Individual Insurance for Employee Group Plans

Transcription

1 Individual Insurance for Employee Group Plans Introduction Employee group benefit plans are sometimes used to provide selected group(s) of employees, for example an executive group, with supplemental benefits or benefits which replace standard group coverage. Although employee benefit plans may encompass a number of different types of benefits this Tax Topic discusses scenarios where individual insurance polices are grouped together to provide coverage for employees in order to form a group sickness or accident insurance plan. The tax treatment of such plans as well as the application of disability, critical illness and long term care insurance in this context will be covered. Taxation of Employee Group Plans To the Employee Generally, the value of all benefits received or enjoyed in respect of an employee s employment must be included in employment income based on paragraph 6(1)(a) of the Income Tax Act (Act). However, specific exclusions from this paragraph are provided for any benefit derived from the contributions of the taxpayer s employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan (PHSP), supplementary unemployment benefit plan, deferred profit sharing plan, an employee life and health trust ( ELHT ) or group term life insurance policy. In respect of group term life insurance, however, subsection 6(4) of the Act includes a taxable benefit for group term life insurance benefits (generally employer-paid premiums per dollar of insurance coverage across the group) in employment income. Paragraph 6(1)(e.1) includes the amount of employer contributions to a group sickness or accident insurance plan (GSAIP) in an employee s income except if the benefit would be included under paragraph 6(1)(f). This provision applies in respect of employer contributions in respect of coverage after 2012 and includes these amounts in employees income. Employer contributions in respect of critical illness and long term care insurance that are part of a group sickness or accident insurance plan would be included in an employee s income under paragraph 6(1)(e.1). CRA technical interpretation # dated February 26, 2013 confirmed that paragraph 6(1)(e.1) likely applies to employer s contributions to a group business travel accident plan and a group occupational accident insurance plan on the assumption that the benefits are not likely payable on a periodic basis and/or the benefits are payable in respect of a sickness or accident where there is no loss of employment income. Paragraph 6(1)(e.1) would not apply to employer contributions to a group sickness or accident insurance plan involving disability insurance. However, when the benefits from such plans are ultimately paid out the 1

2 benefits would be taxable to the employee under 6(1)(f). Paragraph 6(1)(f) of the Act would include in the employee s income amounts received by the taxpayer in the year that were payable to him or her on a periodic basis in respect of the loss of all or any part of the taxpayer s income from an office or employment, pursuant to (i) a sickness or accident insurance plan, (ii) a disability insurance plan, or (iii) an income maintenance plan. If the benefit received is a lump sum amount (which is not a substitution for periodic amounts) and/or if it is not in respect of loss of income from an office or employment, the amount received would not be taxable to the individual under paragraph 6(1)(f). The Supreme Court of Canada decision in Tsiaprailis v. The Queen, 2005 DTC 5119 (SCC) supports this line of argument. To the Employer To the extent that they are reasonable and laid out to earn income from business or property, contributions to a group sickness or accident insurance plan by an employer are deductible in the taxation year in which the legal obligation to make the contribution arose under section 9. A deduction may be limited in a year if expenses are seen as prepaid as set out in subsection 18(9). The deduction is restricted to premiums for the current fiscal year plus any paid-up life premium. Group sickness or accident insurance plans are excluded from the definition of an employee benefit plan (EBP) as are PHSP and other plans discussed above in relation to exclusions from subsection 6(1)(a). Contributions to an EBP are not deductible to an employer. What is a group sickness or accident insurance plan? For the above tax treatment to apply the employee group plan must qualify as a group sickness or accident insurance plan. This term is not defined in the Act, therefore, it is important to look at similar definitions first. These definitions, in addition to specific sections of the Act that impact employee group plans, and the many administrative rules that the CRA has established provide the industry guidelines. Group Insurance The term group insurance is used in the Act but not defined. Under the Ontario Insurance Act, group insurance means insurance other than creditor s group insurance and family insurance, whereby the lives or well-being, or the lives and well-being, of a number of persons are insured severally under a single contract between an insurer and an employer or other person. Plan The term plan is a very generic term and is commonly used to describe an entire set of benefits life, health, long term disability etc and also used for each benefit. There are no registration requirements to set up a plan. CRA allows a plan sponsor/employer to set up rules for a plan. For example, paragraph 8 of IT- 428 on Wage Loss Replacement Plans state:.each such plan [short term disability and long term disability] normally would be considered a separate plan for all purposes but, if desired, they may be treated as one plan, however certain conditions apply. Therefore a key question in addressing tax issues to group plans is to determine what the plan is in the context of the question. Examples of plans in the Act include group sickness and accident insurance plans, private health services plans (PHSP), disability insurance plans, and income maintenance insurance plans. Group sickness or accident insurance plan The term group sickness or accident insurance plan is used in the Act but is not defined. Some direction from CRA is contained in IT-85R2 at paragraph 2. It states that in the absence of any statutory definition, the CRA generally accepts that an employer s contribution to a sickness or accident, disability or income maintenance (or salary continuation) plan would be a contribution to a group sickness or accident insurance plan provided that the particular plan is a group plan and an insured plan. What is a group plan? To be a group plan, the plan must cover more than one individual (Rudolph Meyer v. MNR, 77 DTC 413 (TRB)). This requirement is reiterated in numerous interpretation letters and in the health and welfare trust (HWT) context in paragraph 7 of IT-85R2. It is possible to offer different benefits to different classes of employees with each class of employees constituting a group provided that the same class of employees are entitled to participate in each of the plans which are to be considered as one and any premium or other cost which is shared by the employer and the employees is shared in the same ratio for all members of the plan. The employees comprising such a class should have a common element and all employees of that employer which share that common element 2

3 should be included in that class. (Technical interpretation # , dated January 13, 1993 in the context of wage loss replacement plans.) Single employer groups cover employees who work for one company. Multi-employer groups may cover employees across an associated group of companies or cover members who work for different companies in the same industry. In the context of a multi-employer plan the CRA has confirmed (# E5 dated August 24,2012) that if it is determined that there is a single plan, the requirement of having at least two employees will be met even where the two employees are not employed by the same employer. In many cases members are part of the same union and plan and/or plan contributions are determined by collective bargaining. Usually a trust is used for multi-employer groups. What is an insured plan? Contracting with an insurance carrier to provide the promised sickness or accident benefits would satisfy this requirement. An ASO (administrative services only) contract with an insurer would not be viewed by the CRA as a contract of insurance, as the insurance company does not typically bear any risk respecting the plan. (See CRA technical interpretation # E5 dated March 4, 2011.) However, the benefits may be self-insured. In a 2002 ruling (# ) the CRA accepted a self-insured plan as a HWT provided the annual contributions to the trust, to fund the long-term disability benefits, under a self-insured plan, do not exceed the amount required to satisfy the current year benefits paid to qualifying employees. Does the possibility of return of premium benefits affect group sickness or accident insurance plan qualification? In two technical interpretations involving disability insurance (# E dated March 3, 2011 and E5 dated January 24, 2012) the CRA made the following statement: It is our view that a GSAIP (group sickness or accident insurance plan) does not include any plan or contract of insurance that provides benefits other than sickness and/or accident benefits. Therefore, where a plan or contract of insurance could provide other benefits to employees, such as ROP where there has been no adverse event, the plan or contract of insurance will not qualify as a GSAIP. It is interesting to note that the former question involved a grouping on individual disability insurance policies and the latter question involved a single contract of group disability insurance. In each case, the possibility of a benefit being payable to an employee where there has been no adverse event appears to be the CRA s concern. Question 9 at the 2012 CALU CRA Roundtable dealt with grouping individual disability insurance policies where the employer chooses to add ROP, not deduct any premium payable in respect of the ROP rider and to the extent any such benefit is payable would receive the ROP benefit. In the CRA s view, a group sickness or accident insurance plan for the purposes of paragraph 6(1)(a) of the Income Tax Act does not include a plan or contract of insurance that provides or could provide benefits other than sickness or accident benefits. Therefore, the existence of additional benefits such as ROP on policies, would disqualify the plan as a GSAIP. It does not matter whether the employer or the employee is the recipient of the ROP benefit. Structure of a Group