31 August 2001 External T.I. 2001-0087575 - 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.

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:

If an employer pays the PST on an insurance premium paid by an employee for a wage loss replacement plan:

(1) Is the PST a taxable benefit?

(2) Are benefits paid out of the plan taxable income of the employee?

Position:

Question of fact; depends on who has the contractual obligation to pay the premiums.

Reasons:

Paragraph 6(1)(f) and IT-428

XXXXXXXXXX 				2001-008757
					Randy Hewlett, B.Comm.
August 31, 2001

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plans

We are writing in response to your letter dated June 7, 2001, wherein you requested our opinion on a matter involving a wage loss replacement plan. In your letter you indicate that the Province of Ontario imposes an 8% sales tax on group long-term disability insurance plans. In that regard you inquire whether the PST would be taxable benefit and if benefits paid out of the plan would be taxable income, where:

1. The employee pays the premium and also the PST or

2. The employee pays the premium and the employer pays the PST.

Our Comments

The situation presented appears to be an actual fact situation involving completed or ongoing transactions. 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 IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The income treatment of disability plan benefits is discussed in Interpretation Bulletin IT-428, Wage Loss Replacement Plans. Paragraph 6(1)(f) of the Income Tax Act (the Act) provides that amounts received on a periodic basis by a taxpayer as compensation for loss of income from an office or employment, that were payable under a sickness, accident, disability or income maintenance insurance plan (i.e. wage loss replacement plan) to which the employer made a contribution, are to be included in income, but subject to a reduction for contributions made to the plan by the employee.

A wage loss replacement plan in which employees have the obligation to pay all of the premiums, including applicable taxes, is referred to as an "employee-pay-all plan". Benefits received from an employee-pay-all plan are not included in computing taxable income of the recipient. Paragraphs 16 through 21 of IT-428 discuss employee-pay-all plans. As stated in paragraph 17 of IT-428, whether or not a particular wage loss replacement plan is an employee-pay-all plan is a question of fact and that the onus is on the employer to prove that such a plan exists.

The existence of an employee-pay all plan is determined by ascertaining who is contractually obligated to pay the premiums under the plan. This determination can only be made after a review of the plan documents. However, if a wage loss replacement plan were an employee-pay-all plan, and the employer paid the PST portion of the premium on the employee's behalf, it is our view that the employer has not made a contribution to a plan as contemplated by paragraph 6(1)(f) of the Act. The employer's payment would, however, be included in the employee's income under subsection 5(1) or paragraph 6(1)(a) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch