Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
Are the premiums paid to a separate long-term disability insurance plan by an employee in order to extend the individual's coverage beyond the 104 weeks provided for by a first basic plan to which only the employer contributes, deductible from the taxable wage-loss replacement benefits that an employee receives under the original plan in a situation where the employee would be absent for a period of less than 104 weeks?
Position:
No. Only the contributions that an employee has paid into a given plan that comes within paragraph 6(1)(f) are deductible from benefits from that same plan.
Reasons:
It must first be determined whether, in the situation presented, two separate plans exist. If so, contributions made by an employee to a plan whose benefits will not be taxable cannot be deducted from taxable benefits arising from another plan.
XXXXXXXXXX 2000-001148
N. Deslandes
Attention: XXXXXXXXXX
June 19, 2000
Dear Sir,
Subject: Request for technical interpretation: Deduction of wage-loss insurance premiums
This is in response to your letter of February 28, 2000 in which you asked us for our opinion on the above subject.
The Facts:
You presented a situation where an employer offers a group insurance plan with 104 weeks of salary insurance coverage. Initially, under that plan, an employee absent due to illness receives 85% of the employee’s salary during the first 52 weeks of absence and 66 2/3% for the following 52 weeks. The employer contributes to that plan and pays all the contributions. At the end of the 104-week period, the employee no longer receives benefits under that plan.
If an employee so wishes, the employee can extend the employee’s protection beyond the 104 weeks by taking out long-term income protection insurance with an insurer. To do so, the employee can have a premium deducted from each of the employee’s payslips, which the employer, the college, will pay to an insurance company. The college does not contribute in any way to this long-term income protection insurance.
Your Question:
You asked whether, in our opinion, the premiums paid by an employee to extend coverage beyond the 104 weeks provided for in the basic plan are deductible from the wage insurance benefits the employee receives under the initial plan, i.e., when the employee is absent due to illness for a period of less than 104 weeks.
Our Comments:
As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, it is the practice of our Directorate not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices following their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
Interpretation Bulletin IT-428 Wage Loss Replacement Plans (copy enclosed) states that a plan to which paragraph 6(1)(f) applies is any arrangement between an employer and employees, or between an employer and a group or association of employees, under which provision is made for indemnification of an employee, by means of benefits payable on a periodic basis, if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident. Where the arrangement involves a contract of insurance with an insurance company, the insurance contract becomes part of the plan but does not constitute the plan itself.
Paragraph 6(1)(f) provides, among other things, that the amounts received by a taxpayer pursuant to a disability insurance plan to which the employer has made a contribution must be included in the computation of income if those amounts were received as compensation payable periodically for the total or partial loss of income relating to an office or employment. It is also under that same paragraph that the contributions paid by an employee may be deducted, where applicable, from the taxable benefits. In order to determine whether paragraph 6(1)(f) applies in a particular situation, it is necessary to establish, among other things, under which plan the compensation is paid and also to determine whether the employer has contributed to that plan.
During our telephone conversation (XXXXXXXXXX/Deslandes), you confirmed that the two plans were separate from each other. To be sure of this, we would like to confirm our general position, which is to consider that two separate disability insurance plans exist insofar as:
• the plans are administered separately;
• the premium rate is determined separately for each plan;
• the amount of benefits, the rate of premiums, the conditions for joining the plan and the other conditions of each of the plans do not depend on the existence of the other plan;
• there is no cross-financing between the two plans, i.e. the premiums or the yield of one of the plans must not be used to finance the other plan; and
• the administration of the plans must indicate that each plan can be considered as separate from the other.
In the situation you presented, the mere fact that employees can, if they choose, extend their period of long-term disability insurance coverage for a period exceeding 104 weeks is not in itself a conclusive factor in determining that these same employees are covered by a plan separate from the one from which the other employees benefit. A separate plan would be considered to exist only to the extent that the conditions set out above were satisfied.
If it is determined that two separate plans do indeed exist, the long-term disability plan, being funded entirely by the employees, is not a plan coming within paragraph 6(1)(f). Consequently, the benefits arising from that plan are not taxable and the related premiums cannot be deducted from those benefits. The contributions that an employee pays to a plan referred to in subparagraph 6(1)(f)(v) can be deducted against the benefits that will be received from that same plan. In the situation you presented to us, the contributions to a separate long-term disability plan paid by employees could not therefore be deductible from the taxable benefits from the basic plan that an employee could receive during the first 104 weeks, as the two plans are separate from each other.
On the other hand, if it is determined that only one plan exists, the long-term disability insurance benefits, as well as the basic benefits received by an employee during the first 104 weeks, will have to be included in computing the income under paragraph 6(1)(f) since the employer contributes to that plan. The contributions paid by the employee will then be deductible under subparagraph 6(1)(f)(v) against the benefits arising from the plan, even if the employee is absent from work due to illness for a period of less than 104 weeks.
If necessary, you can consult the Client Assistance Service of the XXXXXXXXXX Tax Services Office to help you determine whether there are one or two disability insurance plans.
These comments do not constitute advance income tax rulings and are not binding on the Canada Customs and Revenue Agency. We hope that you find them of assistance.
Best regards,
Ghislain Martineau
Acting Manager
Individuals and Businesses Section
Individuals and Publications Division
Income Tax Rulings Directorate
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