Tax Alert – Government Releases Health And Welfare Transitional Rules

June 05, 2019


Health and welfare trusts (HWTs) and employee life and health trusts (ELHTs) are vehicles that can be used to provide eligible members with specific benefits, namely private health services plans (PHSPs), group sickness or accident insurance plans, and group term life insurance policies.

The 2018 federal budget proposed to discontinue the HWT regime so that the legislative rules in the Income Tax Act (ITA) for ELHTs would apply to all of these types of arrangements.

At the time of the budget announcement, the government invited stakeholders to comment on transitional matters in advance of the issuance of the transitional rules. BDO Canada LLP (“BDO”), as an industry leader, along with other stakeholders, submitted suggestions on key areas with respect to the transition from HWTs to ELHTs.

On May 27, 2019 the Department of Finance Canada (Finance) issued proposed legislative amendments to the ITA to facilitate the conversion of HWTs to ELHTs along with amendments pertaining to the operation of existing ELHT rules. Finance responded to the concerns raised by BDO and other stakeholders. As a result, the proposed legislation provides HWTs with a transition process that is simple and without negative tax consequences. Additionally, Finance granted relief from concerns raised for multi-employer HWTs established through a collective bargaining process. Finance has again invited stakeholders to provide comments on the proposed legislation by July 31, 2019.

The chart below summarizes the key recommendations made by BDO after the 2018 federal budget announcement and the responses from Finance that form part of this recently proposed legislation.

BDO Recommendation Finance Response
Conversion process should be simple
  • Retroactive application for trusts established after February 27, 2018
  • Simplified election process
  • Extended timing to December 31, 2022 for collectively bargained plans to meet the ELHT conditions
  • Permitting Trust-to-Trust transfers if certain conditions are met, allowing a tax-free rollover of assets
Definition of eligible beneficiaries should be extended
  • Added the term “former participating employer” to allow coverage to continue for trust beneficiaries even if the employer is no longer participating in the plan
Deductibility of contributions to a Multi-Employer Plan (MEP) should be amended
  • Removed restrictions on the number of contributing employers and percentage of employee beneficiaries employed by a single employer allowing a broader array of MEPs to meet the conditions
  • Now allows for deductibility to the employer of “contributions made pursuant to a collective bargaining agreement or participation agreement in respect of a collective bargaining agreement”
Address independent contractors that participate through a collective or participation agreement
  • Introduced a “trustees ought to have known test” with respect to non-eligible participants indicating if the Trustees could not reasonably have known that benefits were provided to non-eligible beneficiaries who are members of a union, such as contractors, the ELHT will not be considered to have breached its terms. This, however, does not explicitly allow for the participation of sub-contractors that are participating pursuant to a collective or participating agreement.

Conversion of Trusts

Finance has addressed many of the concerns surrounding conversion of the existing HWTs. The proposed legislation allows HWTs time to update their existing trust agreement to align with the requirements for ELHTs, without triggering income tax implications or having to create a new trust.

The election to continue as an ELHT will be as simple as notifying CRA in a prescribed form, which will be a letter included with the T3 Trust Income Tax and Information Return.

The transitional rules will permit HWTs to be deemed to be ELHTs until December 31, 2022, assuming certain conditions are met. This will give trusts time to amend the terms of their trust agreements and benefit arrangements to align with ELHT rules. The conditions to be deemed an ELHT are:

  • the trust was established before February 27, 2018;
  • contributions are made pursuant to a collective bargaining agreement;
  • all or substantially all of the benefits are designated employee benefits, which are benefits from a group sickness or accident insurance plan, a group life insurance policy or a PHSP; and
  • the trust files a letter included in the T3 Trust Income Tax and Information Return at a date subsequent to 2018.

The proposed transitional rules will allow for a tax-free rollover of assets when a new ELHT is created, or where two or more existing qualifying trusts merge.

Trusts that do not convert to an ELHT by the end of 2020 and do not meet the conditions to be deemed ELHTs as described above will be considered ‘employee benefit plans’. Accordingly, designated employee benefits provided to an employee by these plans will continue to be taxed in the same manner as if the benefits were provided through a HWT or an ELHT.

Amendments to Improve ELHT Rules

In addition to providing information on the conversion process, Finance also proposed changes to the ITA to improve the operation of the rules applicable to ELHTs.

Under the existing rules, the contributing employers who are not part of a MEP would be restricted on the amount of contributions they can deduct. The previous ELHT rules had the following specific requirements to be considered a MEP:

  • at no time in the year should more than 95% of the employee beneficiaries be employed by a single employer or related group of employers;
  • there must be 15 unrelated contributing employers or 10% of the employee beneficiaries should be employed by more than one unrelated employer;

These conditions have been removed. This change to the MEP conditions is especially important for HWTs where contributions are made to the trust pursuant to rates negotiated through collective bargaining since the ELHT rules are, in fact, better aligned with the environment in which these trusts operate than the existing HWT administrative positions.

In the unionized environment, there are certain sectors where a local union may have few contributing employers if most of the business in the sector is undertaken by a few large employers. In addition, depending on the geographic area in which a union operates, there may not be many employers in that area. Therefore, in many union sectors, the requirement for 15 unrelated contributing employers may have been problematic.

The amendments addressed these concerns and broadened the criteria to be able to deduct a payment to the plan pursuant to a collective agreement. Under the new rules, the following criterial must be met to obtain such a deduction:

  • the employer contributes to the trust under a collective bargaining or a participation agreement in respect of the collective bargaining agreement, and in accordance with a negotiated contribution formula that does not provide for any variation in contributions determined by reference to the financial experience of the trust; and
  • contributions are made by each employer by reference to the number of hours worked by the employee or some other measure that is specific to each employee.

Although this is a step in the right direction, the changes do not address all potential issues with MEPs. BDO intends to bring to the attention of Finance that the definition of “employee” should be expanded to include independent contractors for which contributions are received by the trust pursuant to a collective or other participation agreement.

Other legislative changes

The announcement also proposes the following changes:

  • The current ELHT tax rules restricting an ELHT from making a loan to, or investing in, a participating employer or a person with whom a participating employer does not deal at arm’s length are repealed and replaced with a new tax applicable to prohibited property held by the trust.
  • The current rules require the ELHT to be a resident of Canada and the new rules will allow for non-resident trusts if certain conditions are met.

Future Considerations

Finance also indicated that they are continuing to consider the following matters:

  • The types of benefits that currently qualify as “designated employee benefits” under an ELHT and whether other benefits should be considered.
  • Expanding the scope of the PHSP component of designated employee benefits
  • The use of ELHTs to provide benefits to “key employees”.
  • The rules related to carry back and forward on non-capital losses under ELHTs.

The first two points will be of particular interest to trusts that are providing Employee Assistance Program (EAP) or other health and wellness benefits that may not currently fit into the ELHT requirements for “other” benefits offered through a PHSP to be medical in nature. There is an increased focus on mental health, as well as wellness programs including preventative healthcare; therefore, health funds desire to provide these types of benefits to eligible members through their trust funds. Accordingly, we have suggested that the ELHT rules be expanded to include EAP and other health and wellness benefits.


The government’s proposal to align the HWT and ELHT rules is a positive development and the transitional rules should allow for a transition that is not administratively onerous and should not result in negative tax consequences.

The government’s consideration of the benefits that can be covered under an ELHT will be important as trusts evaluate their benefit programs under the ELHT rules.

Please contact us if you would like one of our professionals to discuss how these transitional rules will impact your trust.

The information in this publication is current as of June 5, 2019.

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.