20 June 1996 External T.I. 9607385 - EMPLOYEE BENEFIT PLANS-TAX EFFECTIVE ALLOCATIONS

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 an employer reallocate its commitment to fund employee benefits so employees can enjoy a more benficial income tax result? In an employee-pay-all plan, where the employer agrees to pay a set percentage of the premium costs, is it only the employer's contribution which is added to the employee's income?

Position:

Several specific questions addressed all around the issue of how an employer can reallocate a commitment to fund a set percentage of benefit premium costs, as usually found in the collective agreement. Position is that the only way to change the legal obligations of the employer/employees, as found in the collective agreement (or other applicable documentation), is to change the provisions of the collective agreement (or other applicable documentation). No retroactive changes would be accepted by the Department. On the second issue, an employee-pay-all plan does not exist if the employer is obligated to be any portion of the premiums to the plan (that is, "contributions" to the plan). If the employer opts to pay any premiums which the employee is legally obligated to pay himself/herself, then the employer is paying a personal expense of the employee and this is a 6(1)(a) benefit. It is a question of fact whether an employee-pay-all-plan exists.

Reasons:

961391 930963 950885 941687 5-8678 953062

		960738
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

June 20, 1996

Dear Sirs:

Re: Employee Benefit Plans

This is in reply to your letter of February 16, 1996, which asks several questions relating to various employee benefit packages.

Re. Issue One - Allocation of employee premium contributions:

You have asked that we consider a situation where an employer has set up an employee group benefits package (the package). The employer has agreed to a formula whereby the employer will contribute 70% of the total costs associated with providing all benefits under the various plans in the package. The 70/30 cost split is a formula representing the employer's overall commitment of funds to the package and is not an agreement that the employer is to pay 70% of each premium for each benefit. You have asked a number of questions relating to an agreement between the employer and employees which will allocate the employees' 30% share of premiums costs in the package so that they will have the most beneficial income tax result. We respond as follows.

1.In the absence of a collective agreement, we will examine the documentation relating to the employer's commitment to fund the overall cost of the package. In this regard, we will consider the arrangements made with the plan administrator, the plan document or documents, the individual policies with the insurance carriers, the individual employment contracts, directors' resolutions, as well as other related documentation. An agreement to change the funding of the costs of the benefits can only be accomplished by amending the legal terms of the relevant documentation. If undertaken, any changes cannot be made on a retroactive basis. In summary, an admendment would be necessary to identify, clarify or amend the legal obligations of each of the parties to contribute to the plan.

2.When the collective agreement in place reflects a commitment by the employer to fund a specific percentage of the overall cost of all premium costs in the package, it is our view that the employer cannot simply reallocate the premium dollars in a manner that is most tax efficient for the employees. In our view, any change in the employer and the employee funding arrangement must be by way of a change to the collective agreement which clarifies and amends the legal terms of the original collective agreement to say that the employer is to share premiums in a different manner. This may be done in a way that attracts the least amount of tax in the employees' hands. As in 1, no retroactive amendments would be accepted.

3.If a collective agreement specifically provides that the employer must pay a specific percentage of each type of premium in the package, then, presumably, that amount is what the employer is legally obligated to pay. We fail to see how the employer can be legally obligated to pay a certain percentage of each premium in the package under the terms of the collective agreement and, simultaneously, be able to reallocate the same premiums in the package on some other basis.

4.Assuming that the terms of a "letter of understanding" are sufficient to amend the legal obligations imposed upon the employer and employees in the collective agreement, then we agree that a reallocation of premium dollars could take place from the date of the "letter of understanding" (or from such future date as agreed upon in the terms of the letter of understanding) to so amend the terms of the collective agreement.

Issue Two - Taxation of Employer Paid Disability Premiums

In addressing your questions relating to employer-paid disability premiums, we have assumed that the disability plan referred to in your example is a sickness, accident, disability or income maintenance insurance plan (collectively referred to as a "wage loss replacement plan").

An employee-pay-all wage loss replacement plan is a plan the entire premium cost of which is required to be paid by one or more employees. Thus, there cannot also simultaneously exist a cost sharing arrangement as a term of the same plan which obliges the employer to pay a certain percentage of the premium. An employee-pay-all plan does not exist if the employer is contractually obligated to contribute any portion of the premium cost to the plan. It is the imposition of a legal obligation on employees to pay 100% of all premiums due which distinguishes an employee-pay-all plan from one to which the employer contributes, as discussed in the case of Dagenais et al. v The Queen (95 DTC 5318).

There is no provision in the Act which permits an employer, with or without the concurrence of the employee, to add the value of an employer's contribution to a group sickness or accident insurance plan to the employee's income. Subparagraph 6(1)(a)(i) specifically excludes such amounts. Having said that, and assuming that a true employee-pay-all plan does in fact exist (i.e., employees have the legal obligation to pay all premiums), if an employer opts or chooses to pay the employees' premiums to the plan on the employees' behalf, such payment would not represent a benefit "derived from the contributions of the taxpayer's employer to or under a...group sickness or accident insurance plan..." as referred to in subparagraph 6(1)(a)(i) of the Act. The payment by the employer would not represent a benefit which is an employer "contribution" but, rather, the employer's payment of an employee's own personal expense. The payment by the employer in such a situation is reported as additional remuneration rather than as an employer contribution to the plan and reported in the manner of salary and wages. Thus, it is a question of fact whether or not an employee-pay-all plan exists.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch