Dear Sirs:
This is in reply to your letter of April 9, 1991 in which you enclosed correspondence between your company and the Winnipeg District Taxation Office and requested us to provide additional comments regarding a legal services plan.
The issue raised with the Winnipeg District Taxation Office relates to the tax consequences of a situation where an employer pays premiums on behalf of an employee under policies written by your company covering a legal services plan. The response to your query indicated that the related insurance premiums were deductible where the payment gave rise to a taxable benefit.
Before commenting on the matter at hand, we are mentioning that the tax consequences of a legal services plan can only be determined by reviewing a copy of the actual plan. As a copy of the plan has not been provided, the comments set out below as well as the comments provided by the District Taxation Office must be construed as being general in nature.
The Winnipeg District Taxation Office was addressing a type of arrangement where an employer pays the premiums to an insured plan and in return the insurer would be responsible for certain legal expenses incurred by the employees. In this type of situation, it is our general view that the employer may claim a deduction in respect of the premium paid by virtue of subsection 9(1) and paragraph 18(1)(a) of the Income Tax Act (the Act). However, the premium can only deducted in a fiscal period to the extent that it relates to that period pursuant to the provisions of subsection 18(9) of the Act. The part of the premium that relates to subsequent fiscal periods may, of course, be deducted in those periods. On the other hand, the employee would receive a taxable benefit under paragraph 6(1)(a) of the Act in the year the employer pays the premium to the insurer. The amount of the taxable benefit would be equal to the premium attributable to the respective employee.
We also note that the payment or reimbursement of legal expenses incurred by an employee under the plan would not give rise to any tax consequences to either the benefitting employee or the employer.
As previously indicated, the Winnipeg District Taxation office responded to your query on the basis that the legal service plan was an insured plan. We consider a plan to be an insured plan where, under an arrangement, risk is assumed by a third party in return for a premium that is payable to that party. This type of arrangement can be contrasted with a situation where the services to be provided are not contingent on a future occurrence or a situation where the risk of the uncertain event is carried by the first party.
Where a legal services plan is not an insured plan, the arrangement may be an "employee benefit plan" or an "employee trust". Both these terms are defined in subsection 248(1) of the Act. For general comments concerning the tax consequences of such arrangements, you may refer to Interpretation Bulletin IT-502 entitled "Employee Benefit Plans and Employee Trusts" which has been enclosed.
Should you have any further questions concerning your legal services plan, you may contact Ms. Lana McDougall (983-4210) of the Winnipeg District Taxation Office.
We trust that these comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
cc Wayne Douglas-Deferred Income Plans cc Ms. Lana McDougall-Winnipeg D.O.