26 June 1995 External T.I. 9504225 - 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:

Two or more professional corporations have set up a partnership. They classify each other as an employee of the partnership. Does the defintion of "personal services business" and more specifically RCT's position wrt the term "five full-time employees" have any application? Can a partnership comprised of two or more professional corporations set up a WLRP? Can the WLRP be provided through the establishment of a HWT? Finally if EE/SH's WLRP payments are paid directly to the professional corporation will all other ee's receive them directly from the insurer what are the tax repurcussions?

Position TAKEN:

RCT's position with respect to 125(7) has no application to the issues raised. The fact that the employer corporation is a professional corporation would not preclude that corporation from setting up a WLRP in accordance with the guidelines contained in IT-428.

WLRP benefits can be provided through est. of HWT.

Benefits receivable by the EE/SH but paid to the corporation will be taxable to EE/SH and by virtue of 56(2) will be included in his income pursuant to 6(1)(f).

Reasons FOR POSITION TAKEN:

IT-428, previous correspondence, IT-85R2, IT-189R2

		950422
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

June 26, 1995

Dear Sirs:

Re: Wage Loss Replacement Plan

We are writing in response to your letters of December 7 and 13, 1994 as well as your subsequent correspondence of May 18, 1995 based on our telephone conversation of the same date (Zion/XXXXXXXXXX). Your enquiry concerns whether or not a partnership of two or more professional corporations would be able to establish a wage loss replacement plan ("WLRP"). We apologize for the delay in responding.

You have outlined a situation in which two or more professional corporations have set up a partnership. You have advised us that they have similar complementary professions and that they share the cost of running the business. They also classify each other as an employee of the partnership. You have asked us to confirm whether Revenue Canada would apply the position cited in your letter with respect to the term "five full-time employees" contained in the definition of "personal services business" in subsection 125(7) of the Income Tax Act (the "Act") to the situation you have described such that a partnership comprised of two or more professional corporations can set up a WLRP. Accordingly, you have asked whether, in such a situation, a WLRP could be provided through the establishment of a health & welfare trust. You also requested our position with respect to a situation where an employee-shareholder's wage loss replacement payment is made to the professional corporation while all other employees covered under the WLRP would receive their wage loss replacement payments directly from the insurer as individuals.

The questions that you have asked appear to relate to specific taxpayers and involve 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 following a review of all the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in the enclosed Information Circular 70-6R2 dated September 28, 1990 and the related Special Release dated September 30, 1992. As a request for an advance income tax ruling has not been made, our comments set out below must be construed as being broad and general in nature rather than having been made in respect of a specific situation.

Our Comments

For the purposes of the definition of "personal services business" in subsection 125(7) of the Act, with respect to the partner's income from the particular partnership only, each full-time employee of the particular partnership will be considered to be a full-time employee of each corporate partner, whether general or limited. The Department's position with respect to the term "five full-time employees" referred to in that definition has no application to the issues you have asked us to consider.

It is our view that the fact that the employer corporation is a professional corporation would not, in and by itself, preclude that corporation from setting up a wage loss replacement plan in accordance with the guidelines set out in Interpretation Bulletin IT-428 "Wage Loss Replacement Plans". As two or more employees must be covered under the plan if it is to be the type of plan that qualifies as a "group sickness or accident insurance plan" a professional corporation with only one employee may not be able to establish a qualifying WLRP on its own. However, it is possible for a partnership of professional corporations to establish a plan with an insurer that is available to all the employer partners such that two or more employees would be covered under the plan. A WLRP can be established in a situation where employees are insured under a single contract between an insurer and a health and welfare trust. In addition, a WLRP can involve employees covered under individual insurance contracts but pursuant to a common plan.

You have enquired whether or not the WLRP could be established through the use of a health and welfare trust. Neither the type of business carried on nor the legal status (i.e. corporation, partnership or sole-proprietorship) of the employer is relevant in regard to the minimum number of employees in respect of which health and welfare benefits must be provided in order for an employer to be a participant in a health and welfare trust. Comments with respect to the type of plans administered by a health and welfare trust are contained in IT-85R2, "Health and Welfare Trusts for Employees". There is no minimum number of employees that must be covered under a private health services plan as is indicated in paragraph 7 of Interpretation Bulletin IT- 85R2. However, in the case of a wage loss replacement plan referred to in IT-428, two or more employees must be covered under the plan if it is to be the type of plan that qualifies as a "group sickness or accident insurance plan".

It is important to note that the determination of whether the benefit has been conferred on the employee-shareholder qua shareholder or qua employee involves a finding of fact. However, where a benefit is granted to an individual who is both an employee and a shareholder (or is related to a shareholder of the employer), the benefit will be presumed to have been conferred upon that shareholder by reason of the shareholdings unless the benefit is available to all employees of that corporation or the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.

It is our view that any benefits receivable by the employee/shareholder under the WLRP but paid to the corporation would still be considered to be receivable by the employee/shareholder pursuant to a plan to which the employer has made contributions in respect of individual employees. Where an employee/shareholder receives income in his own right, it is taxable to him and not to the corporation. As a result, the employee/shareholder would be required, by virtue of subsection 56(2) of the Act, to include such amounts in income to the extent required by paragraph 6(1)(f) of the Act despite the fact that the benefit claim had been paid directly to the corporation.

These comments represent our opinions of the law as it applies generally and as indicated in paragraph 21 of Information Circular 70-6R2 are not binding on the Department. Nevertheless, we hope that our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch