Dear Sirs:
Re: Group Term Life Insurance Policies
This is in reply to your letter dated August 27, 1991 concerning the income tax status of benefits payable under a total and permanent disability provision of a group term life insurance policy.
More specifically you requested that we confirm the Department's position that the part of a life insurance premium that relates to disability coverage is excluded from the computation of the employment benefit under subsection 6(4) of the Income Tax Act (the 'Act'). You have also requested that we confirm that the disability benefits paid to employees out of a life insurance policy would not be subject to tax.
We understand that certain group term life insurance policies provide that if an employee becomes totally or permanently disabled, benefits will be payable to the extent of the life insurance coverage, plus interest, during a period of five years.
Our Comments
In calculating a taxpayer's benefit derived from his employer's contribution to an employee's group term life insurance policy under subsection 6(4) of the Act, only the part of the premium in respect of "life insurance" is included in the computation of the benefit under subsection 6(4) of the Act. Any part of the premium that relates to insurance other than group term life insurance, such as long-term disability insurance or accident and sickness insurance, is excluded from the calculation for purposes of that subsection.
With respect to the tax consequences of the disability benefits received by the insured, we are unable to provide you with a definitive answer as we have not examined the terms and conditions of the life insurance policy. However, we are prepared to give you the following general comments which may be of some assistance.
If the life insurance policy is in part a wage loss replacement plan, as described in paragraphs 5 and 6 of Interpretation Bulletin IT-428, and if one of the purposes of taking out the policy was to provide wage loss benefits, then, even though the policy is not described as a disability income plan, those benefits would be taxable under paragraph 6(1)(f) of the Act.
However, disability benefits would be exempt from taxation under paragraph 148(1) of the Act by virtue of subparagraph 148(9)(c)(vii), if the benefits are paid pursuant to a total and permanent disability provision, contained in a life insurance policy, and that they represent advance payments of the proceeds of the life insurance policy.
Where a disability payment is paid on a periodic basis, the interest element included in these receipts is subject to tax.
Yours truly,
P. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch