18 November 1997 External T.I. 9719125 - RETROACTIVE CONVERSION TO EMPLOYEE-PAY-ALL?

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether a long-term disability plan, to which only the employer has contributed, can be converted to an employee-pay-all plan by notifying employees that they are responsible for the payment of premiums, increasing their salaries by an amount equal to premiums payable under the plan and withholding that amount from their salaries.

Position TAKEN:

Cannot retroactively change the plan. It is a question of fact as to whether an amendment to a plan creates a new plan.

Reasons FOR POSITION TAKEN:

Income Tax Act.
                                                													971912
XXXXXXXXXX                                     	G. Donell

Attention: XXXXXXXXXX

November 18, 1997

Dear Sirs:

Re: Long-term Disability Insurance

This is in reply to your letter of July 15, 1997 in which you have asked us whether a long-term disability plan ("LTD"), to which only the employer has previously contributed, can be converted to an employee-pay-all plan such that any benefit paid to an employee under the plan would be free of any income tax. You indicate that the employer has converted the LTD to an employee-pay-all plan by notifying employees that they are responsible for the payment of premiums, increasing their salaries by an amount equal to premiums payable under the plan and withholding that amount from their salaries.

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 Winnipeg Tax Service Office for their review. However, we have provided the following general comments which may be of assistance to you.

Where employer contributions are made to a plan that is a "group sickness or accident insurance plan" no benefit is included in the income of the employee by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act"). Paragraph 14 of Interpretation Bulletin IT-428 titled "Wage Loss Replacement Plans", a copy of which we have included, considers a "group sickness or accident insurance plan" to include the three plans described in paragraph 6(1)(f) as long as they are group plans. Paragraph 6(1)(f) of the Act requires all payments out of a sickness or accident insurance plan, a group disability insurance plan or an income maintenance insurance plan to be included in the employment income of the employee in the year such amounts are received as long as the employer has made a contribution to that plan at any time.

Paragraph 16 of IT-428, describes an employee-pay-all plan, in part as follows,

"An employee-pay-all plan is a plan the entire premium cost of which is paid by one or more employees. Except as indicated under 21 below, benefits out of such a plan are not taxable...because an employee-pay-all plan is not a plan within the meaning of paragraph 6(1)(f)."

Paragraph 17 of IT-428 elaborates further and reads as follows,

"It is a question of fact whether or not an employee-pay-all plan exists and the onus is generally on the employer to prove the existence of such a plan. It should be emphasized that the Department will not accept a retroactive change to the tax status of a plan. For example, an employer cannot change the tax status of a plan by adding at year end to employees' income the employer contributions to a wage loss replacement plan that would normally be considered to be non-taxable benefits. On the other hand, where an employee-pay-all plan does, in fact, exist and it provides for the employer to pay the employee's premiums to the plan and to account for them in the manner of wages or salary, the result is as though the premiums had been withheld from the employee's wages or salary. That is, the plan maintains its status as an employee-pay-all plan if the plan provided for such an arrangement at the time the payment was made."

As indicated above an employer cannot change the tax status of a plan by simply adding the employer's contribution to the plan to the T4 information slips of the employees. However, 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 from the inception of the plan provided such an arrangement was in place from that time. We refer you to the Trial Division decision of the Federal Court in the case of Dagenais et al v the Queen, 95 DTC 5318.

The ultimate determination of the taxation of benefits received by an employee out of a disability plan will depend 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. The shift in the payment of premiums to employees, by itself, to an existing taxable disability plan will not result in the creation of a new plan that is an employee-pay-all plan where an employer has previously made contributions to that plan. However, the question of whether or not a new plan is created when a plan is changed remains one of fact. Paragraph 21 of IT-428 provides some guidance where the status of a plan does change and the onus of establishing the status of a plan as an employee-pay-all plan rests with the employer.

In general 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. Where the premium rate under the policy which is to provide benefits under a 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.

We trust our comments will be of assistance to you.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch