12 January 1990 Ruling 58983 F - Short Term 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.

Dear Sirs:

Re:  Health and Welfare Trust Short Term Disability Plans

We are responding to your letter of October 26, 1989, concerning the administration of a wage-loss replacement plan.

You ask whether it would be permissible for the trust document which creates a health and welfare trust as outlined in Interpretation Bulletin IT-85R to provide for the reimbursement to an employer who pays, directly from its own payroll, the wage loss replacement benefits which are contractually set out under the terms of the plan document. You suggest that an employer might wish to operate in this fashion for the payment of benefits of a short term nature such as sick leave or short term disability benefits.

It is a question of fact as to whether or not a plan qualifies as a health and welfare trust and as a result, we are reluctant to express an opinion about a particular plan when we do not have a copy of its governing document. If you have an actual proposed transaction, you may wish to obtain an advance income tax ruling or if the transaction is already completed, you may wish to forward the relevant documentation to the local district taxation office to obtain their views. Nonetheless, we would like to offer the following general comments.

As stated in paragraph 6 of IT-85R2, a health and welfare trust is one in which the trustee or trustees act independently of the employer. This would not appear to be the case in the situation you describe. The use of a trust to fund a disability plan allows the employer to transfer the administration of its plan to the trustees. If the trustees in turn transfer all or part of the administration  back  to the employer, in effect, there is no trust. Consequently there is no trust. Consequently the plan would not be a health and welfare trust if the employer was involved in the administration of the plan.

If the employer administers the plan, notwithstanding the existence of a formal trust agreement, the agreement would be considered to be a contingency reserve on the part of the employer  and the employer would not be entitled to a deduction for any contributions to such a fund until actual payments were made to or for the employees pursuant to the terms of the plan. Any benefits paid to employees under this type of arrangement as short term disability benefits would be included in their income pursuant to subsection 5(1) as opposed to paragraph 6(1)(f) of the Act.

We trust our comments have clarified our position.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      A.M. PaquetteCoverage Policy and Legislation Source Deductions Division