24 January 1995 External T.I. 9427995 - TAXABILITY OF 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 particular optional arrangement to an existing Long Term Disability Plan would constitute a separate plan. If so, and the optional plan is funded entirely by the employee, would the benefits be exempt from tax under paragraph 6(1)(f).

Position TAKEN:

In order for the optional arrangement to be considered a separate plan the premium rates, benefit levels, qualifications for membership, etc. must not depend on the existence of the main plan. This is a question of fact with respect to the particular plan at issue. If true, however, then the benefits would not be taxable under 6(1)(f).

Reasons FOR POSITION TAKEN:

Where there is no cross-subsidization, no dependencey at all on the existence of the other plan then it can be considered to stand alone and assessed on its own merits.

		942799
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

January 24, 1995

Dear Sirs:

Re: Taxability of Wage Loss Replacement Plans

This is in reply to your letter of October 12, 1994 in which you requested our views on the taxable status of an amended Long Term Disability Benefit (LTD) arrangement. We apologize for our delay in responding.

It is our understanding of the circumstances that under the original benefit package all employees were covered for a basic LTD benefit of 70% of salary (reduced by any entitlement to Canada/Quebec Pension Plan disability benefits). The plan was paid for by the employer resulting in the benefits being taxable under paragraph 6(1)(f) of the Income Tax Act (the Act) when received. A modification to the benefit package was made to reduce the employer-paid benefits to 50% of salary with the other 20% being available to the employee through an optional benefit component of the plan. This optional component, when selected, could be employer-paid (using employer-provided credits) or entirely employee-paid.

It is evident that the circumstances described above relate to an actual fact situation. In order to obtain the Department's position on the tax consequences thereof, you should contact your local District Taxation Office. We are, however, prepared to provide you with the following general comments.

It is your understanding that selecting the first method of funding would result in the 20% benefit being taxed under paragraph 6(1)(f) of the Act. With respect to the employee-paid method you emphasize that (i) the premium rate is established with no cross subsidization with the basic 50% benefit, and (ii) separate accounting for premiums, claims and administration has been established.

Whether or not the second option covering the additional 20% of salary can be viewed as a separate plan is a question of fact. In order for a separate plan to be considered to exist the premium rate, the level of benefits, the qualification for membership and other terms and conditions of the plan must not depend on the existence of the other plan. If that is determined to be the case then the disability benefits paid under this optional plan, the premiums for which are entirely employee-paid, would not be considered taxable under paragraph 6(1)(f) of the Act.

We would emphasize that the above comments do not represent an advance ruling and as such is not considered binding on the Department.

We hope 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