16 January 1996 External T.I. 9529635 - WAGE LOSS REPLACEMENT PLANS

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:

An individual will be entitled to receive benefits under a wage loss replacement plan during three periods of time (an Initial Period, a Secondary Period, and a Long Term Period). The issue is the extent that benefits paid under each period are taxable.

Position:

Benefits paid under the Initial Period are taxable under 6(1)(a) and benefits paid under the Secondary Period (disability insurance is involved) are taxable under 6(1)(f). It is unclear whether benefits paid under the Long term Period are taxable under 6(1)(f).

Reasons:

The payments in respect of the Initial Period involve the continuance of normal earnings by the employer (insurance is not involved) (See paragraph 7 of IT-428). With respect to the Secondary Period, the employer makes all the contributions. In the case of the third period, the taxability or non-taxability involves a question of fact notwithstanding that the individual has indicated that he makes all the contributions.

		952963
XXXXXXXXXX	M. Eisner

January 16, 1996

Dear Sir:

Re: Wage Loss Replacement Plan

This is in reply to your letter of September 20, 1995 sent to the XXXXXXXXXX Tax Services office in which you asked us about the tax consequences of disability income that is set out in the document you enclosed. We apologize for the delay in replying.

The document you enclosed sets out three periods under which amounts may be paid to an employee in respect of disability. These three periods are the "Initial Period", "Secondary Period" and "Long-term Disability (LTD) (XXXXXXXXXX)". Under the Initial Period, a disabled employee will be entitled to continue to receive his regular earnings for a certain period of time which is dependant on his or her length of employment service at the time the employee became disabled. If the employee continues to be disabled beyond the Initial Period, the employee will become entitled to receive benefits pursuant to the Secondary Period for a certain period of time which is also dependant on the length of service. In the case of the third period (the LTD Period), an employee who has more than 9 years of continuous service has the option of applying flex benefits for the purpose of obtaining coverage described in the document as XXXXXXXXXX involves coverage beyond the Secondary Period for a certain percentage of base earnings. However, an employee can pay for additional coverage in respect of "XXXXXXXXXX" coverage. An employee who has less than 9 years of service may obtain coverage beyond the Secondary Period by paying for XXXXXXXXXX coverage as well as enhanced coverage under XXXXXXXXXX.

In relation to the above circumstances, you have indicated that you have been employed with your employer for over thirty years, that you pay no premiums with respect to the Secondary Period, and that you pay all the premiums with respect to coverage under the LTD period.

In the case of disabled employees, an employer will normally continue to pay earnings to employees for a period of time before he or she becomes entitled to receive disability benefits under insured disability plans. Paragraph 6(1)(f) of the Income tax Act only applies to insurance plans while other employment income, which includes the period of time that a disabled employee continues to receive regular earnings from his or her employer is taxable under other provisions of the Income Tax Act. This is explained in paragraph 7 of Interpretation Bulletin IT-428 which has been enclosed for your convenience. In relation to these comments, the document you enclosed indicates on page 2.2 that an employee will receive his or her regular earnings from which normal taxes and payroll deductions will be withheld. On the basis of this information, it seems clear that the payments that would be made in respect of the Initial Period would be fully taxable as employment benefits.

With respect to the Secondary Period and the LTD Period, paragraph 5 of Interpretation Bulletin IT-428 refers to the type of plan to which paragraph 6(1)(f) of the Income Tax applies. Such a plan, as indicated in the bulletin, may be a plan under which the participating employees make all contributions (an employee-pay-all plan) or a plan under which the employer has made a contribution. Where an employee-pay-all plan is in existence, the participating employees are legally obligated to make all the contributions. Under such a plan, benefits are non-taxable and the related contributions (which would include the premiums deducted from an employee's remuneration in respect of the plan) would be non-deductible. On the other hand, where employees are participants of a plan where the employer makes contributions to it, the benefits are subject to the provisions of paragraph 6(1)(f) of the Income Tax Act. Such benefits are taxable under that provision to the extent that they exceed contributions made by the employee to the plan as set out in paragraph 1 of IT-428.

In determining whether a plan is an employee-pay-all plan or a plan under which an employer has made a contribution, it is necessary to all the relevant documentation including copies of the plan and insurance document. While we have not reviewed all such documentation, we have proceeded to provide comments on the basis of the document you enclosed which describes the benefits in broad and general terms. However, we would also add that when plans are being established for the payment of insured disability benefits, consideration is normally given in establishing a plan as to whether it is an employee-pay-all plan or a plan under which the employer has made a contribution and such information is normally provided by an employer to employees in that regard if requested.

In the case of the Secondary Period, the document you enclosed indicates the employer makes the contributions (i.e., coverage seems to be automatically provided to all employees) and you have indicated that you do not make any contributions. Accordingly, the benefits paid in respect of the Secondary Period would be required to be included in income under paragraph 6(1)(f) of the Act.

With regard to the LTD Period, page 9 of the document indicates that disability benefits paid to an employee may or may not be taxable. For information in that regard, we suggest you contact your employer.

We also suggest that you contact your employer for information concerning the extent that premiums you have paid may be eligible for deduction from insured disability benefits.

Of course, if need be, a submission may also be made to your local Tax Services office.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch