23 February 1989 Income Tax Severed Letter 5-7262 -  

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.

A. Humenuk (613) 957-2135

FEB 23 1989

Dear Sirs:

Re: Wage Loss Replacement Plans

We are replying to your letter dated December 16. 1988, and Our subsequent conversation of January 3. 1989, (Humenuk XXXX) wherein you requested our views on employee pay-all wage loss replacement plans.

You would like to know whether or not an employee pay-all-plan exists where the employer adds the premium cost to the employee's taxable earnings each pay period and withholds tax thereon. You would also like to know whether the premium must be based on each individual's inherent risk or whether an average rate as set by the insurer can be used.

The manner in which the payments are remitted to the carrier of the plan does not by itself answer the question as to whether or not an employee payroll plan exists. Such a determination can only be made by looking at the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the carrier, the employment contract or some other document, places upon the employees the legal obligation to pay 100% of the premiums (although the employer may still be responsible for remitting the premiums). If such an obligation exists, and the employer remits the premiums to the plan carrier and accounts for them in the manner of salary and wages, the plan will be considered an employee pay-all plan provided such an arrangement was in place at the time the payment was made.

On the other hand, it is not sufficient for the employer to add to the employee's income premiums which the employer was required to pay since such benefits are non-taxable by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act").

You have also asked whether the premiums must be calculated on an individual or group basis in order to maintain the tax status accorded to employee pay-all plans. Employee pay-all plans are not specifically governed by any provision in the Act. Accordingly, premiums paid by an employee are not deductible in computing income and benefits received by the employee under such a plan are not taxable.

Keeping in mind that an employee pay-all plan must not be cross-subsidized with any other plan provided by the employer, the premiums may be calculated in any manner sufficient to provide the benefits so insured. The tax status of the plan will only be affected if the employer in some way becomes legally obligated to make a contribution (i.e. in the case of a deficiency), other than as noted in paragraph 17 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans".

We trust our comments will be of assistance to you.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR

P.D. FUOCO

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch