7 June 2010 External T.I. 2010-0361971E5 - Tax status of LTD Plan

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 the tax status of a Long Term Disability Plan altered if payments are returned?

Position: The tax status of a LTD Plan would not be altered by a return of payments as long as the terms of the LTD Plan did not alter the legal obligation of the employees to pay the premiums and the facts show that only the employees continue to fund its future contributions.

Reasons: The taxation of benefits derived from a LTD plan depends upon whether or not a particular plan is funded entirely by employee contributions. Benefits received by employees from an employee-pay-all-plan are not taxable employment income since it is the employees, not the employer, who are funding the plan from their taxed earnings. Generally, an employee-pay-all-plan is one under which the employees have the legal obligation to pay the premiums and in fact do so from their taxed earnings. The tax status of the LTD Plan is not altered by a return of the payments as long as the terms of the LTD Plan did not alter the legal obligation of the employees to pay the premiums and the facts show that only the employees continue to fund its future contributions.

XXXXXXXXXX                                      2010-036197
                                                Carmine Paglia
June 7, 2010

Dear XXXXXXXXXX :

Subject: Long Term Disability Plan - Return of Contributions

We are writing in response to your letter of March 4, 2010, concerning whether returning benefits paid in error from a long term disability plan (the LTD Plan) to a pension plan (the Pension Plan) would alter the status of the LTD Plan as an "employee-pay-all plan".

A disabled employee used to be required under the terms of the Pension Plan to continue to make contributions during a period of disability. The LTD Plan, which you have indicated is entirely funded by employee contributions, included a provision whereby the insurance carrier would pay to the employer the required employee contributions to the Pension Plan. Due to a subsequent amendment to the Pension Plan, disabled employees were no longer required to make employee contributions to the Pension Plan during a period of disability. Although the Pension Plan was amended, the LTD Plan was not and the insurance carrier for the LTD Plan continued to pay contributions to the employer. The employer did not remit these to the Pension Plan but placed them in a "segregated account".

You indicated that the employer would now like to return these contributions to the LTD Plan but is concerned how this would affect its status as an employee-pay-all-plan. The concern centers on the fact that the return of contributions may result in a lowering of future employee contributions to the LTD Plan.

Our Comments

The particular situation presented in your letter is a factual one involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

The income tax treatment of disability insurance plans is set out in Interpretation Bulletin IT-428, Wage Loss Replacement Plans. As discussed in IT-428, the taxation of disability benefits, as well as the tax treatment of premiums paid by the employer to the plan, is dependent upon whether or not a particular plan is an employee-pay-all plan. An employee-pay-all plan is a wage loss replacement plan in which employees are required to pay all of the premium cost of the plan. Benefits received by employees from an employee-pay-all-plan are not taxable employment income since it is the employees, not the employer, who are funding the plan from their taxed earnings.

Whether or not a particular wage loss replacement plan is an employee-pay-all plan is a question of fact. Generally, an employee-pay-all-plan is one under which the employees have the legal obligation to pay the premiums and in fact do so from their taxed earnings. In our view, the tax status of the LTD Plan would not be altered by a return of the payments from the Pension Plan as long as the terms of the LTD Plan did not alter the legal obligation of the employees to pay the premiums and the facts show that only the employees continue to fund its future contributions.

You can obtain a copy of IT-428, as well as other CRA interpretation bulletins, on our website at www.cra-arc.gc.ca.

We trust that our comments will be of assistance.

Yours truly

Randy Hewlett
Manager
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch