Principal Issues: [TaxInterpretations translation] 1. Are the premiums paid by the employer for individual critical illness and long-term care insurance policies for certain categories of senior employees deductible for the employer?
2. Does the payment of these premiums by the employer provide a taxable benefit to employees pursuant to paragraph 6(1)(a)?
3. Is the lump sum payment received by the employees in respect of the critical illness policy taxable pursuant to paragraph 6(1)(f)?
4. Are the periodic payments received by employees in respect of the long-term care insurance policy taxable pursuant to paragraph 6(1)(f)?
Position: 1. Premiums are deductible from the employer's income.
2. There is no taxable benefit to employees if the critical illness and long-term care policies are part of a group sickness or accident insurance plan. That determination is a question of fact.
3. The lump sum payment received by employees for critical illness insurance would not be taxable by virtue of paragraph 6(1)(f).
4. Periodic payments received by employees for long-term care insurance would not be taxable by virtue of paragraph 6(1)(f).
Reasons: 1. The expenditure is incurred or made by the taxpayer for the purpose of earning income from a business.
2. Individual policies may, in some cases, form part of a group sickness or accident insurance plan and, if so, the premiums paid by the employer are included in the exceptions to subparagraph 6(1)(a)(i).
3. The lump sum received in respect of critical illness insurance does not come within paragraph 6(1)(f) since this type of insurance does not provide income to the beneficiary in the form of periodic benefits.
4. Periodic payments received under the long-term care policy are not taxable by virtue of paragraph 6(1)(f) if they are received in satisfaction of certain conditions stipulated in the insurance contract as compensation for home or institutional care and not for loss of income from an office or employment.
FINANCIAL SERVICES ROUND TABLE
2004 APFF CONFERENCE
Question 11
Long-term care and critical illness
Increasingly, corporations are offering certain categories of senior executives (non-shareholders) individual critical illness policies and individual long-term care policies (without a return of premium rider at maturity) for which these categories of employees are the beneficiaries. These insurance policies are not life insurance. They are in addition to the regular group insurance coverage offered to all employees, such as life insurance, long-term disability, drug and dental insurance.
Are the premiums paid by the employer for this category of senior employees for critical illness and long-term care coverage deductible to the employer?
Does the fact that the employer pays such premiums for the employees constitute a taxable benefit for the employees pursuant to paragraph 6(1)(a)?
Is the lump sum payment received by employees in respect of the critical illness policy taxable pursuant to paragraph 6(1)(f)?
Are periodic payments received by employees in respect of the long-term care insurance policy taxable pursuant to paragraph 6(1)(f)?
CRA Response
Critical illness insurance policy
Premiums paid by the employer would be deductible if they are incurred by the employer for the purpose of earning income from business or property and are not disbursed on capital account. Where an employer pays insurance premiums for some of its employees, who are the beneficiaries of the insurance, we are of the view that the employer incurs expenses for the purpose of earning income from its business. Consequently, premiums paid by the employer for individual critical illness insurance policies for certain categories of employees may be deductible from the employer's income.
Where the employer pays insurance premiums for its employees, a taxable benefit to the employees may result pursuant to paragraph 6(1)(a) unless one of the exceptions in that paragraph applies. Subparagraph 6(1)(a)(i) provides an exception for benefits that result from contributions to a group sickness or accident insurance plan. Critical illness insurance is generally equivalent to sickness or accident insurance. Even though critical illness insurance is under an individual insurance policy, this does not automatically mean that the insurance policy is not part of a group plan. It is our view that a group insurance plan refers to a plan under which a number of employees are insured either under a single policy between the insurer and an employer or under individual policies that are purchased as part of the plan set up by the employer for the group of insured employees. Whether individual insurance policies are purchased as part of a group sickness or accident insurance plan is a question of fact that cannot be decided without examining a specific situation. Assuming that the individual critical illness policies are part of such a group plan, there would be no taxable benefit to the management employees pursuant to the exception in subparagraph 6(1)(a)(i).
Where the executive employee receives the lump sum payment for this insurance, we are of the view that this amount is not taxable by virtue of paragraph 6(1)(f) since, inter alia, this type of insurance does not provide the beneficiary with income in the form of periodic payments.
Long-term care insurance policy
The premiums paid by the employer for this insurance would also be deductible from income for the same reasons as for critical illness insurance.
Based on our understanding of this type of insurance, we find that there are generally two mechanisms for paying benefits for such insurance. The first mechanism consists of a reimbursement of expenses incurred by the beneficiary and the other consists of a fixed periodic payment regardless of the expenses actually incurred by the insurance beneficiary. As stated for critical illness insurance, where the employer pays insurance premiums for its employees, a taxable benefit to the employees may result pursuant to paragraph 6(1)(a) unless one of the exceptions in that paragraph applies. For long-term care insurance, two exceptions under subparagraph 6(1)(a)(i) may be applicable. If the insurance reimburses the beneficiary for expenses, this insurance could, in some cases, be for a private health insurance plan. If the insurance provides for fixed periodic payments, this insurance could be for sickness or accident insurance and form part of a group sickness or accident insurance plan for the same reasons, as stated, for critical illness insurance. If the insurance falls within one of the exceptions in subparagraph 6(1)(a)(i), there would be no taxable benefit to the employees.
Periodic payments received by employees under such long-term care insurance are not taxable by virtue of paragraph 6(1)(f) if they are received as a result of the fulfillment of certain conditions stipulated in the insurance contract as compensation for care received at home or in an institution and not for the loss of income from an office or employment.
Lucie Vermette
957-2092
October 8, 2004
2004-009079