sickness or accident insurance plan A group sickness or accident insurance plan can be a single contract between an insurer and the employer. This is traditional group insurance. Alternatively it can be established with individual contracts pursuant to a common plan. In interpretation letter # , dated December 11, 1991 CRA clarifies the phrase, pursuant to a common plan as follows: The phrase simply means that the individual contracts are bought in respect of employees covered by one plan. Each individual contract forms part of the plan of the employer. The insurance plan includes an undertaking by the employer to insure a certain class or group of employees against sickness or accident as well as the relevant contracts themselves. It was also our stated position at the time that describing such a plan or undertaking in the corporate minutes would be adequate, that no formal agreement was necessary. Normally, the individual policies are owned and paid for by the employer corporation with the benefits payable to the employees. In CRA technical interpretation # E5 dated February 21, 2008 and #2009-3

4 E5 dated March 3, 2011, the CRA confirmed that individual policies that are part of a group sickness or accident insurance plan pursuant to a common plan need not be corporately owned but may be owned by the individual employees who are part of the group. For Employees The individuals covered must be employees and be entitled to receive benefits in their capacity as employees (not as shareholders). Several interpretation letters contain the following statement: In the case where an individual is both an employee and a shareholder, it is a question of fact whether a benefit has been conferred on the individual in the capacity of a shareholder or in the capacity of an employee. However, where a benefit is granted to such an individual, the benefit will be presumed to have been conferred upon him or her by reason of being a shareholder, unless the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of comparable size. (# , dated January 9, 2001) The following further information on this issue was provided in response to a question at the 1999 Conference for Advanced Life Underwriting Tax Policy Round Table (# , question 6): In examining a particular case, a negative answer to one or more of the following queries would suggest that the benefits are provided to the recipient in his or her capacity as shareholder: (a) Is participation in the plan made available to all employees, including those who are neither a shareholder nor related to the shareholder? If not, is there a logical reason to exclude some employees? (b) Are the benefits available under the plan the same for all employees of the business, in their nature, quantum and cost-sharing ratio? (c) When all participating employees are also shareholders, is the benefit coverage similar to coverage given to non-shareholder employee groups for similar size businesses who perform similar services and have similar responsibilities? In CRA letter # E5 dated October 6, 2005, the CRA considered a question involving a PHSP for a shareholder only group. The CRA concluded that in and of itself, where employees of a corporation who are shareholders and receive benefits under a PHSP that are not available to all employees, this does not necessarily mean that the benefits are shareholder benefits. Such a determination is always a question of fact and would have to be determined with reference to, among other facts, reasonableness of the coverage provided, whether the corporation is closely held by the shareholders, the relationship between the shareholders, and the degree of corporate control they have. Further comments, in cases where the only employees are shareholder/employees, take the approach that benefits will be regarded as employment benefits if they are part of a reasonable remuneration package (# E5 dated April 28, 2005). Also, along these lines, Q 13 of the 2006 CALU Round Table (# C6 dated May 9, 2006) CRA indicated that in its view, the fact that an individual is the only employee and shareholder of the corporation does not mean a benefit is received in the capacity as a shareholder. CRA agreed that a pragmatic approach to the determination is warranted and, generally, if it is reasonable to conclude that the benefit has been provided as part of a reasonable employee remuneration package we will consider it to be received qua employee. In # I7 dated October 19, 2006 the CRA also expressed the view that the Spicy Sports decision (Spicy Sports Inc. and Steve Cousins v. The Queen, [2004] T.C.J. No. 333) was consistent with its assessing practices. In this case the Tax Court ruled that the benefits from a cost-plus PHSP provided by the company to an employee/51% shareholder were received in his capacity as a shareholder. The Court concluded, having regard to the generosity of the particular plan (providing complete coverage to the employee/shareholder for a $55,996 knee surgery performed in the US) that it would be unlikely that the company would have entered into a contract to provide the particular cost-plus PHSP with an arm s length key employee. The benefit, therefore, was held to be a non-deductible shareholder benefit. Partners in partnerships are considered to be carrying on a business as co-owner of the business and not an employee of the business. Therefore partners are not eligible for group sickness or accident insurance plans. However, employees of the partnership may be covered under such plans. 4

