Occasionally we see decision makers working closely with their Accountants to create tax advantages for the company by paying dividends to a non salary shareholder or contractor.
Unfortunately, Insurance Companies who handle group employee benefit plans have not caught up to their way of thinking and do not include dividends or profit sharing as part of the definition of earnings. Contractually they cannot provide any benefits for Long or Short Term Disability and will only offer a minimal amount of Life Insurance.
The concern from the insurance companies is that they cannot gauge the true loss of income, if the owner is still able to collect dividends while they are off sick or disabled. There is no true loss of income and therefore would not be eligible for disability benefits.
Independent Contractors
The changing nature of the workplace has opened up a lot of opportunities for more flexible employment arrangements. Given the chance, many people become independent contractors, selling their services to the highest bidder.
From a tax perspective, the difference between an employee and an independent contractor are payroll or government sponsored deductions for income tax, such as C.P.P. and E.I. This results in the contractor not receiving a T4 or T4A slip from the Employer, and subsequently would not be considered an employee and would not meet the contractual definition. They would not receive any disability benefits as well.
Some of the questions an insurance carrier may ask in regard to placing an employee who is a contract worker under group benefits.
Do they work exclusively for the company, and work for the plan sponsor on a regular, full time basis (i.e. at least 20 hours per week)? Is there a minimum 6 or 12 month renewable contract in place to provide coverage to the contractors, (benefits will cease when the individual's contract with the plan sponsor terminates)?
The plan sponsor is required to remit premium for independent contractors. In order for the plan sponsor to maintain non-taxable status of the benefits plan, CRA requires the plan sponsor to either fully recover premiums from the contractors on an after-tax basis OR to account for the premium as a taxable benefit to the contractor.
Should these two situations apply to your group benefits, please let us know so that we can work with you and the carrier to ensure your plan is set up correctly.
