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.
Principal Issues: Are benefit payments made from a Wage Loss Replacement Plan ("WLRP") subject to withholding?
Position: Yes
Reasons: Provisions of the Act
September 28, 2012
Canada Revenue Agency HEADQUARTERS
Debt Management Compliance Directorate Income Tax Rulings
Trust Accounts Programs Division Directorate
Policy and Legislative Research Section M. Gauthier
750 Heron Road, 7th Floor (613) 948-1143
Ottawa, ON, K1A 0L5
2012-045632
Attention: Marlene Sylvest
Requirement to withhold Tax on Wage Loss Replacement Plan Payments
We are replying to your email of July 19, 2012, in which you asked whether benefit payments made from a Wage Loss Replacement Plan ("WLRP") are subject to withholding of income tax at source. You also asked us for our views on the withholding instructions found in Guide T4001, Employers' Guide - Payroll Deductions and Remittances and IT428, Wage Loss Replacement Plans.
Requirement to withhold
Paragraph 6(1)(f) of the Income Tax Act ("Act") provides that amounts received on a periodic basis by an employee or an ex-employee as compensation for loss of income from an office or employment, that were payable under a sickness, accident, disability or income maintenance insurance plan ("wage loss replacement plans") to which the employer made a contribution, are to be included in income, but subject to a reduction as specified in that paragraph for contributions made by the employee to the plan.
Paragraph 153(1)(a) of the Act requires any person paying salary, wages or other remuneration to deduct or withhold from the payment the amount determined in accordance with prescribed rules. The definition of "remuneration" in section 100 of the Income Tax Regulations, (the "Regulations") includes any payment that is in respect of "salary or wages". "Salary or wages" is defined in subsection 248(1) of the Act to include a taxpayer's income from an office or employment, which includes payments taxable pursuant to paragraph 6(1)(f) of the Act.
Subsection 102(1) of the Regulations generally provides the amount to be deducted or withheld by an employer from any payment of remuneration made to an employee where the employee reports for work at an establishment of the employer. Where an employee is receiving WLRP benefits, the employee would generally not be required to report for work at an establishment of the employer. In this situation paragraph 100(4)(b) of the Regulations deems the employee to report for work at an establishment of the employer in the province where the employee resides. If the employer does not have an establishment in that province, the employer would be deemed to have an establishment in the province where the employee resides.
Depending on the structure of the WLRP, payments could be made by either the employer or by a third party, such as an insurance company or trustee. For the purposes of determining the withholding and reporting requirements, an "employer" is defined in subsection 100(1) of the Regulations as "any person paying remuneration". In other words, any person paying WLRP benefits would be considered the employer and is required to withhold income tax from those payments.
In summary, any person paying WLRP payments, as described above, is required to withhold income tax at source.
CRA published positions on WLRP's
Chapter 6 of Guide T4001, Employers' Guide - Payroll Deductions and Remittances generally states that income tax deductions are not required when an employee receives WLRP benefits from a trustee or insurance company where the employer does not exercise a degree of control over the terms of the WLRP and does not determine the eligibility for benefits.
As noted above, we do not agree with this interpretation and recommend that the guide, as well as similar comments made on the CRA website, be revised.
Paragraph 23 of IT428, Wage Loss Replacement Plans, states that the Act does not require income tax to be deducted from WLRP payments. We indicated in technical interpretation 1999-0015206 (E) dated February 22, 2000 that IT428 should be revised to reflect the fact that WLRP payments should be subject to withholding. This continues to remain our position.
If you have any questions, please do not hesitate to contact Michel Gauthier at (613) 948-1143.
Regards,
Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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