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: To determine the tax implications for a self-employed individual with respect to a disability insurance policy offered through a professional association. The policy will provide the individual with a monthly benefit in the case of a loss of income due to sickness or injury.
Position: Where the self-employed individual on his/her own behalf the premiums are not deductible against the professional income of the individual and the benefits received are not included in income.
Reasons: ITA 9, 18(1)(a), 18(1)(h), 6(1)(a), 6(1)(f), 56(2)
2004-010473
XXXXXXXXXX Luisa A. Majerus, CA
(613) 957-2138
February 17, 2005
Dear XXXXXXXXXX:
Re: Disability Insurance Premiums and Benefits
This is in reply to your letter dated November 23, 2004, requesting our views regarding the income tax implications of the payment of premiums for a disability insurance policy (the "Policy") and the receipt of benefits under the policy in the case of a loss of income due to sickness or injury.
You have asked us to consider the income tax implications where a self-employed individual (the "Individual") is a member of a professional association and purchases a Policy directly from an insurance company or indirectly through the professional association. The self-employed Individual pays the premiums on the Policy and expects to receive a monthly income benefit in the case of a loss of his/her self-employment income due to sickness or injury. Alternatively, a corporation, of which the Individual is the majority shareholder (the "Corporation"), will pay the premiums on the Policy. The Individual is concerned about the income tax implications of the payment of the premium and the receipt of benefits under the Policy.
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.
Paragraph 18(1)(a) of the Income Tax Act (the "Act") provides that an outlay or expense is deductible when it is made or incurred for the purpose of gaining or producing income from a business or property. Furthermore, paragraph 18(1)(h) of the Act provides that an outlay or expense is deductible provided it is not a personal or living expense of the taxpayer. Where a Policy, purchased directly from an insurance company or indirectly through a professional association, provides an Individual, carrying on a business or practicing a profession, with a benefit for loss of income-earning capacity, the premium paid on such a Policy by the Individual is a personal or living expense that is not deductible for income tax purposes. Additionally, the receipt of disability benefits under the policy will not be included in computing the individual's business income. This position is noted in paragraph 3 of Interpretation Bulletin IT-233 "Overhead Expense Insurance vs. Income Insurance [Archived]" ("IT-233"), which can be found on our website at www.cra-arc.gc.ca.
Where a Corporation pays the premiums on a Policy for employees of the Corporation, the premium is normally deductible in computing the business income of the Corporation. Where the premiums can be regarded as benefits derived from contributions to or under a group sickness or accident insurance plan, the premiums paid will not be a taxable benefit to the employees by virtue of subparagraph 6(1)(a)(i) of the Act. The receipt of disability benefits made under the policy will be included in the employees' income where all of the requirements of paragraph 6(1)(f) of the Act are satisfied. However, where the Individual received the benefit in his capacity as a shareholder, the amount of the premium paid by the Corporation would be included in the Individual's income by virtue of subsection 15(1) of the Act and the premium would not be deductible by the Corporation. In such cases, disability benefits would not be taxable to the shareholders.
Finally, it should be noted that the actual terms and conditions of a particular policy would have to be referred to in order to determine the actual income tax consequences relating to a specific situation.
We trust this information is helpful.
Yours truly,
John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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