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Tax Alert

Government releases updated rules for transitioning health and welfare trusts and existing employee life


On Nov. 27, 2020, the Department of Finance issued updated proposed legislative amendments to the Income Tax Act (ITA) to facilitate the conversion of health and welfare trusts (HWTs) to employee life and health trusts (ELHTs), along with amendments to the existing ELHT rules. The proposed changes in these amendments will positively impact many trusts as they transition from a HWT to an ELHT.


The 2018 federal budget proposed to discontinue the HWT regime so that one set of legislative rules under the ITA would apply to all of these types of arrangements.

On May 27, 2019, Finance issued proposed legislative amendments to the ITA to facilitate the conversion of HWTs to ELHTs, along with amendments to the existing ELHT rules. Finance also invited stakeholders to provide comments on the proposed legislation.

The following outlines some of the key areas that have changed with respect to the transitional rules.

Conversion of trusts

The 2018 federal budget had indicated that the Canada Revenue Agency (CRA) would not apply its administrative rules with respect to HWTs after 2020. In its Nov. 27 announcement, Finance and the CRA indicated that there would be a one-year extension to the HWT administrative rules. Therefore, trusts now have until the end of 2021 to convert.

The extension of the administrative rules allow 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.

Finance indicated that for HWTs that do not convert to an ELHT or wind-up by the end of 2021, the CRA will apply the existing tax rules that apply to inter vivos trusts. The previously issued proposed transitional rules indicated that there would be an option to become an employee benefit plan where the benefits the employees receive would be treated in the same favourable way from a tax perspective as under a HWT or an ELHT.

Since Finance's goal was to have only one set of tax rules apply to designated employee benefits, it's not surprising that the “employee benefit plan” option is no longer available. Accordingly, it's important that HWTs ensure they meet the criteria to be an ELHT to maintain their favourable tax status.

The transitional rules now clarify that the ELHT rules are extended to apply to trusts created prior to 2010.

The election to become an ELHT will be as simple as notifying the CRA in prescribed form, which will be a letter included with the T3 Trust Income Tax and Information Return. This notification is required at the time of the election, or transfer of property, and no later than the trust's first filing due date for 2021. For most trusts this would be March 31, 2022.

The transitional rules will permit HWTs to be deemed ELHTs, assuming certain conditions are met. The change to the deemed ELHT rules from the previously issued transitional rules is that Finance has now indicated that the trust will have until the end of 2022 to convert, whereas it had previously indicated that this deadline would be earlier if there was a new collective bargaining agreement in effect before the end of the deeming period.

The deemed ELHT option 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 Feb. 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 to elect to become a deemed ELHT that is 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 into the ELHT or where two or more existing qualifying trusts merge.

Amendments to improve existing ELHT rules

In the updated proposed transitional rules announced on Nov. 27, 2020, Finance proposed changes to the ELHT rules to address concerns raised by stakeholders. These changes will broaden an ELHT's ability to provide a fulsome benefit program. In essence, it allows certain benefits to be provided through an ELHT, even if they are not “designated employee benefits.” This puts ELHT provided benefit programs on equal ground with benefits employees may receive directly from an employer.

There has been an increased focus on mental health and Finance has recognized the importance of such benefits being permitted under an ELHT benefit program. Therefore, Finance has proposed expanding the list of “designated employee benefits” to include certain counselling services for mental or physical health, re-employment, or retirement.

In addition, the list of “designated employee benefits” has been expanded to include death benefits up to $10,000, whereas the previous rules only permitted group life insurance policies.

Another significant change that will impact many trusts is that the requirement of the trust to provide only “designated employee benefits” has been relaxed. Under the updated proposed transitional rules, “all or substantially all” of the total cost of benefits must be designated employee benefits. The term “substantially all” is generally understood to be 90% or more.

Therefore, trusts now have the option to provide certain benefits (such as bereavement leave or jury duty leave) as long as it doesn't represent more than 10% of its overall benefits and the employer contributions in respect of those other benefits would otherwise be deductible to the employer under the ITA if the employer had paid the benefit directly.

The updated proposed transitional rules permit an employer to deduct the contributions in computing its taxable income if it meets the conditions of a collectively bargained or similar agreement. To meet the conditions, the trust must be providing benefits negotiated under a collective bargaining agreement or under a participation agreement that are substantially the same as under the collective bargaining agreement.

Alternatively, the collectively bargained classification can be met if there is a legal requirement for each employer to participate in the trust, there are a minimum of 50 beneficiaries under the trust who are employees of the participating employers, and each employee is at arm's length with each participating employer. In addition, contributions must be determined, in whole or in part, by reference to the number of hours worked by an employee or some other measure that is specific to each employee.

The updated proposed transitional rules continue to propose a “trustees ought to have known test” with respect to non-eligible participants indicating that 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.

Key employee participation

The current ELHT rules have restrictions on key employees, including specified shareholders and highly compensated employees. The existing rules indicate that key employees cannot represent more than 25% of employee beneficiaries.

Under the updated proposed transitional rules, these restrictions will not apply if the benefits are provided to key employees who deal at arm's length with their employer under the terms of a collective bargaining agreement, or the total cost of private health services plan (PHSP) benefits paid to each key employee and family member does not exceed $2,500.

Other legislative changes

The updated draft legislation also proposes the following:

  • The current ELHT rules require at least one class of beneficiaries that represents at least 25% of all the beneficiaries of the trust who are employees of a participating employer and at least 75% of the members of the class must not be key employees of the employer. This test can be hard to meet for small employers. The new rules remove the 25% and 75% test for each participating employer but rather applies a global test for the ELHT. The ELHT must not have more than 25% of its members be key employees of the participating employers.
  • 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. Although punitive from a tax payable perspective, the ownership of prohibited property would not cause the trust to lose its status an ELHT.
  • 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.
  • The new rules extend loss carry-forward period for non-capital losses to seven years from three years. For most ELHTs, this will not have a significant impact since most trusts will not have taxes payable in any given year because all designated benefits are deductible.
  • The updated draft legislation also indicates that trustees who do not deal at arm's length with one or more participating employers must not constitute the majority of the trustees of the ELHT.
  • As announced in the original proposed transitional rules, the term “former participating employer” was added to allow coverage to continue for beneficiaries even if the employer is no longer participating in the plan.


As previously observed by BDO, 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 updates announced on Nov. 27, 2020 provide additional flexibility in the conversion process and allow ELHTs to provide a more robust benefit program that has a direct impact on the health and wellness of Canadians.

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 December 08, 2020.

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.

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