Tax-Free Benefits Do Exist; Group Insurance Plans Can Be Structured So Employees Don't Get Dinged
Imagine if you could provide your employees with a benefit that is completely tax-free. Impossible? Actually, there are a few such benefits, but one of the most valuable is a group insurance plan. Under the Income Tax Act, group sickness or accident insurance (GSAI) plan coverage can be provided and paid for by an employer as a tax-free benefit for employees.
Interestingly, the term "GSAI plan" is not actually defined in the tax act. Rather, the concept is generally described by the Canada Revenue Agency (CRA) "as an arrangement between an employer and employees under which provision is made for indemnification of an employee if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident."
As a result of this broad definition, the CRA's position is that it is possible for individual policies owned by employees to be combined to form a common plan and be considered a GSAI plan, provided each employee is eligible to receive the same benefits under the plan and the plan has the same ratio of employee and employer-paid premiums. This means that the coverage can either be formal group coverage, where the group policy is held by the employer, or, alternatively, consist of employee-owned insurance policies, where the employer agrees to pay the premiums on the insurance policies for each employee for as long as that employee is working for the corporation.
Some insurance policies come with a "return of premiums" feature, which means that all premiums paid into the policy are returned to the policyholder if there has been no claim during the duration of the policy. In March 2011, the CRA was asked whether such a feature on a GSAI plan would taint the tax-free status of premiums paid by an employer under such a plan. The CRA replied that a GSAI plan "does not include any plan or contract of insurance that provides benefits other than sickness or accident insurance benefits. Thus, where a contract of insurance could provide other benefits to employees, such as a return of premiums... the contract of insurance will not qualify to be part of a GSAI plan."
Employers should be mindful of the CRA's clarification when establishing a GSAI plan for their employees, because if the employer pays the premiums on behalf of an employee for insurance that is not part of that plan, the premium payments will be considered by the CRA to be a taxable employment benefit to the employees.