FCA to Consider Deductibility of Contributions to a Sickness and Accident Insurance Plan for Single Employee

Are contributions to a particular sickness and accident insurance plan for a single employee deductible for tax purposes?  The Federal Court of Appeal will decide that issue when it hears the taxpayer’s appeal in Labow v. R. in Ottawa on October 4th.

The taxpayer, Dr. Labow, is a surgeon and professor of surgery. With the help of an Ottawa lawyer, he set up a trust to provide employee sickness and accident insurance and to pay medical, dental and vision care expenses. Dr. Labow had three employees in his office in the relevant taxation years, one of whom was his wife. However, the only beneficiary under the trust was Mrs. Labow. The trustee was initially a Cayman Islands trust company; however, in 1997 Dr. Labow’s lawyer exercised a right to substitute a Bermuda trust company.

The CRA disallowed the deductions claimed by Dr. Labow for his contributions to the trust.

Decision Below

The Tax Court of Canada dismissed Dr. Labow's appeal on the basis that Dr. Labow had not made the contributions for the purpose of gaining or producing income from his medical practice. In addition, the Court concluded that the income of the trust attributed to Dr. Labow and that the CRA was entitled to reassess Dr. Labow beyond the normal period.

Potential Significance

For Small Business Owners

The Federal Court of Appeal’s decision should be of interest to small business owners since it will discuss the boundaries of tax deductions for compensation and benefits provided to non-arm’s length employees.

For Tax Professionals

In addition to the deductibility of the contributions, two other issues in this case should be of interest to tax professionals:

  • In his returns, Dr. Labow included the contributions to the trust with salary expenses. Since Dr. Labow had been advised that the CRA would likely challenge the deductibility of the contributions, the Tax Court held that reporting the contributions with as salary expenses was a misrepresentation attributable to neglect, carelessness or wilful default, which permitted the CRA to assess beyond the normal period.
  • The Tax Court concluded that the income of the trust attributed to (and thus was included in) Dr. Labow’s income because the trust funds could revert to him.

Case Information

Labow v. R.

FCA Docket Number: A-348-10

Hearing Date:  October 4, 2011

compensation and benefits CRA Federal Court of Appeal non-arm's length employees Sickness and Accident Insurance Plan Tax Court of Canada tax deduction trust

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