2 October 1995 Internal T.I. 9991117 - CAN INSURANCE CONTRACTS BE EBPS

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:

Insurance contracts as EBPs

Position TAKEN:

review each on case by case basis.

Reasons FOR POSITION:

routine analysis

			October 2, 1995

Business and General Division Financial Industries
Bryan Dath Division
Director W.C. Harding
957-8953
Attn: A. Humenuk
Personal and General Section
950214

Employee Benefit Plans

This is in reply to your request of July 19, 1995, in which you asked us to comment on the treatment of insurance contracts as EBPs and SDAs. We have summarized your questions as follows:

1. Does paragraph 6(1)(a) apply to tax benefits under insured arrangements; and

2.Will the carry forward of purchased vacation or "cashed out vacation result in the creation of an SDA.

Our comments are as follow.

1.In our opinion, except as noted below, an insurance policy will not be an EBP. On the other hand, an insurance policy may be held as property of an EBP in which case the rules governing EBPs will apply.

An employer may hold an insurance policy in its own capacity or as a custodian or trustee. If the employer is holding it as the custodian/trustee, the arrangement will be an EBP and the contract will be a property of the EBP provided the remaining conditions for an EBP are met. This was the position taken in the Department's letter of July 24, 1992 referred to in your submission (file 9220347). Paragraph 5 of Interpretation Bulletin 502 discusses when an employer may be acting as a trustee.

An exception to the above comments may occur where a policy with an insurer is, in fact, an administration contract under which the insurer is providing the employer services as a custodian or trustee. In this case the contract itself may be an EBP.

You also raised the question of whether a flexible benefit plan would itself be an EBP if an insurance contract is held under its terms.

The preamble to the definition of an EBP defines an arrangement as an EBP if payments are made under its terms by an employer, or person who does not deal at arm's length with the employer, to another person and payments are to be made by that person to (or for the benefit of) employees or former employees of the employer or persons who do not deal at arm's length with such employees, except payments that would not otherwise be included in an employee's income under section 6 of the Act. Accordingly, a cafeteria plan could be an EBP if a payment is made by the employer to the trustee of the arrangement and any portion of the amount is to be paid under the terms of the arrangement to or for the benefit of an employee. However, the Department has developed a number of positions that may apply to alleviate this concern. In particular, IT 85R2 provides that if a single master plan is used to fund a number of plans all of which are described in paragraph 6(1)(a)(i) of the Act, we will not consider the master plan to be an EBP and where a portion of an arrangement is an EBP while another portion is not, we will treat the parts as separate arrangements. In our opinion these positions are appropriate and should prevail.

2.An SDA may be created where a person has a right in a year to receive an amount after the year and one of the main purposes of the arrangement is to defer taxation of salary or wages that would have been taxed in the year, or a preceding year, in the absence of the arrangement. When an employee has the right to receive or defer the receipt of such an amount, it is a question of fact why the deferral is being made. Accordingly we can not generally rule on whether or not the plan is an SDA. We note that this position is in accord with your written response in file E9500075.

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