15 February 2011 External T.I. 2010-0388721E5 - Short Term Disability and CPP

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. What is the definition of a Wage Loss Replacement Plan for purposes of the Act? 2. Does the taxpayer's short term disability policy fit into the definition of a Wage Loss Replacement Plan? 3. Are payments under a short term disability plan pensionable earnings for CPP purposes?

Position: 1. See definition in letter 2. No 3. Referred to CPP/EI Rulings Division to respond directly to the taxpayer.

Reasons: 1. 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. 2. The taxpayer's short term disability policy is not an uninsured wage loss replacement plan as it is not based on insurance principles. 3. The issue is being referred to CPP/EI Rulings Division.

XXXXXXXXXX
									2010-038872
									P. Waugh

February 15, 2011

Dear XXXXXXXXXX :

Re: Short Term Disability and CPP

I am writing in response to your letter of November 19, 2010 concerning short term disability payments and the Canada Pension Plan ("CPP"). More specifically, you have enquired whether your short term disability plan (the "Plan") meets the definition of a wage loss replacement plan ("WLRP") under the Income Tax Act (the "Act') and whether payments from the Plan are considered pensionable earnings for CPP purposes.

In the situation you described, your Plan provides wage continuation to employees during periods of illness or disability. The Plan is an unfunded contingency plan, you do not set money aside to establish a sick leave fund, and no premiums are paid to an insurance company by either the employer or the employee. You continue to pay employees their salary or wages during periods of illness or disability.

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 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.

Generally, there are two types of WLRPs:

1. Insured plans are guaranteed under a formal insurance contract and issued by an insurance carrier. The insurance carrier makes payments directly to the employees and acts as an independent third party and not on behalf of the employer, and

2. Uninsured plans are arrangements whereby an employer provides wage loss benefits to employees without a contract with an insurance company. The plan may be administered by the employer, by an insurance carrier, or other independent organization. This type of arrangement will not be considered a WLRP unless the plan is based on insurance principles. This means that the funds must be accumulated, normally in the hands of trustees or in a trust account and are calculated to be sufficient to meet anticipated claims.

Based on the information you have provided, it appears that the Plan is not a WLRP for purposes of the Act. However, payments received from the Plan will generally be taxable under subsection 5(1) or section 6 of the Act.

With regards to your question concerning whether payments from the Plan are pensionable earnings for CPP purposes, we have forwarded your letter to the CPP/EI Rulings Division who will respond directly to you on this issue.

We trust these comments will be of assistance.

Guy Goulet CA, M.Fisc.
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