29 June 1995 External T.I. 9505255 - COST SHARING OF EMPLOYEE BENEFITS

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:

reallocation of cost sharing arrangement between employer and employee to maximum tax savings

Position TAKEN:

the cost sharing arrangement cannot be altered for tax purposes without an underlying change in the legal obligation for the cost sharing arrangment

Reasons FOR POSITION TAKEN:

same position as taken with e9309635

A. Humenuk
XXXXXXXXXX 950525

Attention: XXXXXXXXXX

June 29, 1995

Dear Sirs:

Re: Cost Sharing of Premiums by an Employer and its Employees

We are replying to your letter of February 10, 1995 concerning the taxation of various insured benefits, the cost of which are shared between an employer and its employees. Reference is also made to our conversation of June 9, 1995 (XXXXXXXXXX/Humenuk).

You are involved in setting up and reviewing group employee benefit programs, programs that include group life insurance, accidental death and dismemberment benefits, disability income, extended health care, dental care and provincial health care plans. To this end, you offer your clients an analysis of the tax consequences relating to the benefit plan for their employees. In some cases your analysis indicates that the tax consequences to the employees could be reduced by a reallocation of the premiums paid by the employer and employee to the various benefit plans offered by that employer without requiring any change to the overall ratio of cost sharing between the employer and employee.

Based on the overall cost sharing ratio of the cost of such benefits between employer and employee, you determine a formula, such as that shown in the sample chart attached to your letter, for the sharing of costs of each benefit which will result in tax savings for the typical employee. However, the use of the group formula will not necessarily be advantageous for all employees. As a result, you ask whether the Department will permit an employer to use a group specific formula to determine the tax status of the benefits, that is, a formula which can be adjusted according to the specific circumstances of each employee.

Before addressing the issue of whether separate formulas can be used for each employee, it is necessary to consider who has the legal obligation to pay the cost of any particular benefit. Where an employer and employee have agreed to share in the payment of a particular benefit, whether or not evidenced by an employment contract, such an agreement will be considered to be in effect until such time as both the employer and employee have agreed to a change. For example, if an employer had previously agreed to pay 50% of cost of employee benefits, the cost sharing between the employee and employer for any particular benefit cannot be reallocated for tax purposes by means of either of the formulas you describe in your letter.

This is not to suggest that an employer must have the same arrangement with all of its employees; an employer may provide its employees with a flexible benefit plan under which the employer agrees to pay the cost of benefits up to a specified amount and the employee chooses prior to the commencement of the year which benefits are to be paid for with the employer's funds. In such an arrangement, the liability for payment of a particular premium is established by means of the formal selection process.

It may be helpful to review the tax consequences relating to employee benefits. The value of benefits provided to employees are generally included in income under section 6 of the Income Tax Act (the Act) except to the extent that such benefits are derived from an employer's contribution to, among others,

- group sickness or accident insurance plan or

- private health services plan (as defined in the Act).

However, if the benefits are provided through an employee benefit plan or employee trust, such benefits will be taxed in the manner outlined in the attached Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts" and special release thereto. Benefits which are fully funded by the employees either individually or as a group are generally not required to be included in the employees' income under paragraph 6(1)(a) of the Act. It is a question of fact as to whether a particular benefit is funded in whole or in part by the employer or by the employees.

In order to consider a benefit to be fully funded by employees, there must be a legally effective requirement for the employee to pay the cost of such benefit. It should be emphasized that a benefit plan which does not place such an obligation upon the employees cannot be treated as an employee-pay-all plan either by reallocating the amounts an employee has paid for another type of benefit or by adding to the employee's income (on an annual basis or otherwise) premiums which the employer was required to pay.

We refer you to Interpretation Bulletin IT-428 "Wage Loss Replacement Plans", particularly paragraphs 14 to 21 which describe the impact of employer and/or employee contributions to such plans. We would bring your attention to paragraph 18 which notes that a benefit received out of a disability plan may still be taxable to an employee who pays the entire premium unless the plan itself is an employee-pay-all plan, as described in the bulletin. Where an employer makes available to its employees both an employee-pay-all disability plan and a disability plan to which the employer contributes, the plans will be considered as a single plan to which the employer has made a contribution unless there is no cross-subsidization between the plans and the rate of contribution and level of benefits is not dependant upon the existence of the other plan. Paragraph 25 of the bulletin explains the calculation of the taxable portion of any benefit received from a plan to which the employer and employee have made contributions.

In summary, it is not possible to determine the legal obligation to pay premiums for any particular benefit without a review of all the relevant documentation pertaining to the particular plan. If you wish confirmation of the tax consequences of a plan already in existence, you should send all the relevant plan documentation to the local district taxation office for their review. If you wish confirmation of the tax consequences of a proposed change to a particular plan, you may wish to obtain an advance income tax ruling, as explained in the attached Information Circular 70-6R2 "Advance Income Tax Rulings" and the special release thereto. Please note that in order to provide a definitive response we would need to review the current underlying plan documentation as well as the draft documentation supporting the proposed changes to the cost sharing arrangement.

We trust 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