6 February 1996 External T.I. 9602845 - CONVERT EMPLOYER PAID DISABILITY PLAN TO NON-TAX

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:

can a disability plan to which the employer has contributed be converted to an employee pay all plan as originally intended -issue of retroactive changes and what constitutes a new plan as opposed to a continuation of an existing plan (where the liability for premiums has been shifted from employer to employees)

Position:

-cannot retroactively change the plan & it is a question of fact as to whether a plan amendment creates a new plan
-the existing plan will be a plan which is subject to 6(1)(f) even if the plan documentation indicates otherwise because the employer did make contributions to it even if that was not the intent

Reasons:

question of fact to be determined by TSO or a ruling

A. Humenuk
XXXXXXXXXX		960284

Attention: XXXXXXXXXX

February 6, 1996

Dear Sirs:

Re: Wage Loss Replacement Plans

We are replying to your letters of January 17, 25 and February 2, 1996 in which you ask for our comments concerning a particular long term disability plan.

Your letters refer to an actual fact situation related to both past and future transactions and events. The confirmation of the tax consequences of specific transactions is only given by way of an advance income tax ruling as described in Information Circular 70-6R2 "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto dated September 30, 1992 and is restricted to proposed transactions. Where such a ruling is requested, copies of all relevant documents and a complete statement of the facts and issues should be submitted along with a deposit of $450.00. We also wish to note that paragraph 21 of the Information Circular indicates that it is the Department's practice not to comment on proposed transactions other than in the form of an advance income tax ruling.

The tax implications pertaining to an existing plan can only be determined after a review of all the relevant facts and documentation. As a review of this type is the responsibility of the local Tax Services Offices, you may wish to submit all the relevant facts and documentation to the Toronto Tax Service Office for their review. However, we have provided the following general comments which may be of assistance to you.

In the situation you describe, a long term disability plan was set up with the intention that it be an employee-pay-all plan and the plan documentation presumably reflects that intent. However it is the employer who has been paying the premiums required under the policy to date. You have asked what Revenue Canada's position would be if the employer were to retroactively gross up each employee's wage by the amount of the premium so paid by the employer for coverage under the plan. You have also asked what steps would be necessary if any, to change the plan so that it is an employee-pay-all plan as originally intended and whether it is possible to use the same underwriter for the new plan. On a more general note, you have asked for our comments on what constitutes a new plan as opposed to a continuation of the existing plan where the obligation to pay premiums on a group disability policy is shifted from the employer to the employees by means of an amendment to the terms of the plan.

Prior to addressing your questions, we would like to clarify that a disability insurance plan which is funded by the employer cannot be converted to an employee-pay-all plan by adding the value of the premium to the salary reported on the T4 information slip. There is no provision in the Act under which an employer, with or without the concurrence of the employee, can add the value of the employer's contribution to a group sickness and accident insurance plan to the employee's income since such contribution is excluded from the employee's income by reason of paragraph 6(1)(a) of the Act.

The Federal Court-Trial Division looked at the issue of whether it was the employer or employee who made a contribution to a particular plan in the case of Dagenais et al. v The Queen (95 DTC 5318). In that case the taxpayers argued that they had accepted a lower hourly rate increase in order to gain improvements to their benefit package so that they were the contributors to the plan. However based on the fact that there was no indication that the employer had deducted any amount from the employees' wages and remitted it on their behalf to an insurer, the Court ruled that the benefits in question were taxable to the extent provided by paragraph 6(1)(f) of the Act.

An amendment to a plan cannot undo the past and convert something which has already happened, and to which legal consequences have already attached, into something else which did not in fact ever happen. In addition, neither the employer nor the employees can reverse or negate the application of paragraph 6(1)(f) of the Act to benefits out of a particular plan by effecting a reimbursement to the employer for contributions previously made by the employer where the original agreement did not clearly state that the obligation for premiums rested with the employees.

With respect to your question concerning the steps needed in order to provide the type of plan originally intended, the comments in paragraph 21 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" may be helpful to you. The taxation of benefits received by an employee out of a plan depends on the type of plan in effect at the time of the event that gave rise to the benefits and any changes in the plan subsequent to that date.

As stated in IT-428, the onus of establishing a plan to be an employee-pay-all plan rests with the employer. The question of whether or not a new plan is created when the plan is amended is one of fact. Where the original funding which was contributed by the employer still exists in the plan, as may be the case in a self-insured arrangement, the plan will be considered to be a continuation of the old plan and paragraph 6(1)(f) of the Act will continue to be applicable to future benefits received out of the plan. In the case of a plan which is funded through an insurance policy, it is a question of fact as to whether the employer funding still exists in the plan. In your subsequent letter dated January 25, 1995, you state that no other insurer is willing to assume the risk associated with this plan. Where the premium rate under the policy which is to provide benefits under the proposed new plan is based on the existence of the previous plan, the original funding will be considered to exist in the proposed new plan and any benefits will continue to be taxable to the extent provided by paragraph 6(1)(f) of the Act.

In providing our response to your question concerning the choice of underwriters, it is important to distinguish between the plan under which an employer agrees to provide benefits to its employees and the insurance policy or policies which may be used by the employer to fund such benefits. Subject to our comments above concerning the manner in which the premium is set, there is no reason that the same underwriter or insurance company cannot be used to insure the new plan.

While we trust that our comments will be of assistance to you, we caution you that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

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