Principal Issues: Whether ruling 2004-009868 contradicts the CRA's position in paragraph 21 of IT-428 concerning the purification of a wage loss replacement plan?
Position: No.
Reasons: Where the terms of a taxable wage loss replacement plan are changed to provide that all future contributions to the plan will be 100% funded by employees, and it can be shown that all previous employer contributions to the plan are exhausted (e.g. where the plan is in a deficit position), we will not only consider all payments from liabilities that occur after the purification to be paid under an employee-pay-all plan, but also all payments for liabilities that arose before the purification. In such a case, we do not consider liabilities that arose before the purification to be "provided for in the old plan".
2005-012579
July 14, 2005
Randy Hewlett
Question 11
Conversion of LTD plan from Taxable to Non-Taxable Status
RID 2004-0098681R3 appears to describe circumstances in which a trusteed, uninsured, long-term disability income replacement plan funded by both public sector employer(s) and employees is replaced by a plan funded solely by the employees. Because of the past employer funding, benefits under the existing plan were taxable under paragraph 6(1)(f) of the Act. That paragraph requires the employee to include in computing income amounts received under a (ii) disability insurance plan, less the employee's own contributions. Employer funding of the existing plan was provided by an initial lump sum payment only. Subsequently, benefits paid and expenses charged have exceeded the total of that lump sum, all employee contributions, and all investment income. As a result, the existing plan has been (and may currently be) "in deficit". The Ruling appears to conclude that any benefits payable with respect to current liabilities under the existing plan will be deemed to be entirely employee-funded. As a result, such benefits will effectively become non-taxable.
This appears to contradict the CRA's published position in the last sentence of paragraph 21 of IT-428: "Where an employee is receiving benefits under a taxable plan at a time when it is converted to a new employee-pay-all plan, the benefits he continues to receive subsequent to the date of conversion, to the extent that they were provided for in the old plan, will remain of an income nature because they continue to flow from the old taxable plan."
Question
Is the Ruling intended to override IT-428, and if not, can the CRA explain the apparent conflict?
Agency's Response
We cannot comment on the specifics of the Ruling. We noted your observation that the ruling appears to conflict with the comments in paragraph 21 of IT-428. The bulletin is dated in 1979 and it certainly could be written more clearly to reflect our current views on how a taxable wage loss replacement plan can be "purified" and become a non-taxable plan. Generally, where the terms of a taxable wage loss replacement plan are changed to provide that all future contributions to the plan will be 100% funded by employees, and it can be shown that all previous employer contributions to the plan are exhausted (e.g. where the plan is in a deficit position), we will not only consider all payments from liabilities that occur after the purification to be paid under an employee-pay-all plan, but also all payments for liabilities that arose before the purification. In such a case, we do not consider liabilities that arose before the purification to be "provided for in the old plan".