2 June 1997 External T.I. 9711505 - CRITICAL ILLNESS INSURANCE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Critical Illness Insurance -

1) Are premiums paid by an employer in respect of such coverage a taxable benefit under paragraph 6(1)(a) of the Act?

2) Is the lump-sum payment received free from income tax (i.e., paragraph 6(1)(f) does not apply?

3) Are the premiums considered medical expenses under paragraph 118.2(2)(q) of the Act?

4) Are the premiums tax deductible by the employer?

Position:

1 to 3

- See response, question of fact and law general comments only.

4) Question of fact and law - no comments as they would be so general that they would essentially be meaningless.

Reasons: See letter and response.

XXXXXXXXXX 971150

Attention: XXXXXXXXXX

June 2, 1997

Dear Sirs:

Re: Critical Illness Insurance

This is in reply to your facsimile letter dated April 29, 1997, concerning the income tax consequences under the Income Tax Act (the Act) of a type of insurance you refer to as "critical illness insurance".

In your letter, you have indicated that several insurers in Canada have begun to provide critical illness insurance on both a group or individual basis. You advise that critical illness insurance typically provides a lump-sum benefit to the individual upon the first occurrence or diagnosis of a named critical medical condition or event, such as a severe heart attack, stroke, life threatening cancer, etc. (herein referred to as "medical event"). We understand that the payment of the lump-sum benefit is dependent only on the occurrence of the medical event, however, an insurer may require that the individual survive such medical event for a specified period before the lump-sum benefit becomes payable. We also understand from your letter that the purpose of critical illness insurance is to provide additional funds to the individual to be used to cover "large extra expenses" which can accompany the development of such medical event since periodic payments under any accompanying disability insurance plan, if any, may not be sufficient to cover such expenses.

You advise that it is your understanding that where an employer contracts with an insurer to provide critical illness insurance for its employees on a group basis, any premium paid by the employer in respect of such coverage will be deductible by the employer as a business expense and will not result in a taxable benefit to its employees under paragraph 6(1)(a) of the Act, on the basis that the critical illness insurance arrangement qualifies as a private health services plan. It is also your view that if an employee pays all or any part of the premium on such a policy, the premium would be considered as a medical expense under paragraph 118.2(2)(q) of the Act.

Our Comments

While we can provide some general comments, specific income tax implications will be dependent on the terms and conditions of a specific policy and any relevant agreements that may be entered into. Should you wish confirmation of the income tax consequences with respect to a particular critical illness insurance policy XXXXXXXXXX you may request an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996. In considering such a request, the Department would require a complete description of all the relevant facts, information and proposed transactions, including a copy of the insurance policy to be entered into between the parties.

The value of any benefit received by an employee by virtue of, or in respect of, their employment must be included in the employee's income under subsection 6(1) of the Act unless such benefit is otherwise specifically excluded from the employee's income; such as is the case for group sickness or accident insurance plans, or private health services plans under subparagraph 6(1)(a)(i) of the Act.

A private health services plan ("PHSP") is defined in subsection 248(1) of the Act and the Department's general position on PHSPs is set out in Interpretation Bulletin IT-339R2. As indicated in IT-339R2 a PHSP must contain all of the five basic elements listed in paragraph 3 and be in respect of hospital care or expenses or medical care or expenses which normally would otherwise have qualified under subsection 118.2(2) of the Act as medical expenses for the purpose of the medical expense credit under subsection 118.2(1) of the Act, as noted in paragraph 4.

Based on your description of critical illness insurance, the payment of a lump-sum benefit upon the first occurrence of a medical event does not appear to us to depend on, require, or otherwise relate to the incurrence of any hospital or medical expense, or any combination of such expenses, by the individual (i.e., we understand that the insurance proceeds can be used without restriction to reduce debts, pay for vacations, cars or other personal items) such that the conditions outlined in paragraphs (a) and (b) of the definition of PHSP in subsection 248(1) of the Act do not appear to be met.

Further, while paragraph 5 of IT-339R2 indicates that contracts of insurance issued in arm's length situations will normally contain all of the five basic elements that are listed in paragraph 3 of that IT, this may not be the case with respect to a critical illness insurance policy if, as noted above, the individual does not have to incur any expense, loss or liability in respect of the occurrence of the medical event to be paid the lump-sum benefit. Therefore, while the determination as to whether a particular critical illness insurance policy meets the definition of a PHSP remains a question of fact and law, where such insurance is provided on a non-group basis and it is not considered to be a PHSP, a taxable benefit would be applicable to the employee under paragraph 6(1)(a) of the Act if the employer paid any portion of the premium.

It would appear possible for critical illness insurance which is provided by an employer on a group basis to its employees to qualify as a group sickness or accident insurance plan such that no taxable benefit would be applicable to the employee under paragraph 6(1)(a) of the Act if the employer paid any portion of the premium. It remains a question of fact and law as to whether the lump-sum benefit under such a policy would be taxable under paragraph 6(1)(f) of the Act. For example, if a lump-sum benefit was considered to represent a payment in respect of the employee foregoing the right to receive periodic payments that were otherwise payable under the policy, or under another accident and sickness plan, the lump-sum payment could, in our view, be taxable under paragraph 6(1)(f) of the Act.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Section Chief
Financial Institutions Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch