Employers considering payouts in lieu of health and dental benefits should move quickly, as the Canada Revenue Agency (the CRA) has indicated that (subject to certain exceptions for insolvent employers) such payments will be taxable beginning in 2012.

In response to commentary included in the federal budget, the CRA recently posted a series of Qs & As clarifying its administration of the rules regarding the tax treatment of lump sum amounts received in lieu of health and dental coverage. In the past, the CRA had taken the position that lump sum amounts received by retirees or employees upon cancellation of their private health coverage could be considered “advance reimbursements of medical expenses” and, as a result, not taxable when received. Upon reconsideration, the CRA has changed its position and concluded that such amounts are in fact taxable when received.

The CRA is providing advance notice of this change in position, by allowing these lump sum payments to continue on a tax-free basis until 2012. However, where the payments are in relation to an employer’s insolvency that arose prior to 2012, the payment eventually made to any retirees or former employees would not be subject to CRA’s new position on taxability even if it is made in 2012 or later.

Further details regarding reporting and withholding requirements are included in the CRA Qs & As.