7 September 1995 External T.I. 9509755 - DISABILITY PLAN CONTRIBUTIONS BY EMPLOYER & T4

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:

determination of whether a disability plan is an employee-pay-all plan

Position TAKEN:

one must look to the policy, contract of employment or other documentation to determine who has the legal obligation to pay premiums under the plan

Reasons FOR POSITION TAKEN:

longstanding position

A. Humenuk
XXXXXXXXXX 950975

Attention: XXXXXXXXXX

September 7, 1995

Dear Sirs:

Re: Employer Sponsored Benefit Plans

We are replying to your letter of April 10, 1995 concerning disability plans. We apologize for the delay in our response. As discussed with you on September 6, 1995 (XXXXXXXXXX/Humenuk), we will be replying to your other letter of the same date concerning benefit coverage for same-gender partners of employees under separate cover.

You ask us to confirm the tax treatment of disability payments received out of an insured plan where the employer pays the disability premium by increasing the employee's pay by an amount equal to the group insurance premium and including the amount on the employees' T4 information slips. It is your understanding that it is widely accepted within the insurance industry that such a plan would be considered to be an employee-pay-all plan and that payments out of the plan would not be taxable to the employee.

As stated in paragraph 17 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans", an employer cannot change the tax status of a plan by adding the employer's contribution to the plan to the T4 information slips of the employees. A distinction must be made between the situation where an employer increases an employee's remuneration by the amount of the premium and imposes on that employee the obligation to pay the premium and the situation where it is the employer who funds the disability plan. The manner in which the payments are remitted to the carrier of the plan does not by itself answer the question as to whether or not an employee-pay-all plan exists.

Such a determination can only be made by looking at the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the carrier, the employment contract or some other document, places upon the employees the legal obligation to pay 100% of the premiums (although the employer may still be responsible for remitting the premiums). If such an obligation exists, and the employer remits the premiums to the plan carrier and accounts for them in the manner of salary and wages, the plan will be considered an employee-pay-all plan provided such an arrangement was in place at the time the payment was made.

The reason that the employer cannot voluntarily add the value of the employer's contribution to the employee's T4 information slip is that paragraph 6(1)(a) of the Act provides a statutory exemption for such a contribution. Furthermore, the taxation of benefits received out of the plan would not be altered by the fact that an employee might voluntarily include the value of the employer's contribution in income.

Thus, it is a question of fact as to whether or not a particular disability plan is an employee-pay-all plan. As stated in paragraph 18 of the bulletin, it is important to note that all payments out of a wage loss replacement plan will be taxable to the extent provided by paragraph 6(1)(f) of the Act if it is a plan to which the employer has made a contribution.

We trust our comments will be of assistance to you.

Yours truly,

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