21 November 2005 External T.I. 2005-0148221E5 - 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: The taxable status of a wage loss replacement plan from an employee/shareholder benefit perspective, whether a company is entitled to a deduction for the cost of the premiums and whether separate policies have to be grouped together by a corporate director's resolution to be considered a qualifying wage loss replacement plan.

Position: Question of fact.

Reasons: The fact that an employee who is insured by a wage loss replacement plan is also the sole shareholder of a company would not generally affect the tax treatment if the plan provides the same benefits coverage received by other employees of the company or, if the company has no other employees that deal at arm's length with the employer, the plan provides the same type of benefits coverage received by employees who are in comparable positions with other employers. Otherwise, the premium paid could be considered a shareholder benefit when paid and the company would not be entitled to a deduction. There is no requirement under the Act that different insurance policies that provide wage loss benefits coverage to employees be "grouped" together to qualify as a wage loss replacement plan for purposes of paragraphs 6(1)(a) and 6(1)(f)

Randy Hewlett
XXXXXXXXXX 613-941-7239
2005-014822
November 21, 2005

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plan

We are writing in response to your letter of July 6, 2005 on the above noted issue.

Your letter described a situation where a corporation that has two employees, the sole shareholder and his son, is considering purchasing two separate insurance policies to provide salary protection in the case of their disability. We understand your main concerns to be the taxable status of the plans from an employee/shareholder benefit perspective, whether the company is entitled to a deduction for the cost of the premiums and whether the two policies have to be grouped together by a corporate director's resolution to be considered a qualifying wage loss replacement plan under the Income Tax Act (the "Act").

Our Comments

Subparagraph 6(1)(a)(i) of the Act excludes from an employee's income the value of benefits derived from employer-paid contributions to certain employer-sponsored benefit arrangements including, among others, group sickness or accident insurance plans. Paragraph 6(1)(f) of the Act, on the other hand, applies to include in employment income any benefits paid to an employee from a sickness, accident, disability or income maintenance insurance plan (commonly referred to a "wage loss replacement plan") where the employer pays all or part of the premiums for the plan. As well, for the employer the premiums would be considered an expense incurred for the purpose of gaining or procuring business income. The CRA's position on the tax implications of wage loss replacement plans is described in detail in Interpretation Bulletin IT-428, Wage Loss Replacement Plans, which is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it428/README.html

The fact that an employee who is insured by a wage loss replacement plan is also the sole shareholder of a company would not generally affect this tax treatment if the plan provides the same benefits coverage received by other employees of the company or, if the company has no other employees that deal at arm's length with the employer, the plan provides the same type of benefits coverage received by employees who are in comparable positions with other employers. Otherwise, the premium paid could be considered a shareholder benefit when paid and the company would not be entitled to a deduction. Finally, we would like to note that there is no requirement under the Act that different insurance policies that provide wage loss benefits coverage to employees be "grouped" together to qualify as a wage loss replacement plan for purposes of paragraphs 6(1)(a) and 6(1)(f).

We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch