Recent Changes to WLRP Benefits and Contributions

Anytime source deduction or reporting requirements change, it often takes a couple of years for these to filter out and be properly understood. This may be the case with recent changes to source deduction and reporting requirements for Wage Loss Replacement Plans.

What is a WLRP itself has not changed. This is best described in the CRA’s interpretation bulletin, IT-428. Even though this bulletin was last updated in 1995, it’s still the standard reference for describing what WLRPs are.

Before describing the recent changes, it’s important to make a couple of distinctions. First, we have to distinguish between employer contributions to a WLRP, versus the actual payment of benefits to employees (or former employees). Source deduction and reporting requirements only apply where employers have made contributions to a WLRP. In some cases, it’s possible for an employer to pay into a WLRP, without such being regard as ‘employer contributions’, but that’s beyond the scope of this article (see IT-428).

It used to be the case, that employer contributions under the terms of a WLRP were not taxable benefits. Instead, when employers have contributed under a plan’s terms, benefits paid out of the plan are income taxable (we won’t get into the calculations required).

As of the 2013 tax year, there is a change that relates to lump-sum WLRP benefits. Now, when employers contribute to WLRPs, those contributions that relate to lump-sum benefits are taxable, at the time of contribution. This means that if a plan provides for a mix of periodic and lump-sum benefits, employer contributions now have to be segregated on the same basis, in order to apply the correct source deduction and reporting.

Note, prior to this change, the CRA considered any lump-sum WLRP benefits received, where an employer had contributed to the plan, as taxable income. Now, that for lump-sum benefits, the point of taxation has shifted from receipts to contributions, employer-funded lump-sum WLRP benefits are presumably non-taxable when received. This hasn’t yet been clearly stated by the CRA.

So far we have distinguished between employer contributions vs. benefits received. By contributions we mean employer premiums paid to 3rd party insurance companies, which in turn make the actual payment of benefits to employees. The term ‘contribution’ also includes employer payments to a 3rd party trust, when WLRP benefits are self-insured. Such self-insured WLRPs may involve ‘Administrative Services Only’, often by these same insurance companies.

For income tax purposes, there is very little difference between WLRPs that are ‘insured’ vs. those that are ‘self-insured’ or ASO. Employer contributions to lump-sum WLRP benefits are income taxable at the time of contribution and employer funded periodic benefits are income taxable at the time of receipt. For this purpose, it does not matter whether the WLRP is insured vs. self-insured or ASO.

However, there is one difference. Traditionally, the CRA has not required 3rd party insurance companies to withhold and remit income tax owing on taxable WLRP benefits when these were provided under a contract of insurance. By contrast the CRA does expect income tax to be withheld and remitted when WLRP benefits are self-insured by the employer. For this purpose it does not matter whether self-insured benefits are provided directly by the employer or through a 3rd party on an ASO basis.

The other recent change relates to CPP contributions on self-insured WLRP benefits, whether paid by the employer or by a 3rd party ASO. Following its loss at the Federal Court of Appeal, in the TTC decision, the federal government amended the CPP legislation to ensure that CPP contributions applied to self-insured WLRP benefits. This change was made in 2011, with retroactive effect back to the 2006 tax year. Despite this retroactive effect, it’s not clear whether the CRA expects employers affected by this change to amend T4s back to 2006.

Note, insured WLRP benefits, provided on a periodic basis, are not affected by these changes. Such benefits are not CPP pensionable, nor are they EI insurable. Similarly, there is no change to the EI status of self-insured WLRP benefits provided on a periodic basis – they have always been EI insurable earnings, no matter whether paid directly by the employer or through an ASO agent.

This table summarizes the source deduction and reporting treatment of WLRPs described above:

Type of WLRP

Income Tax

CPP Source Deductions

EI Source Deductions

Year-End Reporting

Taxable Income

Source Deductions

Pensionable Income

Source Deductions

Insurable Earnings

Source Deductions

Employee pay-all

No

No

No

No

No

No

None

Employer contributions to lump-sum provisions

Yes

Yes

Yes

Yes

Yes

Yes

T4 Boxes 14,16, 18, 22, 24 and 26

Lump-sum benefits received

No

No

No

No

No

No

None

Insured, periodic benefits

Yes

No

No

No

No

No

T4A,
Code 107

Self-insured, periodic benefits

Yes

Yes

Yes

Yes

Yes

Yes

T4 Boxes 14,16, 18, 22, 24 and 26

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posted to Canadian HR Reporter on June 25, 2013

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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