7 March 1991 Income Tax Severed Letter - Health and Welfare Trusts - Disability Insurance

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 Trusts - Disability Insurance

This is in reply to your letters of October 17 and 18, 1990. We apologize for the delay in replying to you. You have queried the taxation of amounts received by an individual in various hypothetical scenarios given the following common facts, which facts have been presented to you by insurance salesmen:
• 1. Employees own personally funded disability insurance policies.
• 2. Some of the employees are shareholders.
• 3. The employer corporation establishes a Health and Welfare Trust (“Trust”).
• 4. The corporation permits the employees to assign their policies to the Trust.
• 5. The corporation pays the premiums due on the policies.
• 6. At some future time, either when the employee ceases to be employed or the employer ceases to provide this benefit the employee “unassigns” the disability policy.

If your enquiries relate to a specific disability plan, you should forward the plan document and other pertinent information to your local district taxation office for review. We do, however, offer some general comments.

Representation has been made to you that the premiums referred to in 5. above do not result in a taxable benefit to employees as subparagraph 6(1)(a)(i) of theIncome Tax Actwould exempt any benefit from taxation. This is true where the benefit derived is from the employer's contribution to a group sickness or accident insurance plan. Paragraph 2 of Interpretation Bulletin IT-85R2 states that the Department generally accepts that an employer's contribution to a sickness, accident, disability or income maintenance (also known as salary continuation) plan qualifies as a contribution to a “group sickness or accident insurance plan” as described in subparagraph 6(1)(a)(i), provided that the particular plan is a “group” plan and an insured plan. The view has been expressed to you that, in the scenario described above, the disability plan is at no time a group disability plan. If so, then there is no exemption from taxation by virtue of subparagraph 6(1)(a)(i) of the Act.

A “group” plan means a plan under which a number of employees are insured either under a single contract between the insurer and an employer contracting with the insurer or under individual contracts but pursuant to a common plan. It appears from the information furnished by you that there is no group plan as each employee's individual disability insurance plan is assigned to the trust.

In the instance where there is no group plan, the following comments apply:
• A taxable benefit will result to any employee whose employer makes a payment on behalf of the employee to a non-group plan. The outlay by the employer from his own funds is deductible under paragraph 18(1)(a) of the Act. The payment by the employer is not viewed as a “contribution” by the employer to the plan and, hence, paragraph 6(1)(f) does not apply to subject to tax in the employee's hands, at any time, any benefits received by him pursuant to the plan as no employer contributions are considered to have been made. These comments are expressed in paragraph 20 of Interpretation Bulletin IT-428.
• The employer can deduct the cost of premiums paid for employees; however, where coverage is provided to a shareholder/employee in his capacity as a shareholder no deduction is permitted. Paragraph 6(1)(f) of the Act does not apply to any benefits received by the shareholder pursuant to the plan. Rather, the amount of the individual's premiums or contributions that are paid by the corporation in the year and attributable to the shareholders are included in income as a shareholder benefit under subsection 15(1) of the Act.

We trust the above comments are of assistance to you.