Tax Alert

Both Health and Welfare Trusts (HWTs) and Employee Life and Health Trusts (ELHTs) are trust vehicles that can be used to provide eligible members with specific benefits, namely group sickness or accident insurance plans, private health services plans and group term life insurance policies. Requirements for a HWT are outlined in administrative positions published by the Canada Revenue Agency (CRA), while legislative rules in the Income Tax Act (ITA) apply for an ELHT. The 2018 federal budget proposes to discontinue the HWT regime so that one set of rules applies to these types of arrangements.

It is proposed that transitional rules will be added to the ITA to convert HWTs to ELHTs and the CRA will no longer apply their administrative positions with respect to HWTs after 2020. HWTs that do not convert will be subject to the normal income tax rules for trusts. Additionally, the CRA's administrative positions will not apply to a HWT set up after February 27, 2018.

In 2015, BDO, along with other organizations, provided comments to the CRA with respect to their Health and Welfare Trust Folio S2-F1-C1 (the “HWT Folio”). Within this commentary, we recommended that the rules pertaining to HWTs be aligned with the rules for ELHTs. Based on the budget announcement, it appears that this alignment will occur.

Some of the key provisions pertaining to ELHTs that will affect many HWTs include:

1. Plan Surpluses: Under the HWT Folio, the existence of a “permanent surplus” may put the status as a HWT at risk. The legislation for ELHTs make a specific provision for the deductibility of employer contributions that are made at hourly wage rates pursuant to collective bargaining. This may allow the Trust to accumulate funds to provide future benefits to members, such as health benefits to retirees, or to provide continuous benefits to members in an economic downturn.
2. Plan Mergers: The HWT Folio is silent on the subject of mergers and therefore by inference mergers are not permitted. The legislation on ELHTs allows for the transfer of assets from one ELHT to another ELHT.
3. Eligible Members: The HWT Folio makes no references to retirees, dependents of the employees or members of a union that may be temporarily unemployed. Conversely, an ELHT provides benefits to a current or former employee of an employer, as well as specified dependents.
4. Calculation of Taxable Income: The HWT Folio contains comments regarding trust income subject to tax and allowable deductions. An ELHT is permitted to deduct a significantly broader range of costs including all benefits, thereby reducing the likelihood that the Trust will have taxes payable.
5. Employer Deductions: The HWT Folio indicates that employers may only deduct contributions equal to the cost of benefits plus reasonable administrative costs. An employer contributing to an ELHT may deduct the entire amount of the contributions if the contribution is pursuant to a negotiated contribution formula.

The government intends to consult with stakeholders on transitional issues, after which time they will release draft legislative proposals and transitional administrative guidance. The government has invited stakeholders to submit comments on transitional issues by June 29, 2018.

The budget announcement and request for commentary are positive responses to the industry submissions and concerns. The door is open to provide HWTs equal tax treatment to ELHTs.

However with this positive change, action needs to be taken. Submissions to the government with respect to this conversion are important, as they can affect the future of how existing HWTs are treated on conversion and ensure there are no negative tax implications when the HWTs become ELHTs.

Please contact us if you would like one of our professionals to discuss the differences between HWTs and ELHTs in more detail.

The information in this publication is current as of March 6, 2018.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.