24 August 2012 External T.I. 2011-0422621E5 - Group sickness or accident insurance plan

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: Where multiple employers combine to form a group sickness or accident insurance plan, is each participating employer required to have at least two employees in the plan?

Position: Question of fact. It depends whether a single plan or multiple plans exist.

Reasons: It is CRA's longstanding position that a group sickness or accident insurance plan must have at least two employee plan members. Where there is a single plan, there is no requirement that both plan members be employees of the same employer.

XXXXXXXXXX							2011-042262
									P. Waugh

August 24, 2012

Dear XXXXXXXXXX:

Re: Group Sickness or Accident Insurance Plans

We are writing in response to your email dated September 26, 2011, in which you requested our comments concerning whether multiple corporate employers forming a group sickness or accident insurance plan must each have at least two employees as members in the plan.

In the situation you described, three corporations are considering jointly establishing a health and welfare trust for the purpose of administering a common group sickness or accident insurance plan (“GSAIP”) for employees of these corporations. The corporations are small owner/manager corporations with one or two employees. In the example provided, a doctor may incorporate with himself/herself as an employee and the corporation may have one other employee (administrative assistant). The trust will hold individual disability (income replacement) insurance policies for each of the member employees. The premiums will be paid by each respective employer corporation. There will always be at least two insured plan members. The GSAIP will only provide for sickness and accident insurance.

Our Comments

Subject to certain exceptions, paragraph 6(1)(a) of the Income Tax Act (the “Act”) requires that the value of any benefits received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment be included in the taxpayer’s income from employment. The broad wording of this provision means that a taxable benefit may exist where there is any connection between the particular payment or benefit and the particular office or employment.

Subparagraph 6(1)(a)(i) of the Act provides an exception to the general rule described above for benefits derived from an employer’s contribution to a GSAIP. A GSAIP is not defined in the Act but paragraph 14 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans, indicates that this exception would apply to any of the three types of plans described in paragraph 6(1)(f), that is:

1. a sickness or accident insurance plan;
2. a disability insurance plan; or
3. an income maintenance insurance plan.

These plans are collectively referred to as “wage loss replacement plans” and the exception under subparagraph 6(1)(a)(i) of the Act applies as long as the particular plan is a group plan. Where the plan is a wage loss replacement plan, any premium contributions made by an employer to an insurer for its employees would not be taxable under paragraph 6(1)(a) of the Act. However, under paragraph 6(1)(f) of the Act, an employee will be taxed on periodic amounts received in respect of the loss of employment income pursuant to a wage loss replacement plan to which an employer has made contributions.

It is CRA’s view that in order for a plan to be considered a GSAIP for purposes of subparagraph 6(1)(a)(i) of the Act, there must be at least two employees as members in the plan. Where the plan consists of individual policies, the policies should provide similar benefits to each employee and each employer must have the same ratio of employee and employer-paid premiums; otherwise it may not be reasonable to consider that the benefits provided under each policy are under the umbrella of a single plan. If it is determined that there is a single plan, the requirement of having at least two employees will be met even where the two employees are not employed by the same employer.

Where an employee is also a shareholder, subsection 15(1) of the Act may apply to include in the income of a shareholder for the year the amount or value of a benefit conferred on the shareholder by the corporation. A benefit conferred on a taxpayer in his or her capacity as a shareholder would not be exempted by the exclusion for employees under subparagraph 6(1)(a)(i) of the Act, nor would the cost of such a benefit be deductible by the corporation under paragraph 18(1)(a) of the Act.

Paragraph 1 of Interpretation Bulletin IT -432R2, Benefits Conferred on Shareholders, notes that if a person on whom a benefit has been conferred is both a shareholder and an employee of the corporation, a determination will have to be made, taking into consideration all the relevant facts and circumstances of the particular case, as to whether the benefit was conferred by the corporation on the person as a shareholder or as an employee.

In examining a particular case, a negative answer to one or more of the following queries would suggest that the benefits are provided to the recipient in his or her capacity as a shareholder:

a) When all participating employees are also shareholders or persons related to a shareholder, is the benefit coverage similar to coverage given to non-shareholder employee groups for similar size businesses who perform similar services and have similar responsibilities?

b) Is participation in the plan made available to all employees, including those who are neither a shareholder nor related to a shareholder? If not, is there a logical reason to exclude some employees?

c) Are the benefits available under the plan the same for all employees of the business, in their nature, quantum and cost-sharing ratio?

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch