Wage Loss Replacement Plans: Canada Revenue Agency Updates Tax Withholding Requirements
Date: December 11, 2014
Effective January 1, 2015, the Canada Revenue Agency (“CRA”) is changing the tax withholding requirements for benefits paid under a “wage loss replacement plan” (“WLRP”). The CRA will now require the withholding of income tax from benefit payments under a WLRP, even if the benefits are not subject to Canada Pension Plan (“CPP”) contributions or Employment Insurance (“EI”) premiums. In this FTR Now, we discuss an employer’s obligations pursuant to these new requirements.
WHAT IS A WAGE LOSS REPLACEMENT PLAN?
A WLRP is an arrangement between an employer and its employees through which the employer provides short-term disability, long-term disability or weekly indemnity benefits. In order to be considered a WLRP, the CRA requires that all of the following criteria are met:
- The plan is a group plan – it provides coverage for more than one employee.
- The plan is funded, in whole, or in part, by the employer.
- The purpose of the plan is to indemnify employees against a loss of employment income as a result of sickness, accident or maternity.
- Benefits are paid on a periodic basis, not as a lump-sum.
- The plan follows insurance principles – funds are accumulated, normally in the hands of a trustee or in a trust account, and are calculated to be sufficient to meet anticipated claims.
Benefits under a WLRP can be paid by the employer, an insurance company, trustee, board of trustees or other independent organization.
HISTORICAL TREATMENT OF WAGE LOSS REPLACEMENT PLAN BENEFITS
WLRP benefits have always been subject to income tax and were required to be reported on a T4A or a T4 form. Historically, the CRA’s Employer’s Guide – Payroll Deductions and Remittances (“CRA Payroll Guide”) indicated that only when CPP contributions and EI premiums were required to be remitted with respect to a WLRP, would the benefits also be subject to income tax withholding at source by the payor. The historical CRA policy confirmed that tax withholding was not otherwise required on WLRP benefit payments (but applicable reporting was still required).
This position that certain WLRP benefits were exempt from tax withholding had long been a policy position taken by the CRA despite the specific provisions of the Income Tax Regulations that impose withholding obligations on persons paying remuneration (including WLRP benefits).
NEW CHANGES EFFECTIVE JANUARY 1, 2015
In the revised CRA Payroll Guide, the CRA now requires income tax to be deducted from benefits paid under a WLRP, even if CPP contributions and EI premiums are not applicable. In other words, all WLRP payments continue to be taxable (less an amount offsetting any employee contributions to the plan) and income tax should be withheld at source on all taxable WLRP payments. For greater certainty, any disability benefit plan funded wholly by employees does not meet the definition of a WLRP and benefits from such a plan continue to be non-taxable with no corresponding withholding tax obligation on the payor.
Employers are expected to comply with the revised policy starting on January 1, 2015. If you provide WLRP benefits directly to your employees, it will likely be necessary to implement changes to your payroll systems and policies in order to comply with this new policy requirement if you are not currently withholding tax from such payments. If WLRP benefits are provided to your employees through a third party, you should contact that third party service provider to ensure that tax will be withheld from WLRPs in accordance with the CRA Payroll Guide.
CPP CONTRIBUTIONS AND EI PREMIUMS RULES UNCHANGED
The CRA Payroll Guide still requires employers to deduct CPP contributions and EI premiums from WLRP benefits where the plan is employer-funded or benefits are paid by the employer to the employee (unless the employee is receiving CPP-disability benefits, in which case no CPP contributions are required). CPP contributions and EI premiums are also required to be deducted if benefits are paid by a third party when the employer funds any part of the plan, exercises control over the plan and determines eligibility for benefits, either directly or indirectly.
Employers are not required to deduct CPP contributions and EI premiums from WLRP benefit payments where the employer does not exercise control over the plan or does not determine eligibility for benefits, either directly or indirectly. For example, WLRP benefits paid through an insurer are not subject to CPP contributions or EI premiums.
For more information about withholding requirements for WLRP benefits or if you have any questions, please contact any member of Hicks Morley’s Pension, Benefits and Executive Compensation Team.
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