17 August 2010 External T.I. 2010-0371201E5 - Taxation of Long Term Disability 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: Is money received for long term disability through a company plan taxable?

Position: The answer depends upon factors such as whether the company plan is a group plan or a non-group plan and whether the employer has made premium contributions to the plan.

Reasons: Subsection 6(1) of the Income Tax Act.

XXXXXXXXXX 							2010-037120
      							Andrea Boyle, CGA
August 17, 2010

Dear XXXXXXXXXX :

Re: Payments from a Long Term Disability Plan

I am replying to your email dated June 16, 2010 in which you asked if the Income Tax Ruling Directorate would provide a ruling on whether money received from a long-term disability through a company insurance plan is taxable.

The particular situation outlined in your email appears to relate to a factual one, involving specific taxpayers. 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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other 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 offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

Subject to certain exceptions, paragraph 6(1)(a) requires that the value of any benefits received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment be included in the taxpayer's income from employment. The broad wording of this provision means that a taxable benefit may exist where there is any connection between the particular payment or benefit and the particular office or employment.

Group Plans

Subparagraph 6(1)(a)(i) provides an exception to the general rule described above for benefits derived from an employer's contributions to a "group sickness and accident insurance plan". A "group sickness or accident insurance plan" is not defined in the Act but paragraph 14 of Interpretation Bulletin IT-428 Wage Loss Replacement Plans indicates that this exception would apply to any of the three types of plans described in paragraph 6(1)(f) that is:

• a sickness or accident insurance plan;
• a disability insurance plan; or
• an income maintenance insurance plan.

These plans are collectively referred to as "wage loss replacement plans" and the exception under 6(1)(a)(i) applies as long as the particular plan is a group plan. A "group" must consist of more than one employee. Where the plan is a group sickness or accident insurance plan, such as a group long term disability plan, any premium contributions made by an employer to an insurer for its employees would not be taxable under paragraph 6(1)(a).

Paragraph 6(1)(f) describes the tax implications when benefits are paid to an employee from a group wage loss replacement plan to which the employer has made a contribution. Generally speaking, the employee must include in income the total of all amounts received in the year that were payable on a periodic basis as benefits under the group wage loss replacement plan. However, this income inclusion is reduced by the total amount of any contributions made by the employee to the particular plan before the end of the year and to the extent that such employee contributions have not already reduced the amount of benefits previously received by the employee.

Where employees are legally obligated to pay the entire premium cost of a wage loss replacement plan (an "employee pay-all plan"), no amount is required to be included in the employees' income under paragraph 6(1)(f) of the Act. Paragraph 14 of IT-428 clarifies that the status of a plan as an employee pay-all plan is not affected because the employer actually pays the premium, provided the plan is set-up as an employee pay-all plan and the premium is recovered from the employees through payroll deductions or the employer includes the amount in the employees' income. Whether or not a particular plan is considered an employee pay-all plan can only be determined by reference to the plan documents.

Non-Group Plans

The income tax consequences of non-group wage loss replacement plans are discussed in paragraph 20 of IT-428. As indicated therein, where an employer pays the premium under a non-group plan wage loss replacement plan, the payment of the premium is regarded as a taxable benefit to the employee under paragraph 6(1)(a). However, the payment of the premiums by the employer in these circumstances are not viewed by the Canada Revenue Agency as a "contribution" by the employer under the particular non-group wage loss replacement plan. Accordingly, paragraph 6(1)(f) would not apply to tax any benefits received by an employee under such a plan.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch