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: 1. Is the short term sick leave plan based on insurance principles? 2. Are payments under the short term sick leave plan pensionable earnings for CPP purposes?
Position: 1. No 2. Referred to CPP/EI Rulings Division to respond directly to the taxpayer.
Reasons: 1. The sick leave plan is an unfunded plan financed from the company's operating funds. 2. The issue is being referred to CPP/EI Rulings Division.
XXXXXXXXXX
2011-039756
P. Waugh
May 11, 2011
Dear XXXXXXXXXX :
Re: Short Term Sick Payments and CPP
I am writing in response to your email of February 28, 2011 concerning wage loss replacement plans ("WLRP") and short term sick leave payments. More specifically, you have enquired whether the employer's short term sick leave plan (the "Plan") is based on insurance principles and whether payments from the Plan are considered pensionable earnings for Canada Pension Plan ("CPP") purposes.
In the situation you described, the Plan is an unfunded plan, the employer does not set money aside to establish a sick leave fund, and no premiums are paid to a trustee or insurance company by either the employer or the employees. The employer continues to pay employees their salary or wages through regular payroll during periods of illness from the employer's operating funds. If an employee is sick for greater than five days, the employee is paid up to 100% of wages for a period of 16 weeks with proof of illness from an attending physician.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
Generally, a WLRP is an arrangement between an employer and employees, or between an employer and a group or association of employees, under which the employees are compensated with payments on a periodic basis for the loss of employment income as a result of sickness, disability, maternity, or accident. WLRP payments are made under short-term sickness/disability, weekly indemnity or long-term disability plans and may be paid to the employee by their employer or by a third-party insurance carrier or other independent organization. These plans specify certain conditions that employees must meet in order to become eligible to receive payments.
Paragraph 7 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans further explains that:
"A plan for purposes of paragraph 6(1)(f) of the Act and section 19 of the ITAR must be an "insurance" plan. Those provisions are not applicable, therefore, to uninsured employee benefits such as continuing wage or salary payments based on sick leave debits, which payments are included in income under paragraph 6(1)(a). It is to be noted that, while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. If, however, insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. If the arrangement merely consists of an unfunded contingency reserve on the part of the employer, it would not be an insurance plan."
For more information on WLRPs, please refer to Interpretation Bulletin IT-428 and www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/spcl/wglssqstns-eng.html#q1.
Based on the information you have provided, the Plan is not based on insurance principles as funds are not accumulated in a separate fund and there is no calculation to determine if sufficient funds exist to meet anticipated sick leave. The Plan is an unfunded plan financed from the company's operating funds.
With regards to your question concerning whether payments from the Plan are pensionable earnings for CPP purposes, we have forwarded your letter to Christine Pelchat at the CPP/EI Rulings Division who will respond directly to you on this issue. Ms. Pelchat can be reached at 613-946-6720.
We trust these comments will be of assistance.
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc: Christine Pelchat, Field Support Section, CPP/EI Rulings Directorate
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