10 September 1990 Income Tax Severed Letter AC59070 - Wage Loss Replacement Plans

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.

24(1)                               5-9070
                                    J.P. Dunn
                                    (613) 957-8961

19(1)

We are writing in response to your correspondence of November 9, 1989, in which you requested the opinion of the Department with respect to certain wage loss replacement plans currently being developed by your company. We apologize for the delay in responding to your request.

Briefly, the proposal under consideration concerns the addition of a rider to a group accident and sickness policy which is part of a wage loss replacement plan pursuant to an employer-employee agreement. At present, the premiums for the accident and sickness policy are paid by the employer and are not considered to be benefits from employment in the hands of the employee pursuant to paragraph 6(1)(a) of the Income Tax Act (the"Act"). Any disability benefits received by an employee pursuant to the plan are taxable in the hands of the employee as income from employment by virtue of paragraph 6(1)(f) of the Act. The proposed rider would provide for disability benefits in addition to those provided under the base plan. Enrolment in the additional rider would be at the option of the employee by way of deductions at source from employment income. The premiums would not be deductible by the employee for tax purposes and, accordingly, any benefits received pursuant to the additional plan would not be subject to tax in the hands of the employee.

Your question is somewhat hypothetical in nature and concerns whether it is possible to establish such a plan through the addition of the rider to the base accident and sickness policy without affecting the current tax status of the base policy. We would consider that the establishment of this plan by way of an addition of a rider to the base plan would not jeopardize the current tax status of the original plan to the extent that the employer can demonstrate that the rider does, in fact, constitute a separate contract of insurance.

In this regard, the addition of the rider would be authorized by way of an amendment to the employer-employee agreement rather than by way solely of an amendment to the base policy. Furthermore, as the plan pursuant to the employer-employee agreement would provide for a different benefit according to each insurance contract the employer must be able to demonstrate that its contributions to the plan relate only to the original disability policy while the rider is funded entirely by employee contributions.

We would caution that our comments are extremely general in nature consistent with the hypothetical situation outlined in your letter and that the determination of the tax consequences relative to any insurance plan or additional rider would be dependant upon an examination of all the pertinent facts relative to the particular situation. Also, our comments are premised upon your assertion that the rider would constitute a separate contract of insurance an assumption which we would not necessarily concur.

Further, while we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and, accordingly, are not binding upon the Department in respect of a particular situation.

for Director Financial Industries Division Rulings Directorate