First of all, what do we mean by the term wage loss replacement plan (WLRP)?
These are plans which provide employees with income when they can’t work due to illness or injury. For payroll or HR purposes, these plans are often referred to as short or long-term disability, critical illness, weekly indemnity or accidental death and dismemberment plans. However, you won’t find any of these terms used in the Income Tax Act. In that legislation, the term used to define WLRPs is ‘sickness or accident insurance plan’.
WLRPs can either be group plans or they can be individual plans. For all practical purposes, a group plan means a situation where more than one employee is covered under the terms of the plan. This is best determined from the plan documents themselves. If the plan documents limit coverage to a specific named person, it’s clear the plan is individual. If the plan covers all employees or one or more classes of employees (i.e. managers, hourly paid staff, etc.) the plan is a group plan.
Why is it important that we know whether a WLRP is group or individual?
For group WLRP, the taxable benefit timing depends on whether the plan provides for lump-sum or periodic benefits. If a group WLRP provides for lump-sum benefits, i.e. accidental death or dismemberment, the portion of any related premiums is a taxable benefit when paid by the employer. Where a group WLRP, partly or wholly employer-funded, provides for periodic, i.e. monthly, benefits, those benefits are taxable when received by employees.
By contrast, for individual WLRPs, the CRA’s administrative position is that the employer payment of WLRP premiums is a taxable benefit, whether or not benefits under the individual WLRP are lump-sum or periodic.
This CRA position is based on comments in paragraph 20 of IT-428, Wage Loss Replacement Plans. These say that the employer payment of premiums under an individual WLRP are not a ‘contribution’ to the plan. These comments give rise to two questions. First, what distinguishes the employer payment of group WLRP premiums, which the CRA does recognize as contributions, versus the employer payment of premiums under an individual WLRP, which the CRA does not? Second, if the employer payment of individual WLRP premiums is not a ‘contribution’ to the WLRP, what precisely is the nature of the taxable benefit involved? How can employees be seen as having benefited from a WLRP to which the employer has not contributed?
For individual WLRPs, the 2 relevant parts of the Income Tax Act are:
- Paragraph 6(1)(a), which makes any employment related benefit taxable; and
- Paragraph 6(1)(f), which makes the periodic receipt of WLRP benefits taxable, where the employer has paid part or all of the related premiums.
On the face of it these two paragraphs offer conflicting treatment – 6(1)(a) is understood to mean that taxable benefits from an individual WLRP occur at the time of the employer payment of premiums under the plan while 6(1)(f) says that taxable benefits occur at the receipt of periodic benefits by employees. If both stood, this means employees would be taxed twice; once, when employers paid premiums into individual WLRPs and, a second time, when benefits were paid out of an individual WLRP to the employee concerned.
The point of the CRA’s position, that employer-paid premiums are not a ‘contribution’ to an individual WLRP, seems to be that paragraph 6(1)(f) would no longer apply and we would be left with the treatment under 6(1)(a). While I understand the motivation, as explained above, I don’t find this position very convincing.
Instead, there are well recognized rules, termed rules of construction, which apply when two or more provisions of an act are in conflict. One such rule (see Statutory Interpretation, 2nd edition, page 310) states that conflict should be resolved in favour of the more specific provision. Under this rule, since paragraph 6(1)(f) deals specifically with WLRP plan benefits, while 6(1)(a) is deals with taxable benefits in general, we should apply the provisions of 6(1)f) where these are in conflict with 6(1)(a).
Read this way, the Income Tax Act would treat individual WLRP plans in virtually the same way as group plans. Where benefits are periodic, they would be taxed when received under 6(1)(f). Where an individual WLRP provided for lump-sum benefits, the employer payment of any related premiums would be a taxable benefit under 6(1)(a). This is a very minor difference from the treatment of lump-sum benefits under group WLRPs, largely related to the part of the Act involved, paragraph 6(1)(e.1) versus 6(1)(a).
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the payroll industry. He can be reached at email@example.com, (250) 228-5280 or visit www.alanrmcewen.com for more information.