Principal Issues: Taxability of a wage loss replacement plan where a portion of the premiums are paid by the employer.
Position: Where an employer pays all or a portion of the cost of the premiums for such a plan, the amount is not included in the employee's income as a benefit, pursuant to a specific exception in the Act. Should the employee receive periodic payments under the plan because of a disability, they are taxable as employment income in the year received. However, the employee can deduct all of the contributions he or she made to the plan in that year and in previous tax years if they have not already been deducted from benefits previously received.
Reasons: Paragraph 6(1)(f) of the Act and IT-428
2009-034357 XXXXXXXXXX Renee Sigouin (613) 957-2128 November 25, 2009
Dear XXXXXXXXXX :
Re: Wage Loss Replacement Plans
This is in response to your letter of September 14, 2009 concerning the taxability of disability benefits under a wage loss replacement plan ("WLRP") where a portion of the plan premiums is paid by an employer.
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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
The income tax treatment of WLRP's is set out in Interpretation Bulletin IT-428, "Wage Loss Replacement Plans" ("IT-428"). In general terms, the taxation of disability benefits, as well as the tax treatment of premiums paid by an employer to a WLRP is dependant upon whether the plan is an "employee-pay-all" plan. An "employee-pay-all" plan is a WLRP under which employees are required to pay all of the premiums payable under the plan. Under such plans, periodic benefits received by an employee from the plan because of a disability are not subject to income tax. However, the employee can not reduce their employment income by the premiums paid to the plan carrier. Where the employer pays the employees' premiums directly to the plan carrier without withholding them from gross salary, then the premiums would be included in the employees' income as a taxable benefit.
If the plan is not an "employee-pay-all" plan, such as where the employer pays all or a portion of the cost of premiums under the WLRP, the employer contributions to the plan should not be included in the employee's income in accordance with paragraph 6(1)(a) of the Act. In the event that the employee receives periodic benefits from the plan because of a disability, the payments will generally be taxable pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act"). However, the employee can deduct all the contributions that he or she made to the plan in that year and in previous years if they had not already been deducted from benefits previously received. The gross amount of benefits received by an employee under a WLRP should be reported in box 28 of a T4A slip. The amount the employee reports on line 104 of his or her tax return is the gross amount of the benefit less the contributions. The calculation of the amount of benefits to be reported is illustrated in paragraph 25 of IT-428.
We trust that these comments have been of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch