3 March 2011 External T.I. 2009-0314871E5 - Employee owned insurance policies

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: Will individual employee owned insurance policies that provide for a return of premiums form a group sickness and accident insurance plan?

Position: For purposes of paragraph 6(1)(a) of the Act, a group sickness and accident insurance plan does not include any plan or contract of insurance that provides benefits other than sickness or accident insurance benefits. Thus, where a plan or contract of insurance could provide other benefits to employees, such as a return of premiums, where there has been no such adverse event, the plan or contract of insurance will not qualify to be part of a GSAIP..

Reasons: The intent of the exempting provision in subparagraph 6(1)(a)(i) is to provide employees with a plan of insurance against loss in the face of sickness or accident, payments from which (if any) will be taxed as employment income under paragraph 6(1)(f). The purpose is not to provide future cash benefits in the form of a return of employer-paid premiums that were not taxed as an employee benefit under 6(1)(a) at the time of payment under the guise that they were "contributions of the taxpayer's employer to or under a ... group sickness or accident insurance plan...".

XXXXXXXXXX 							2009-031487
								Rita Ferguson
								519-645-5261
March 3, 2011

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Paragraph 6(1)(a)

This is in response to your letter of March 23, 2009 requesting our comments on two hypothetical insurance arrangements involving employee owned insurance policies. We understand that in the first hypothetical scenario an employer agrees to pay the premiums on disability insurance policies for each employee in a particular class for as long as that employee remains employed by the corporation. Each covered employee will purchase an individual policy that will provide him or her with the specific level of coverage that has been agreed on by the employer and which will be consistent across the particular class of employees. The second scenario is the same as the first but contains an additional feature on each policy in the form of a return of premiums that may be paid to the policyholder on termination of the policy.

You have asked whether each arrangement would qualify as a "group sickness or accident insurance plan" for purposes of subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act"). You have also asked whether a taxable employee benefit would arise at the time the employee terminates employment.

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 of a general nature only and are not binding on the CRA.

The meaning of the term "group sickness or accident insurance plan" ("GSAI plan") used in paragraph 6(1)(a)(i) is not defined in the Act. A GSAI plan may be described very generally as an arrangement between an employer and employees under which provision is made for indemnification of an employee if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident. Where the arrangement involves one or more contracts of insurance with an insurance company, the insurance contracts become part of the plan but do not constitute the plan itself.

As we have stated previously, it is possible for individual policies owned by the employees to combine to form a common plan and be considered a GSAI plan provided each employee within a particular class or group of employees is eligible to receive the same benefits under the plan and has the same ratio of employee and employer-paid premiums. In our view the first hypothetical plan you have described would meet these criteria to be a GSAI plan.

Where a GSAI plan, such as the one described in your first scenario, does not provide for any employer coverage after the termination of employment and the employee simply assumes the responsibility for payment of the premiums at that time, the individual insurance contract of the retired employee would cease to form part of the GSAI plan. Generally, in a standard contract of sickness or accident insurance for purposes of 6(1)(a) of the Act, we would not expect a benefit to the employee to result from the withdrawal of the insurance contract from the GSAI plan. However, there may be situations where a benefit could arise. For example, if the arrangement is structured such that the employer pays all premiums before the employee's retirement such that there is pre-funding of premiums for post-retirement periods when the contract of insurance would no longer form part of the GSAI plan, the employee would be in receipt of a taxable benefit at the time of retirement.

It is our current view that for purposes of paragraph 6(1)(a) of the Act, a GSAI plan does not include any plan or contract of insurance that provides benefits other than sickness or accident insurance benefits. Thus, where a contract of insurance could provide other benefits to employees, such as a return of premiums where there has been no adverse event, the contract of insurance will not qualify to be part of a GSAI plan. In our view the individual insurance contracts in the second scenario you have described will not qualify as a GSAI plan for purposes of paragraph 6(1)(a) of the Act.

Where an employer pays the premiums on behalf of an employee for a contract of insurance that is not part of a GSAI plan, the premium payments will be included in the employee's income as a taxable benefit. If the employee assumes the responsibility for payment of the premiums there would be no further taxable benefit to the employee. Accordingly, in the second scenario there would be no taxable benefit to the employee resulting from the assumption of responsibility for the payment of premiums on the contract of insurance at the time of retirement.

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