that the plan continue to be such that the employees will be considered to have made all the contributions so that the payment of benefits out of the plan will be non-taxable. The employees will provide funding for the plan. However, the level of contributions will be less than those which would be made if the level of contributions were to be determined on an actuarial basis. Since it is possible that there will be insufficient funds for the payment of benefits, it is proposed that the employer may provide funds in circumstances where the funds would subsequently be recovered from the employees. The payment of benefits will involve an "administrative services only" arrangement.

Our Comments

It is extremely difficult to provide you with meaningful comments on the situation you have outlined based on the limited information provided. First, it is not clear how the funding for the plan will be provided. We assume that the employee contributions will be made to a trustee to be placed in trust for the benefit of the employees. This raises the question of the tax treatment to be accorded the trust. Second, it is questionable whether the arrangement described above would be considered an accident or sickness insurance plan, a disability insurance plan or an income maintenance insurance plan as those terms are used in section 6 of the Act. In each case, the relevant plan must contain an element of insurance and it appears that the arrangement described above would lack this requirement. If such is the case, in the event the employer were to make a contribution to the plan, the trust may be considered an employee benefit plan. Finally, it is not possible to determine the impact that an employer's contribution to the plan might have without knowing the nature of the plan. This would require that we be provided with full details and documentation relative to the arrangement.

If your enquiry relates to a specific situation involving an actual taxpayer and proposed transactions, you should request an advance income tax ruling pursuant to Information Circular 70-6R2 and the related Special Release which have been enclosed.

We regret that we could not give you a definitive reply.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch