For many years, employers have been allowed to operate their health and welfare programs through a trust arrangement called a health and welfare trust (HWT). These trusts are subject to administrative rules and policies set by the Canada Revenue Agency (CRA), and the rules are generally beneficial. To qualify for these rules, the benefits administered by these trust arrangements must be restricted to group sickness or accident insurance plans, private health services plans and group term life insurance policies (or any combination thereof).
The CRA allows HWTs to effectively be treated as conduits. Employers can deduct contributions to health and welfare trusts in the year the legal obligation to make the payment to the trust arises, to the extent they are reasonable and laid out to earn business or property income. Any income tax advantage that an employee would otherwise benefit from is not affected by the use of a health and welfare trust as an intermediary. For example, the portion of a benefit related to a private health services plan is deductible to the employer and a non-taxable benefit for the employee.
In 2010, the federal government released and passed legislation to provide for a new type of taxable inter-vivos trust called the Employee Life and Health Trust (ELHT). The rules applicable to ELHTs are based to a large extent on the CRA’s administrative rules regarding HWTs and are applicable to trusts established after 2009. This new type of trust initially came about as part of the restructuring of the auto industry in Canada to deal with employee and retiree health and welfare benefits.
Certain rules put in place for ELHTs do not apply under the HWT regime, some of which include: a Canadian residency requirement, loss carryover rules and non-deductibility of contributions in the year to the extent that those contributions are not required to fund current benefits. The legislation also provides special rules applicable to ELHTs whose beneficiaries include employee shareholders, highly compensated employees or related persons to ensure that the trusts do not offer unfair advantages to these individuals. With these rules, ELHTs must be maintained primarily for the benefit of employees who are not key employees (or their family members). These conditions do not exist under the HWT regime and therefore, ELHTs are likely more applicable, in general, to larger and more widely held organizations.
Although the legislative rules for ELHTs codifies much of the administrative rules and policies for HWTs, the government stated in 2010 that it did not intend to make any changes to the tax rules applicable to HWTs. The CRA has more recently confirmed in a technical letter that there is no immediate plan to withdraw the administrative regime for HWTs that is set out in their Interpretation Bulletin IT-85R2. Therefore, the administrative position outlined in their bulletin will continue to apply to trusts established after 2009 where the conditions outlined in the bulletin are satisfied. Note that the CRA has identified a number of tax issues involving the use of HWTs and had attempted to revise its administrative rules in 2005. However, due to public consultation feedback at the time, revisions were not made to IT-85R2. Note that the CRA does plan to revisit the issues again in the future, although a specific timeframe has not been set. Of particular concern to the CRA are contributions designed to pre-fund future benefits.
It should be noted that recent court cases have confirmed that any benefit from a HWT must be received by virtue of an individual’s employment and not their shareholdings. This generally means that similar benefits must be provided to employees who are not shareholders.
In summary, the CRA has indicated that trusts established after 2009 may be a HWT or an ELHT where the requirements under the respective regime are satisfied, and the “trust should maintain evidence to support its intention to which regime is intended to apply”. If you have any questions about the rules that apply to either a HWT or an ELHT, contact your BDO advisor.
Next section: TFSA Update
Download this issue of the Tax Factor
