CRA considers that employee-shareholders presumptively receive benefits under s. 15(1) rather than 6(1)(a) where they can significantly influence business policy

Health and welfare trusts are attractive to an employer as CRA permits an employer to deduct the contributions when they are made to the trust rather than when benefits are provided to the employee. (This contrasts with employee benefit plans which only provide for a deduction when the amount is paid to the employee.) The employee is taxed on the benefit provided through the trust in the same manner as if the amount had been paid directly by the employer on behalf of the employee.

CRA has rewritten its Bulletin on such trusts (IT-85R2) in a way that further obscures the statutory logic for various positions that are taken. Various unhelpful comments have been added, including that:

• Such a trust cannot provide benefit coverage to the partners of a partnership (whereas previously, CRA stated that a partnership needs two distinct trusts for its partners and employees).
• Contributions made after a trust loses its status as a health and welfare trust "will" be treated as capital contributions which are non-deductible under s. 18(1)(b) [i.e., they will be treated as capital even if they do not create "an advantage for the enduring benefit of a trade" - see British Insulated and Halsby Cables].
• "There is a general presumption that an employee-shareholder receives a benefit in the capacity of a shareholder [so that s. 15(1) applies] when the individual can significantly influence business policy."

CRA has dropped a statement that benefits that would not otherwise be taxable under s. 6(1)(a) may be treated at the trustee’s discretion as having been paid out of prior year’s funds or current year’s employer contributions to avoid the application of s. 104(13), and has maintained a statement that employer contributions which are voluntary or gratuitous are non-deductible (cf. Aluminum Co., see also Ken and Ray’s).

Neal Armstrong. Summaries of Folio S2-F1-C1: "Health and Welfare Trusts" under s. 248(1) – employee benefit plan, s. 18(1)(a) – income producing purpose, s. 6(1)(a), s. 15(1), s. 9 – nature of income.