5 Benefits for spouses and family members At the 2011 APFF Conference (# C6 dated October 7, 2011), the CRA was asked the following question (unofficial translation): Would a plan that groups together individual insurance policies providing coverage both to employees and to their spouses or to members of the employee s household with whom the employee is connected by blood relationship, marriage or adoption still be considered as meeting the criteria for qualifying as a group sickness or accident insurance plan and, consequently, would it receive the tax treatment applied to such plans? The CRA responded that the legislative intent appears to be that a group sickness or accident insurance plan can provide benefits to an employee, the employee s married or common-law spouse or a person related to the employee who lives with or is a dependent of the employee. Disability Insurance A separate tax topic, Taxation of Disability Insurance discusses the application and taxation of disability insurance in the individual and corporate owned context. Income Loss Replacement Plans A corporation may provide, sponsor or otherwise support the provision of disability coverage to employees. In these situations, the benefits are payable directly to the employee. An Income Loss Replacement Plan (ILRP) is one name for a group sickness or accident insurance plan created by common plan. The employer groups together, by means of a board resolution, individual disability insurance policies for income replacement for its employees. The individual policies may be owned by the employer or the respective employees and are paid for by the employer with the benefits payable to the employees. Such arrangements are referred to by the CRA as wage loss replacement plans and provide coverage for employment income only. Partners and sole proprietors are not eligible for coverage under such a group plan but may be suitable for individual disability insurance. There are different ways to structure ILRPs. One method is referred to as a top-up plan whereby the ILRP would supplement any existing group plan thereby increasing the percentage of income protection for a particular class of employees. Although it is a question of fact, CRA is of the view that where there is a core plan and a top-up plan there are two separate wage loss replacement plans provided there is no cross subsidization between the plans, and the level of benefits, premium rates, qualification for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other. (Technical interpretation # E5) Another method would be for the employer to purchase separate grouped individual plans for a class of employees. Any existing group plan would be modified so that it does not cover this particular class of employees. These employees would be insured exclusively under the ILRP. This is often referred to as a carve-out plan. Determining whether the premium is deductible depends on whether individual policies grouped together qualify as a group sickness or accident insurance plan. According to paragraph 5 of IT-428, a wage loss replacement plan means a plan to which paragraph 6(1)(f) applies is any arrangement, however it is styled, between an employer and employees, or between an employer and a group or association of employees, under which provision is made for indemnification of an employee, by means of benefits payable on a periodic basis, if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident. By structuring the individual disability policies as a group plan and qualifying as a group sickness or accident insurance plan, the employer can provide employees with disability coverage and deduct the premiums as a business expense under section 9 but subject to the limitation in 18(9) for prepaid amounts. The payment of disability insurance premiums by a corporation does not give rise to an employee taxable benefit as provided under 6(1)(a) of the Act. Under 6(1)(f), employment insurance plan benefits such as disability insurance are exempt from tax if the employee paid all the premiums, and taxable if the employer paid any premiums (with a reduction for any premiums paid by the employee). Note that premiums deducted by payroll deduction are considered paid by the employee. The benefits received by the employee under an ILRP are taxable under paragraph 6(1)(f), 5

6 however, usually under these types of plans the insurer allows a higher benefit than if the employee purchased the coverage individually to compensate the employee for the tax payable. Individual disability insurance policies may offer return of premium features. As discussed above, the CRA has questioned the GSAIP status of individual disability insurance policies grouped by common plan where the individual policies contain return of premium features whether the ROP would be received by the employee or the employer. Notwithstanding the position of the CRA, in a situation where the employer owns the individual disability insurance policies forming part of a group sickness or accident insurance plan, it seems logical to argue that a return of premium feature which, if payable, would be received by the employer, should not affect the group sickness or accident insurance plan status. Previously, the CRA commented on a refund of a premium under an individual disability insurance contract as follows ( ): It is our view that, in the situation you described, the refund of premium or return of the premiums would not be required to be included in the policyholder s income unless the policyholder previously deducted such premiums in computing income. It would be open to the employer to only deduct that portion of the premium relating to the disability income insurance and not to deduct the portion relating to any return of premium benefits. If a return of premium benefit becomes payable to the employer, that portion of the benefit that relates to previously deducted premium would then be included in the employer s income. If the employer deducts all of the premiums under an ILRP, under this logic, the return of premium benefit is fully taxable to the employer. As this position would be contrary to the stated position of the CRA, it is wise to seek independent professional advice. Given that the addition of return of premium benefits is potentially problematic for group sickness or accident insurance plan status, purchasing the ROP feature should be seriously weighed. As well, to the extent that the return of premium benefit also involves a partial premium refund on death, this may be an even greater reason not to add such a rider particularly where accident or sickness characterization is important as in the ILRP context. For a more complete discussion of this issue, see the Tax Topic entitled Taxation of Disability Insurance. Critical Illness Insurance For a discussion of the nature of stand-alone critical illness insurance and it s taxation in the individually owned context refer to the Tax Topic, Taxation of Stand-Alone Critical Illness Insurance that is Individually Owned. Other applications of corporate owned critical illness insurance is covered in the Tax Topic, Taxation of Stand-Alone Critical Illness in the Corporate Context and the accounting treatment of corporate owned critical illness insurance is dealt with in the Tax Topic, Accounting for corporate owned life insurance and critical illness insurance. Grouped Individual Critical Illness Insurance Policies forming a Group Sickness or Accident Insurance Plan Common Plan Critical illness insurance provides a lump sum benefit upon surviving a specified period after diagnosis of a pre-determined serious, life-altering illness or medical event. Do grouped individual stand-alone critical illness policies qualify as group sickness or accident plans? Provided critical illness insurance is indeed accident or sickness insurance, the body of CRA commentary and administrative practice relating to establishing a group sickness or accident insurance plan by common plan would be equally applicable. Where it is clear that critical illness insurance is accident or sickness insurance and is part of a group sickness or accident insurance plan there would be an income inclusion (paragraph 6(1)(e.1)) to the employee for premiums paid by the employer. (Prior to 2013 and the introduction of paragraph 6(1)(e.1), there was no income inclusion to the employee for premiums paid by the employer for federal income tax purposes in the group sickness or accident insurance plan context.) The employer could deduct premiums as a business expense under section 9 but subject to the limitation in subsection 18(9) for prepaid amounts. There would be no income inclusion to the employee under 6(1)(f) after diagnosis of a critical illness since the benefit is a lump-sum benefit which was never intended to be in substitution for periodic payments. In early commentary in the grouping context the CRA argued that critical illness insurance may not qualify as accident or sickness insurance if there is no requirement that a specific loss or expense be incurred. At the 1999 CALU AGM (interpretation # ) question 5 dealt with critical illness group insurance plans seeking 6

7 to confirm the tax treatment. The focus of its comments was on the uncertainty around whether or not a particular critical illness policy could be considered an accident or sickness policy. CRA s comments were as follows: It is our basic understanding that critical illness benefits may be paid on the happening of a specific medical event, such as a heart attack, and that once that event occurs the payments may not necessarily be conditional on the insured having incurred a specific loss or expense. Therefore, until we have had the opportunity to examine the details of a particular critical illness plan we are unable to comment on the income tax treatment of any premiums paid or benefits received in respect of such coverage. It may be that some critical illness insurance plans will be considered as sickness or accident plans while others will not. This concept of loss or expense goes with the general view that paragraph 6(1)(f) relates to benefits that provide for wage loss replacement in the event of the sickness, maternity or accident of an employee (see paragraph 5 of Interpretation Bulletin IT-428 Wage Loss Replacement Plans dated April 30, 1979). The CRA appears to have been arguing that if the critical illness insurance policy is not put in place to indemnify a loss or expense it may not be accident or sickness insurance. This was considered in the context of group insurance providing a critical illness benefit with no return of premium benefits whatsoever in B.C. In CRA letter # E5 dated February 2, 2005 the CRA was unable to determine the status of such a policy (as sickness insurance) and referred the taxpayer to the B.C. superintendent of insurance. It should be noted that the definition of sickness insurance in the BC Insurance Act Regulation (as it then read), unlike in other provinces, did encompass this concept of insurance against loss from illness or disability of a person. [A broader definition of sickness or accident insurance is now incorporated into the B.C. insurance legislative framework.] However, this line of argument does not appear to be supported based on the Insurance Act definitions in other provinces, the current B.C. definition, nor the definitions in the Federal Insurance Companies Act. As well, this line of argument is not raised in CRA comments relating to the characterization of critical illness insurance in the non-group context (e.g. # , CALU AGM Q 1, dated May 6, 2003), nor, in the CRA comments discussed below, all dealing with grouped individual critical illness insurance plans. The main argument in group scenarios appears to hinge on whether there are any potential life insurance benefits. In interpretation letters # dated April 3, 2003, # dated December 9, 2003 and # C6, dated October 8, 2004 (Question 11 of the APFF CRA Roundtable) the CRA has confirmed that grouped individual CI policies that contain benefits only in the event of critical illness, that is, having no return of premium benefits, would be viewed as group sickness and accident insurance. In the plain vanilla context of CI insurance where there are no potential life insurance benefits, the CRA appears to confirm the existing practice as is common in the individual disability insurance realm. Where it is possible to structure the critical illness insurance policy with no potential life benefits (for example, where return of premium on death is offered as a rider, by not adding this rider) there may be greater comfort regarding group sickness or accident insurance plan treatment. Is it wise to add return of premium benefits that don t arise on death in the group accident or sickness insurance plan context? While this may not, in and of itself give rise to a characterization issue (see CRA technical interpretation # E5 dated December 24, 2004), it may still give rise to tax issues. As discussed above, in the disability insurance context, the CRA has taken the position that addition of ROP benefits would disqualify the plan as a GSAIP. Long Term Care Insurance A separate tax topic, Taxation of Long Term Care Insurance discusses the application and taxation of long term care (LTC) insurance in the individual and corporate owned contexts. 7

8 Grouped Individual LTC Insurance Policies forming a Group Sickness or Accident Insurance Plan Common Plan LTC insurance provides benefits in the event an individual is assessed as being and continuing to be functionally dependent, as measured by not being able to perform a specified number of activities of daily living or having a cognitive impairment. A return of premium on death feature may be offered as a rider under a LTC policy. No other return of premium benefits are generally available on LTC policies. The same comments relating to the inclusion of return of premium on death benefits in the critical illness insurance or disability insurance context would apply equally to LTC insurance. Again, it is prudent to consider this commentary in determining whether return of premium on death should be added as a rider. Where a long term care policy provides only long term care benefits (i.e. no return of premium on death) it is considered to be a sickness and accident plan having regard to the definitions under the provincial Insurance Acts. As accident or sickness insurance, it can be grouped under a common plan to form a group sickness or accident insurance plan. Again, 6(1)(e.1) would include the premium in the income of the employee. The premium would be deductible to the employer (under section 9 and subject to subsection 18(9)) as an employee benefit cost. Subsection 6(1)(f) would not include LTC benefits in the employee's income. This provision requires a periodic payment "in respect of the loss of all or any part of... income from an office or employment..." LTC provides periodic payments but the payment is not for loss of income from employment. It is possible that a person who has lost the ability to perform activities of daily living, is still able to work or if they can't work, the benefit provided would not relate to loss of income from employment. On this basis 6(1)(f) does not apply and benefits received would be nontaxable. The CRA confirmed this position in respect of grouped LTC insurance in technical interpretation # C6 dated October 8, 2004 Q 11 APFF Conference. Use of Health and Welfare Trust (HWT) or Employee Life and Health Trust (ELHT) Individual accident and sickness policies may also be used by a HWT or ELHT (as funding vehicles for promised benefits under a group sickness or accident insurance plan ). In general, HWTs or ELHTs allow for the employer to deduct reasonable contributions to the trust and for employees to be taxed in respect of the benefit provided through the trust in the same manner as if the amount had been paid directly by the employer. Regarding HWT s IT 85R2 provides that an employee health and welfare benefit program that is administered by an employer through a trust arrangement is restricted to (a) a group sickness or accident insurance plan (the elements of which are discussed above), (b) a private health services plan, (c) a group term life insurance policy, or (d) any combination of (a) to (c). If an arrangement does not qualify as a HWT, it would be treated for tax purposes as an employee benefit plan (no deduction for employer for contributions but rather at time of payment of benefits, with income inclusion to employee at time of benefit payments) or an employee trust where employer contributions and income of the trust are allocated to the employee (i.e. included in income; employer deducts contributions to the trust.) Further discussion of HWTs is provided in a separate Tax Topic Health and Welfare Trusts. Regarding ELHT s, Bill C-47 which received Royal Assent on December 15, 2010 provided rules contained mainly in section of the Act. These rules, to a large extent, codify but have not replaced existing administrative practice regarding HWTs. As well there are some differences in application between HWTs and ELHTs. In general, the ELHT rules were put in place for large employer situations. Transferring an Individual Policy from a Group Plan to an Employee Where an employee leaves the company, the corporation may wish to transfer ownership in an individual policy that is owned by the employer and is part of a group plan to the insured person under the policy. There are no policyholder tax consequences to the corporation for a transfer of ownership of an accident or sickness insurance policy, however, there still may be an employee benefit conferred on the transfer pursuant to paragraph 6(1)(a) of the Act. The value of any employee benefit would relate to the value of the policy received. This is a question of fact. In various other contexts, the CRA has provided some guidance as to the factors that should be considered in determining the value of insurance policies generally. See the discussion of this issue in the critical illness 8

9 insurance context, which cites these other insurance contexts, in the Tax Topic entitled Stand Alone Critical Illness Insurance in the Corporate Context.) There are CRA comments specific to the context of transferring disability insurance policies out of a group setting. These may be more relevant than the general comments provided in various other contexts to not only transfers of disability insurance but also in respect of critical illness or LTC insurance in the grouped context. The CRA (# , dated July 12, 1994) provided commentary where a disability policy was being transferred to an employee after the termination of the individual s employment with the result of the discontinuation of coverage under the employer s plan. The policy was part of grouped individual disability income insurance policies. In this case, the CRA confirmed that any future benefits received under the policy would not be included in income under 6(1)(f) provided that such benefits were not conditional on coverage under the policy during the period of participation in the employer s plan. However, the former employee would have to include in income at the time of transfer any benefit arising from the transfer of ownership of the policy to him/her. The CRA stated, such a benefit would arise where the level of benefits or amount of premium payable for the policy is favourable in relation to that which the individual could purchase separately. Typically under an ILRP, the premiums and benefits are set at higher amounts than personally owned policies as a method of compensating for the tax payable on the benefits received by the employee. Where upon a transfer of ownership of the policy, the employee retains those higher amounts; there may be an argument that those amounts are favourable inviting a taxable employee benefit assessment on transfer. Similarly, an earlier interpretation letter # dated February 8, 1993 dealt with the tax implications of converting an employer-paid wage loss replacement plan to an employee-paid plan by way of transferring ownership of the policies to the employee. CRA stated the employees would be required to include in income for that year the value of any policy so assigned to the extent that the employer is not reimbursed by the employee. However, if at the time of assignment the policies required no further premiums, CRA would view the group plan to be still in existence and any benefits received by the employee would still be considered to be received pursuant to a plan to which the employer made contributions. As a result, the benefits remain taxable despite the fact that the policy had been assigned to the employee. IT-428 paragraph 21 also confirms this latter tax treatment. It is interesting to note that if the individual policies that are part of a group sickness or accident insurance plan are owned by the respective employees (per the discussion above involving CRA technical interpretation # E5 dated February 21, 2008), the need to transfer the policies when the employee ceases to be part of the group is gone. One may question whether any issue remains relating to the conferral of a benefit where there is simply a change in use of the policy from providing employee benefits under a group sickness or accident insurance plan to personal insurance. In CRA technical interpretation # E5 dated March 3, 2011, this latter question was addressed. The CRA stated: Where a GSAI plan does not provide for any employer coverage after the termination of employment and the employee simply assumes the responsibility for payment of the premiums at the time, the individual insurance contract of the retired employee would cease to form part of the GSAI plan. Generally, in a standard contract of sickness or accident insurance for purposes of 6(1)(a) of the Act, we would not expect a benefit to the employee to result from the withdrawal of the insurance contract from the GSAI plan. However, there may be situations where a benefit could arise. For example, if the arrangement is structured such that the employer pays all premiums before the employee s retirement such that there is pre-funding of premiums for post-retirement periods when the contract of insurance would no longer form part of the GSAI plan, the employee would be in receipt of a taxable benefit at the time of retirement. Since premiums for critical illness and long term care insurance forming a GSAI plan are now included in the employee s income, the potential employee benefit issue on transfer out of a GSAI plan to an employee may not be as problematic. Although the above considerations may still need to be examined. Sales Tax In the context of grouped individual accident and sickness insurance plans, the employer should also consider the applicability of provincial sales taxes in relation to premiums paid. Generally, in Ontario and Quebec, the 9

10 existence of a master policy determines whether the premiums are group insurance and are subject to provincial sales tax. Section 1(1) of the Ontario Retail Sales Tax Act defines "group insurance" as "a policy of insurance that covers, under a master policy, the participants of a specified group or other persons." Section 2.1(8)(c) provides that: Despite this section, no tax is payable on premiums for...contracts of insurance (other than contracts of group insurance or trip cancellation insurance) for the life, health or physical well-being of insured individuals. A "master policy" is not specifically defined. Therefore, the legal meaning and industry usages are important determinants. Where individual disability, critical illness or long term care policies are grouped together to form a group sickness or accident insurance plan, the insurer underwrites for each individual and issues and administers individual insurance plans but has no master contract with the employer. There would be no provincial sales tax reporting requirements for the insurer. However, the Board resolution that grouped the policies along with their common ownership may qualify the common plan to be a master policy. The employer would have both ownership rights and control of the policies. Where the policies that are part of a group sickness or accident insurance plan are owned by the respective employees, the terms of the group plan would govern the entitlement to benefits but the employer would not own the policies. In either circumstance, an employer should consider if it has a sales tax obligation. The same consideration should be given where the employer contributes to a health and welfare trust and the trust holds a group of such policies. Conclusion Individual policies that are grouped together to form a group sickness and accident insurance plan can be an effective method to provide benefits for selected groups of employees that supplement or replace standard group benefits. Where a group sickness or accident insurance plan exists, contributions to the plan are deductible by the employer provided they are reasonable in the circumstances. Employees may or may not receive a taxable benefit for benefits derived from contributions and they may or may not receive an inclusion in income for benefits ultimately received, depending on the nature of those benefits. Disability, critical illness and long term care insurance may be considered for such structures. As many of the issues relating to grouping individual accident or sickness insurance policies by common plan are interpretive and questions of fact in each particular circumstance, it is wise for employers to seek the advice of their own professional tax advisors. Last updated: May 2015 Tax, Retirement & Estate Planning Services at Manulife writes various publications on an ongoing basis. This team of accountants, lawyers and insurance professionals provides specialized information about legal issues, accounting and life insurance and their link to complex tax and estate planning solutions. These publications are distributed on the understanding that Manulife is not engaged in rendering legal, accounting or other professional advice. If legal or other expert assistance is required, the service of a competent professional should be sought. This information is for Advisor use only. It is not intended for clients. This document is protected by copyright. Reproduction is prohibited without Manulife's written permission. Manulife, the Block Design, the Four Cubes Design, and strong reliable trustworthy forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. 10