| 19(1) | File No. 5-8000 |
| A. Humenuk | |
| (613) 957-2135 |
July 12, 1989
19(1)
Re: Wage Loss Replacement Plans
We are responding to your letter dated April 27, 1989, concerning the tax implications of a non-group sickness and accident insurance plan. You are considering both the situation where the single employee covered by the plan has no ownership in the employer- corporation and the situation where the employee is the majority shareholder of the employer-corporation. In either case coverage under the insurance plan would be in respect of a loss of income from office or employment and any payments received would be payable to the employee pursuant to a sickness or accident insurance plan.
You have asked three questions: Will the payment of the insurance premium by the employer be a tax deductible expense to the employer? Will the payment of the premium by the employer be a taxable benefit to the employee insured under the plan? In the event of an accident or sickness of the employee, will the periodic payments received under the plan be included in the employee's income?
The answer to these questions involves a finding of fact and as such we are unable to give you a definitive reply which will cover all situations. However, we would like to offer the following general comments.
Where a majority shareholder is also an employee , it is a question of fact as to whether a particular benefit is received by virtue of his employment or by virtue of his shareholdings. If the benefit is received in his capacity as an employee, our response will be the same as that for an employee who does not hold shares in the employer's corporation.
The payment of the premium by the employer would be deductible in computing the corporation's business income to the extent that the premium is reasonable and incurred to earned income from that business. The premium paid on behalf of a shareholder in his capacity as a shareholder, however, would not be considered to be laid out to earn income from the business.
Since the payment of an insurance premium by the employer on behalf of an employee is a benefit received by virtue of employment and since the employer's contribution to a non-group sickness and accident insurance plan does not fall within the exceptions described in paragraph 6(1)(a) of the Act, it is our view that the payment of the premium by the employer is a taxable benefit to the employee. Alternatively, if the premium is paid by the corporation by virtue of the individual's shareholdings in the company, the benefit from the payment of the premiums is included in the shareholder's income by virtue of subsection 15(1) of the Act.
In respect of your third question, there is a risk that an employee who is required to include a benefit in income in respect of the employer's payment of the premium, may also be required to include in income nay insurance benefits received under the plan. It is not necessary that a sickness or accident insurance plan be a group plan in order that the benefits received from such a plan be included in an employee's income. If the employer has made a contribution to the plan, paragraph 6(1)(f) of the Act determines the amount which must be included in income. However, as stated in paragraph 20 of IT-428, the Department takes the position that the payment of premiums to a non-group plan by the employer on behalf of the employee, is not a "contribution" by the employer. Consequently, the Department would not require the employee to include in income any portion of the insurance benefits from such a non-group plan.
We trust our comments will be of assistance to you.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch