2014-0551831E5 INCOME MAINTENANCE INSURANCE PLAN

Principal Issues: Whether insurance benefits received under a proposed loss of employment insurance policy would be taxable under paragraph 6(1)(f) of the Income Tax Act (Act)?

Position: No.

Reasons: See response

Author: Waugh, Phyllis
Section: 6(1)(f)

XXXXXXXXXX

2014-055183
P. Waugh

January 26, 2015

Dear XXXXXXXXXX:

Re: Income tax treatment of insurance benefits received under a proposed loss of employment insurance policy

We are writing in response to your letter dated October 20, 2014, concerning whether insurance benefits received under a proposed loss of employment insurance policy would be taxable under the Income Tax Act (Act).

In the situation you described, an individual purchases an insurance product (Policy) to insure against the risk of involuntary job loss. The Policy provides pre-determined periodic payments to an insured individual (Insured Individual) on the involuntary loss of his or her employment. The Policy is sold in the open market without any connection with an Insured Individual’s employer. The Insured Individual pays 100% of the premium.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

An amount received on a periodic basis from an income maintenance insurance plan in respect of the loss of income from an office or employment to which an employer has contributed is included in an individual’s income under paragraph 6(1)(f) of the Act. The term “income maintenance insurance plan” is not defined in the Act. Where the legislation does not define a phrase, we generally rely on case law and the ordinary meaning (e.g., dictionary definition).

The Concise Canadian Oxford Dictionary defines “maintenance” as “the action or process of maintaining or being maintained” and “maintain” as “cause to continue; keep up, preserve (a state of affairs, an activity, etc.).” Black’s Law Dictionary defines “maintenance” as “the continuation of something…” The Dictionary of Canadian Law defines “maintain” as “[To provide]… financial or other material support…” The website dictionary.reference.com defines “income maintenance” as “a government program that provides financial assistance to needy people so that they can maintain a certain income level.” (footnote 1)

Based on the ordinary meaning, it is the CRA’s view that for purposes of paragraph 6(1)(f) of the Act, an income maintenance insurance plan is an insurance plan that provides income to an individual so he or she can maintain a certain level of income. Based on the information provided, it appears the Policy would be considered an income maintenance insurance plan since it is an insurance plan that provides income to an Insured Individual so he or she can maintain a level of income upon an involuntary termination from employment.

It is the CRA’s longstanding position that benefits paid out of a wage loss replacement plan (e.g., income maintenance plan) that is an employee-pay-all plan, are not taxable. As noted in paragraph 16 of Interpretation Bulletin IT-428, Wage Loss Replacement Plans, “An employee-pay-all plan is a plan the entire premium cost of which is paid by one or more employees.” Since the Insured Individual pays 100% of the Policy premium, the Policy would be considered an employee-pay-all plan and any amount received from the Policy would not be taxable.

We trust these comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. “income maintenance” Dictionary.com Unabridged. Random House, Inc. 2015. Web. 22 Jan. 2015

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