24 August 2011 Internal T.I. 2011-0414751I7 - XXXXXXXXXX Plan Payments

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: What is the tax status of the benefits received by XXXXXXXXXX employees from the XXXXXXXXXX Plan?

Position: Question of fact, but in this case it appears the benefits are received under an employer-funded wage loss replacement plan and are taxable as income from employment.

Reasons: 6(1)(f) and IT-478.

      								August 24, 2011

Maria Fazio-Archer						Tom Posadovsky, CMA
CPP/EI Rulings Division						IT Rulings Directorate
Legislative Policy and Regulatory Affairs Branch	Ontario Corporate Tax
320 Queen Street, 19th Floor, Place de Ville, Tower A	  Division
Ottawa ON  K1A OL5						(613) 952-8283

      Attention: Maria Fazio-Archer				2011-041475

XXXXXXXXXX Plan Payments

I am writing in response to your email dated July 25, 2011, requesting our views in respect of payments received by XXXXXXXXXX employees under the company's XXXXXXXXXX (the "Plan"). You wish to know whether the payments received are benefits from a wage loss replacement plan required to be included in income from employment pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act").

Background

Based on your email and a copy of the agreement between XXXXXXXXXX and the employees' union regarding the administration of the Plan, our understanding of the relevant circumstances is as follows:

• The purpose of the Plan is to provide a weekly income benefit and insurance coverage to eligible XXXXXXXXXX employees who have been laid-off.
• XXXXXXXXXX fully funds the Plan and bears all associated costs and financial risks.
• In order for the employee to be eligible to receive benefits, he or she must first exhaust all short-term disability, long-term disability, and supplemental unemployment benefit (SUB) plan benefits.
• Eligible employees also receive health care, life, and accidental death and dismemberment insurance coverage under the Plan.
• The Plan is not a SUB plan registered with the Canada Revenue Agency ("CRA") and the payments are paid directly by the employer and not out of a trust.

Our Comments

Paragraph 6(1)(f) of the Act applies to include in employment income any benefits paid to an employee or ex-employee from a sickness, accident, disability or income maintenance insurance plan, commonly referred to as a "wage loss replacement plan" ("WLRP"), where the employer pays all or part of the premiums for the plan. The amount of the benefit included in income is reduced by the amount, if any, of employee contributions. Where employees are legally obligated to pay the entire premium cost of a WLRP (an "employee pay-all plan"), no amount is required to be included in the employees' income under paragraph 6(1)(f) of the Act.

The meaning of a WLRP for purposes of paragraph 6(1)(f) of the Act is set out in paragraph 7 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans. This paragraph indicates that such a plan must be an "insurance" plan, and therefore paragraph 6(1)(f) does not apply to uninsured employee benefits, such as continuing wage or salary payments based on a severance package or a retirement allowance. Further, while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. It is sufficient that the plan 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).

Whether the Plan is an income maintenance insurance plan for the purposes of paragraph 6(1)(f) of the Act is a question of fact that can only be determined by a review of the actual plan. Based on the limited facts and documentation provided, it would appear that the Plan is an employer-funded WLRP as contemplated by paragraph 6(1)(f) of the Act and not a salary continuance arrangement. As the specific details of the Plan were not provided to us, it is not clear whether or not there is a contract of insurance with an insurance provider; however, the CRA is of the view, as indicated in IT-478, that "where it is apparent that a plan was instituted with the intention or for the purpose of providing wage loss replacement benefits, the assumption will be that it is a plan to which paragraph 6(1)(f) applies unless the contrary can be established". Accordingly, any benefits received under the employer-funded wage loss replacement plan are taxable and included in the recipient's income from employment. Such income is considered salary, wages or other remuneration subject to withholding at source under subsection 153(1) of the Act.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust that our comments will be of assistance to you.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch