| 913385 | |
| R.B. Day | |
| 19(1) | (613) 957-2136 |
February 14, 1992
Dear 19(1):
Re: Taxability of Disability Income Payments - Group Plans
We are writing in reply to your letter of December 2, 1991, wherein you requested our opinion on various aspects of the taxation of disability payments in the following situations.
1. Separation of Taxable and Non-Taxable Groups
It is your understanding that the same insurance contract can provide both taxable and non-taxable benefits, provided that the two employee groups are identified separately within the insurer's records. In determining premiums for the two groups, it is your understanding that the premiums must be determined separately with no cross subsidization between groups. Most insurers, however, use combined numbers of employees and volumes of insurance to determine some provisions of their contracts such as:
a. The rate per-unit of benefit which will apply to the combine group.
b. The maximum amount of monthly payment which will be provided without evidence of good health.
c. The maximum amount of monthly disability payments which will be provided with evidence of good health.
d. The charges insurers make for their administrative and claim paying services.
Specifically, you have requested our views as to whether the insurer's practice of combining the numbers of employees covered and the amounts of insurance for the above purposes jeopardize the degree of separateness needed to maintain tax free status of the disability payments for coverage where the employee pays the premiums.
Our Comments
One or more plans may be covered by a single insurance policy. The Department considers that separate plans exist if the administration of the plans demonstrates the fact that they are separate by separate accounting for claims, premiums and administrative charges. However, separate employer records are not required. There must not be cross-subsidization between the two plans and the level of benefits, the premium rates, the qualifications for membership and other terms and conditions of each of the plans must not be dependent upon the existence of the other plan. In the absence of the above criteria, the Department considers that there is only one plan and amounts paid out of the plan would be taxable in accordance with paragraph 6(1)(f) as explained in paragraph 18 of Interpretation Bulletin IT-428 (copy attached).
In response to your specific question, it is our opinion that the insurer's practices listed in paragraphs a through d above, would indicate an interdependence between the two plans thus indicating the existence of a single plan rather than separate plans.
2. Employer Contributions - Taxable Benefits
You have been advised that some employers have adopted the practice of allowing each employee to elect whether or not they wish their disability payments to be taxable or non-taxable. In order to accommodate those employees who wish to have non-taxable disability status the employer paid premium is added as a taxable benefit to the individual employee's form T4. You wish to know if this is acceptable assuming the employer establishes the necessary separateness between the two groups with the insurer.
Our comments
For purposes of the ensuing discussion, we are assuming that your reference to taxable disability payments relates to benefits paid from an "employer pay-all" wage loss replacement plan and your reference to non-taxable benefits, relates to benefits paid out of an "employee pay-all" plan as discussed in Interpretation Bulletin IT-428.
Whether or not a particular disability plan is an employee pay-all plan would involve a finding of fact that can only be determined after reviewing the terms of the plan and any related documents. In the absence of such facts and documentation our comments will be of a general nature.
The prime factor in determining whether or not an employee pay-all plan exists is dependant upon the existence of a requirement, either in the policy of insurance or an employee's contract of employment, that places upon the employee the legal obligation to pay one-hundred percent of the required premiums. The manner in which payments are deducted, remitted to the carrier and accounted for by the employer does not, in and by itself, determine whether or not the plan is an "employee pay-all" plan. For further discussion of the factors to be considered in making such a determination, please refer to the comments in paragraph 17 of IT-428.
In response to your specific question, it is our opinion that the election by the employee and the inclusion in the employee's income of an amount that would not normally be considered a taxable benefit (paragraph 17 of IT-428), would not evidence the existence of an employee pay-all plan. As a consequence, it is our opinion that an employee pay-all plan does not exist and that all benefits paid to the recipients, regardless of their election, would be taxable in the recipient's hands.
We trust our comments will be of assistance to you.
Yours truly,
J. Szeszyckifor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch