20 October 1994 External T.I. 9417685 - CROSS SUBSIDIZATION IN 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.

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:

whether a single premium rate for both an employee-pay-all and a employer-funded disability plan under a single insurance contract will taint the non-taxability of the employee-pay-all plan

Position TAKEN: yes

Reasons FOR POSITION TAKEN:

cross subsidization occurs when the benefits payable out of the plan are in part, contingent or otherwise dependant on the other plan. In the case of a single premium for both groups, the premium for the smaller group or the group with the more costly expereience rating is in effect subsidized by the other plan.

A. Humenuk
XXXXXXXXXX 941768

Attention: XXXXXXXXXX

October 20, 1994

Dear Sirs:

Re: Long Term Disability Plans

We are writing in reply to your letter of July 11, 1994 concerning the potential cross subsidization between an employee-pay-all disability plan and one to which the employer makes a contribution. We apologize for the delay in our response.

It is your understanding that a single insurance contract can provide both taxable and non-taxable disability benefits, provided that claims, premiums and administrative charges for each of the plans are accounted for separately within the insurer's records and there is no cross subsidization between the plans. You have asked whether a single premium rate based on the experience rating of all the employees covered under both plans would cause the benefits from the plan which was intended to be an employee-pay-all plan to be taxable under paragraph 6(1)(f) of the Act.

In providing our response, it is important to distinguish between the plan under which an employer agrees to provide benefits to its employees and the insurance policy or policies which may be used by the employer to fund such benefits. It is a question of fact as to whether or not the benefits under a particular policy are derived from participation in an employer-provided plan. In order for two plans which are covered by the same insurance policy to be considered separate plans, the level of benefits, the premium rates, the qualifications for membership and other terms and conditions of each of the plans must not be dependent upon the existence of the other plan. Where a single premium rate is established based on the experience of all the employees, it is our view that all the employees are covered by the same plan notwithstanding that employer contributions are only required in respect of some employees.

Accordingly, as stated in paragraph 18 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans", benefits payable out of the plan will be subject to the provisions of paragraph 6(1)(f) of the Act even though the employer's contribution to the plan was limited to specific employees.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch