Principal Issues: [TaxInterpretations translation] Are the short term and long term salary insurance plans that are part of a group disability insurance plan both fully funded by the employees when the employer is obliged to pay 50% of the total contributions to the group disability insurance plan (which also includes life, accidental death and dismemberment and medical insurance) but allocates only the contributions paid by the employees to the two salary insurance plans? The employer allocates its portion of the contributions to the other components of the plan.
Position: No
Reasons: Whether a salary insurance plan is a wholly employee-funded plan can be determined not by examining how contributions are allocated but by ensuring that the legal obligation to pay rests entirely on the shoulders of employees, which is not the case
XXXXXXXXXX 2004-008089
N. Deslandes, CGA
November 29, 2004
Dear Sir,
Subject: Application of paragraph 6(1)(f) of the Income Tax Act
This is in response to your email of June 10, 2004 in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
You presented us with a scenario involving a group disability insurance plan where the cost of contributions is allocated as follows:
- Life, accidental death and dismemberment insurance: $8/month
- Short-term disability insurance: $25/month
- Long-term disability insurance: $15/month
- Medical care insurance: $60/month
The collective agreement states, without further clarification, that the employer's contribution for all employees is 50% of the cost of the group disability plan, with the other 50% of the contributions being paid by the employees. The employee contributions are allocated by the employer to long term disability insurance ($15), short term disability insurance ($25), life insurance ($8) and a portion of medical insurance ($6).
Finally, you stated that one of the employees has waived medical coverage because he is covered under his spouse's plan. For this employee, the total contribution to the group disability plan is $48. The employee's share ($24) will primarily cover the long-term disability premium ($15), while the balance ($9) will partially cover the short-term disability premium. The employer proposes to add the difference between the total premium payable for short-term disability insurance and the employee's portion of the premium as salary on the T4 and Relevé 1 (Quebec) forms.
Your Questions:
1. Can the plan described be considered a fully employee-funded salary insurance plan despite the situation of the employee who has opted out of the health insurance coverage?
2. Would our answer be the same:
a. if the collective agreement provided, in addition to the sharing of contributions between the employer and the employees, that in the event that the employee's portion of the contribution was not sufficient to cover the total contributions for both short and long term disability insurance, that the employer's portion of the contribution would be added as a taxable benefit (salary) on the T4 and Relevé 1 forms (Quebec)?
b. if there was no collective agreement or employment contract but the group insurance proposal indicated that the employer must pay 50% of the contributions which, if allocated for all or part of any of the wage loss benefits, will be added as a taxable benefit (wages) on the T4 and Relevé 1 (Quebec) forms?
c. regarding question 2(b), what if the group insurance application stated that the employer "pays approximately 50%" of the premium rather than "pays 50%" of the premium?
Our Comments:
The situation you have indicated in your request appears to relate to an actual situation involving a specific taxpayer or taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance tax ruling. We can, however, offer the following general comments which we hope you will find useful. These comments may not, however, apply to your particular situation in certain circumstances.
Before answering each of your questions, we would like to reiterate some of the more general positions on wage loss replacement plans set out in the interpretations we faxed to you on June 24.
When a plan, such as the one you presented to us, includes several components, the overall contribution paid must be divided between each of the insurance components, as you have indicated. Then, the employer's contribution to each of these components must be determined. Only after completing these first two steps can we determine the tax treatment of the various components of the plan.
In order for benefits from a salary insurance plan to be non-taxable, the plan must be fully funded by the employees. As we have stated in the past, whether a wage loss replacement plan is fully funded by the employees is a question of fact that can only be resolved after examining the terms of the plan, the employment contract and all other relevant documents. A salary insurance plan will be considered to be a fully employee-funded plan where the employees have a legal obligation to pay the full amount of the contributions to the plan. Generally, this legal obligation exists under the plan or the employment contract.
While we have not reviewed the plan provisions, the employment contract or the collective agreement, our understanding of the plan as presented in the situation is that the employer's contribution for all employees is 50% of the cost of the group disability plan while the other 50% of the contributions are borne by the employees. The fact that an employer arbitrarily allocates the contributions collected from employees so that they constitute 100% of the contributions paid to the long-term and short-term disability insurance plans does not make the disability insurance plan a fully employee-funded plan. In the situation presented, it appears to us that the legal obligation to pay premiums is shared equally between the employer and the employees. Consequently, the benefits received by an employee from the long- and short-term disability plan are taxable in computing the employee's income pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act") to the extent that they exceed the contributions made by the employee to the plan.
The questions you asked us seemed to start from the premise that both short and long term salary insurance plans are fully funded by employees. As you can see, we do not agree with that position. However, we have added the following comments which we believe are relevant to the questions you have raised.
Question 1:
Paragraph 18 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans, states that if, under a wage loss replacement plan, the employer makes contributions for some employees, but not all, the plan will not be considered to be an employee-pay-all plan even for those employees who must make all contributions themselves. The Canada Revenue Agency ("CRA") takes the position that all payments under a wage-loss replacement plan to which the employer has contributed are subject to the provisions of paragraph 6(1)(f), even though the employer has contributed for only some employees.
However, where a wholly employee-funded plan actually exists and under that plan the employer makes contributions on behalf of an employee or employees to the plan and treats them as salary or wages, the result is the same as if the contributions had been deducted from the employee's salary or wages. In other words, the plan retains its fully employee-funded status provided there is a provision to that effect at the time of payment. It should be noted, however, that CRA does not accept that the tax status of a plan can change retroactively. For example, an employer cannot change the tax status of a plan by adding back to the employee's income at the end of the year the employer's contributions to a wage loss replacement plan that are normally deemed to be non-taxable benefits.
In the situation presented, since it is not a fully employee-funded plan for the reasons discussed above, the special status of an employee will not affect the tax treatment of benefits received from the plan by employees.
Question 2:
The 3 scenarios you have presented to us have some variations in terms of the employer's obligations. However, there is no indication that employees are legally obliged to pay the full amount of the plan's contributions. Therefore, in the three cases described, the plan would not be fully funded by the employees. Therefore, if benefits were paid from such a plan, they would be taxable pursuant to paragraph 6(1)(f).
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
We hope you find these comments of assistance.
Best regards,
Ghislaine Landry, CGA
Manager
Individuals, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate