19 May 2010 External T.I. 2010-0362001E5 - 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.

Principal Issues: Would an existing insured wage loss replacement plan be treated as an employee-pay-all plan if the employer's portion of the insurance premium is simply added to the employee's income?

Position: No.

Reasons: The employees, under the terms of the particular plan, must be legally obligated to pay all such premiums. In this case, the employer appears to be legally responsible for at least 50% of the premiums.

XXXXXXXXXX 							2010-036200
								Michael Cooke, C.A.
May 19, 2010

Dear XXXXXXXXXX :

Re: Wage Loss Replacement Plan

This is in reply to your correspondence addressed to the Ottawa Technology Centre concerning the taxability of disability benefits under a group wage loss replacement plan (the "Plan"). You indicate that a portion of the insurance premiums under the Plan are paid by the employer. You want to know whether the Plan could be considered as an "employee-pay all plan" if the employer's portion of the insurance premiums are added to the employee's income.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced 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 complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are for the most part, of a general nature only and are not binding on the CRA.

The income tax treatment of wage loss replacement plans is set out in Interpretation Bulletin IT-428, Wage Loss Replacement Plans ("IT-428"). Generally speaking, provided the disability plan in question qualifies as a group sickness or accident insurance plan, subparagraph 6(1)(a)(i) of the Act provides that any employer-paid premiums for disability insurance will not give rise to a taxable benefit. 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 disability plan to which an employer has made contributions. The amount of the taxable benefit is reduced by any employee contributions to the plan that have not already been deducted from benefits previously received. Where the entire premium cost of a wage loss replacement plan is paid by the employee, benefits out of such a plan are not taxable because an employee-pay-all plan is not a plan within the meaning of paragraph 6(1)(f) of the Act.

The main criteria in determining whether a particular wage loss replacement plan is an employee-pay-all plan is the existence of a requirement in the plan documentation that places upon the employees the legal obligation to pay 100% of the required costs of the plan. In the case of an insured plan, the actual manner in which the insurance premiums are deducted, remitted to the carrier and accounted for by the employer does not, in and by itself, determine the status of a particular plan as an employee-pay-all plan. For instance, where under the terms of an insured wage loss replacement plan the employees are legally responsible for the premiums but the plan provides that the employer will deduct and remit the employees' premiums to the insurer from the employees' wages or salary, the plan will maintain its status as an employee-pay-all plan if the plan documents provided for such an arrangement at the time the payment was made. As described in paragraph 17 of IT-428, the onus of establishing whether a plan is an employee-pay-all plan rests with the employer. However, it is important to note that the employer cannot change the tax status of a plan simply by a year-end addition to employees' income of the amount of the employer's contributions to a plan that would normally be considered to be non-taxable benefits to its employees.

In conclusion, since it appears that in the situation you describe the employer is currently legally responsible for paying at least 50% of the insurance premiums under the Plan, it is not possible to change the tax status of the Plan by simply adding these amounts to the T4 information slips of the employees as income. While paragraph 21 of IT-428 provides some guidance on the taxation of benefits received by an employee out of a changed or amended plan, whether an amended plan will be considered as an "employee pay-all plan" remains a question of fact which can only be made after a review of all the pertinent plan documentation.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch