7 April 1998 External T.I. 9803425 - LIFE INSURANCE COVERAGE NOT EXEMPT

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:

life insurance coverage provided together with disability benefits that are exempt under ITAR 19

Position:

life insurance benefit is taxable even if the disability benefits are exempt

Reasons:

ITAR 19 does not apply to group term life insurance policy coverage

980342
XXXXXXXXXX A. Humenuk

April 7, 1998

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plans

This is in response to an inquiry from XXXXXXXXXX, made on your behalf, in respect of benefits you receive from your employer as a result of a long term disability.

It is our understanding that you receive:

1) periodic payments in lieu of salary from your employer and

2) employer-paid life insurance coverage under a group term life insurance policy.

We have been advised that you filed a notice of objection in respect of the 1995 taxation year concerning the assessment of a taxable benefit in respect of the group term life insurance policy coverage. It is our understanding that this assessment has been confirmed by the Chief of Appeals of the XXXXXXXXXX Taxation Centre and that you have been informed of your appeal rights. When a taxpayer disagrees with the Department’s decision in a particular situation, an appeal may be filed to the Tax Court of Canada within 90 days of the date of notice of confirmation. Accordingly, you had until March 24, 1998, to file an appeal in respect of your 1995 assessment. The Tax Court is an independent tribunal and provides the appropriate means to settle an honest difference of opinion between Revenue Canada and a taxpayer. Once a notice of confirmation has been issued, there is no recourse other than an appeal filed in the prescribed manner.

It is our understanding that the issue upon which you require further clarification is how Interpretation Bulletin IT- 428 “Wage Loss Replacement Plans”, and the comments in paragraph 5 in particular, relate to your situation. It is your view that no amount should be included in your income as a result of benefits provided by your employer because you are receiving your benefits through your employer’s long term disability plan and section 19 of the Income Tax Application Rules (ITAR 19) applies to your situation. Since paragraph 5 of IT-428 states that a contract of insurance forms part of a plan, you do not understand why an amount has been included in your income for 1995.

The comments in IT-428 relate to plans which provide periodic benefits in respect of an employee’s loss of income from employment pursuant to a sickness or accident insurance plan, a disability insurance plan or an income maintenance plan. These are the benefits described in 1) above. Such benefits are normally taxable under paragraph 6(1)(f) of the Act except where ITAR 19 applies. An employer may fund its sickness or accident insurance plan, disability insurance plan or income maintenance plan by means of a trust or an insurance policy. The comments in paragraph 5 of IT-428 merely state that an insurance policy which funds an employer’s sickness or accident insurance plan, disability insurance plan or income maintenance plan is not itself the employer’s plan but that the policy forms part of the plan (i.e. an insurance policy which funds a sickness or accident insurance plan forms part of that sickness or accident insurance plan). An insurance policy which provides employees with other types of insurance coverage, such as life, automobile, or liability insurance is taxable under other provisions of the Act. The benefit from coverage under a group term life insurance policy is included in income under subsection 6(4) of the Act. Prior to July 1, 1994, the first $25,000 of life insurance provided to an employee under a group term life insurance policy was non-taxable. The Act was amended effective July 1, 1994 to eliminate this exemption and as a result, the full amount of any premium paid by an employer for group term life insurance under a policy of insurance is included in an employee’s income under subsection 6(4) of the Act for 1994 and subsequent taxation years. These are the benefits described in 2) above. ITAR 19 has no application with respect to subsection 6(4) of the Act or group term life insurance policies.

We trust that these comments have clarified the distinction between periodic payments received under a wage loss replacement plan which may be exempt from tax pursuant to ITAR 19, and the benefit derived from life insurance coverage under a group term life insurance policy which is included in employment income under subsection 6(4) of the Act.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch