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: The terms of the collective agreement require the employer to top up life insurance and long term disability benefits and pay the premiums for the retirees' health benefits. What are the tax implications to the employees?
Position: Factual determination. Provided general comments.
Reasons: The tax implications can be ascertained only after a review of all of the relevant facts and documentation. Based on the facts provided, the top up life insurance benefit is likely a death benefit which is included in the income of the beneficiary under subparagraph 56(1)(a)(iii). The top up long-term disability benefits may be taxed under paragraph 6(1)(a), (f) or (g) depending on how the plan is structured. If the plan to provide health benefits to retired employees constitutes a private health services plan, any benefit derived from the employer contributions to the plan would be excluded from employment income under subparagraph 6(1)(a)(i).
XXXXXXXXXX 2008-026565
Nancy Shea-Farrow
July 21, 2009
Dear XXXXXXXXXX :
Re: Life Insurance, Long Term Disability and Retirees' Health Benefits
We are writing in response to your letter dated October 16, 2007 that was received on January 17, 2008. You requested our views on the tax treatment of certain payments made by XXXXXXXXXX (the "Society") pursuant to the terms of the collective agreement between the Society and its staff union.
The Society is currently paying the cost of the premiums covering life insurance, extended health, dental benefits and long term disability provided under an existing contract with an insurer. The terms of the collective agreement require the Society to top up the life insurance and long term disability benefits in certain circumstances. Under the collective agreement, the Society is required to self-insure in order to provide the top up benefits. The Society is also required to pay the premiums in respect of a plan that provides health benefits to retirees. You would like to know if the payments made by the Society pursuant to the collective agreement are taxable to its employees.
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 as set out in Information Circular IC 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. We are, however, prepared to offer the following general comments which may be of assistance.
It is unclear from the information provided as to how the Society is self-insuring the top life insurance and long term disability benefits. The following general comments relate to an arrangement funded on a pay-as you-go basis where the employer does not make contributions to a plan but pays the benefits as they come due and a plan where contributions are made to a custodian who then pays the benefits.
Top up life insurance
As noted above, the Society is required to self-insure to top up the life insurance benefit payable by the insurer in certain circumstances. In a case where an employer pays a benefit upon the death of an employee out of its own funds and not under a group term life insurance policy, the benefit may constitute a death benefit which is included in the income of the beneficiary under subparagraph 56(1)(a)(iii) of the Income Tax Act (the "Act"). The term "death benefit" is defined in subsection 248(1) of the Act to mean the total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee's service in an office or employment (less an exemption of up to $10,000). Interpretation Bulletin IT-508R, "Death Benefits," contains more information on the tax treatment and the calculation of death benefits.
Where an employer makes contributions to a plan to fund the benefits payable upon the death of an employee, the plan could constitute an employee benefit plan ("EBP"). Subject to certain exclusions, an EBP is defined in subsection 248(1) of the Act to mean an arrangement under which contributions are made by an employer or by any person with whom the employer does not deal at arm's length to another person and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer. When an employer makes contributions to an EBP, no amount is required to be included in an employee's income in respect of the EBP by virtue of subparagraph 6(1)(a)(ii) of the Act. Under paragraph 6(1)(g) of the Act, all amounts received out of or under an EBP or from the disposition of an interest in an EBP constitute income from an office or employment. However, specifically excluded from the application of paragraph 6(1)(g) of the Act is a death benefit.
We note that the proper tax treatment of an amount paid by an employer on the death of an employee can be determined only after a review of all of the relevant facts and documentation. Generally, where an employer self-insures to provide a benefit upon the death of an employee, whether through a pay-as-you-go arrangement or an EBP, the benefit is likely a death benefit which must be included in the beneficiary's income under subparagraph 56(1)(a)(iii) of the Act.
Top up long term disability
The determination of the taxation of benefits received by an employee out of a disability plan will depend on how the plan is structured. As noted above, a self-insurance arrangement can be funded on a pay-as-you-go basis. When an employer utilizes a pay-as-you-go arrangement, the amount paid in respect of the long term disability to the employee would be included in the employee's income pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act as income from office or employment.
The long term disability benefits may also be funded on a self-insured basis using a separate trust arrangement under which the employer makes contributions to the trustees of the trust. If the benefits administered by the trust are restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy, or any combination thereof, the trust may qualify as a health and welfare trust ("HWT"). For more information on the conditions that must be met in order to qualify as a HWT, refer to IT-85R2, "Health and Welfare Trusts for Employees".
In determining whether a particular disability plan qualifies as a group sickness or accident insurance plan, we note that the term "group sickness or accident insurance plan" is not defined in the Act. Such a plan is commonly referred to as a wage loss replacement plan as described in paragraph 14 of IT-428, "Wage Loss Replacement Plans". Paragraph 7 of this bulletin indicates that such a plan must be an insurance plan. This paragraph explains that while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. However, if insurance is not provided by an insurance company, the plan must be one that is based on insurance principles (i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims). Accordingly, if an arrangement uses a separate trust to fund the benefits and the plan is based on insurance principles, in our view it is possible that it is a wage loss replacement plan. However, in order make such a determination, it is necessary to review all the relevant facts and documentation.
If, in fact, the trust qualifies as a HWT as it administers a group sickness or accident insurance plan, the employee is not taxed on the contributions made by the employer to the trust by virtue of the exclusion in subparagraph 6(1)(a)(i) of the Act for employer contributions to a group sickness or accident insurance plan. However, the long term disability top up benefits paid to the employee would be taxable to the employee to the extent provided for in paragraph 6(1)(f) of the Act.
If a trust is not a qualifying HWT because the plan is not a group sickness or accident insurance plan, the trust will generally be treated as a trust governed by an EBP. In such a case, there is no amount included in the employee's income by virtue of subparagraph 6(1)(a)(ii) of the Act in respect of the employer contributions, but the amounts received out of the EBP will be taxed under paragraph 6(1)(g) of the Act.
If both the top up for the life insurance and the top up for the long term disability are self- insured using the same trust and one of the plans is considered an EBP, the combined plan will likely be an EBP as indicated in paragraph 4 of IT-502, "Employee Benefit Plans and Employee Trusts". In such a case, the long term disability top up paid to the employee will be taxable to the employee under paragraph 6(1)(g) of the Act.
Premiums for retirees' health benefits
Subparagraph 6(1)(a)(i) of the Act excludes from an employee's income any benefit derived from an employer's contributions to or under a private health services plan ("PHSP"). A PHSP is defined in subsection 248(1) of the Act and the rules for such plans are discussed in more detail in IT-339R2, Meaning of "Private Health Services Plan". As noted in paragraph 4 of IT-339R2, coverage under a PHSP must be in respect of medical expenses which normally would otherwise have qualified under subsection 118.2(2) of the Act in the determination of the medical expense tax credit.
It is a question of fact whether a particular plan that provides coverage to retired employees qualifies as a PHSP. Such a determination can only be made after a review of the specific contract and other relevant documentation. If the plan qualifies as a PHSP, the benefit derived by an employee or retired employee from an employer's contributions to a PHSP would not be taxable by virtue of subparagraph 6(1)(a)(i) of the Act.
We trust that these comments will be of assistance. However, as explained in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency in respect of any particular situation.
Yours truly,
Roger Filion, Manager
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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