26 April 2005 External T.I. 2005-0117081E5 - Construction Industry Multi-Employer HWT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What is the taxable status of a construction industry multi-employer health and welfare trust that proposes amending its trust agreement to permit a distribution of excess contributions to employees?

Position: Question of fact, but generally where excess contributions are paid to employees, the trust will not qualify as a health and welfare trust. Payments to employees would be taxable employment income in the year received. Since the trust would not be considered a health and welfare trust, contributions by employers would be considered capital contributions to the trust and therefore, would not be deductible in computing business income of the employers. The trust itself would be taxed the same as any other trust. We would not, however, generally be concerned with a situation in which the excess contributions are paid to the employees in the same taxation in which the employer deducts the contributions.

Reasons: As noted in paragraph 6 of IT-85R2, to qualify for treatment as a health and welfare trust the funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. To avoid adverse tax consequences when surpluses occur, otherwise qualifying health and welfare trusts generally have a contribution holiday for employers or increase benefits coverage for employees.

Randy Hewlett
XXXXXXXXXX 613-941-7239
2005-011708
April 26, 2005

Dear XXXXXXXXXX:

Re: Construction Industry Multi-Employer Health And Welfare Trust

We are writing in response to your letter of February 14, 2005, wherein asked for our opinion on the taxable status of a construction industry multi-employer health and welfare trust that proposes amending its trust agreement to permit a distribution of excess contributions to employees.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The Canada Revenue Agency's position on the taxable status of health and welfare trusts is discussed in Interpretation Bulletin, IT-85R2 - Health and Welfare Trusts for Employees. As noted in paragraph 6 of IT-85R2, "to qualify for treatment as a health and welfare trust the funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made". Consequently, it is our general view that where excess contributions are paid to employees, the trust will not qualify as a health and welfare trust (see, for example, our ruling 2003-0022603E). We would not, however, generally be concerned with a situation in which the excess contributions are paid to the employees in the same taxation in which the employer deducts the contributions (this was the case in the our ruling, 990434, that was referred to in your letter).

You also inquired about the taxable status of the trust and the employer's contributions if the trust agreement were amended to provide for a payment of the excess contributions to employees. As noted in your letter, the payments to employees would be taxable employment income in the year received. Since the trust would not be considered a health and welfare trust, contributions by employers would be considered capital contributions to the trust and therefore, would not be deductible in computing business income of the employers. The trust itself would be taxed the same as any other trust. To avoid such adverse tax consequences, qualifying health and welfare trusts generally have a contribution holiday for employers or increase benefits coverage for employees.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch