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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether a Health and Welfare Trust is described in IT-85R2.
Position: No - deficiencies were mentioned.
Reasons: The requirements in IT-85R2 that the funds of the trust cannot revert to the employer and the trust funds cannot be used for any purpose other than providing health and welfare benefits have not been met. Also it is not known if employer and trustee of HWT are related or acting independently.
September 13, 2001
Toronto East TSO HEADQUARTERS
Small/Med Business Audit Shaun Harkin, CMA
Verification & Enforcement (613) 957-9229
Attention: Mike Bolton
Trust and Pension Section
2001-008306
XXXXXXXXXX Health and Welfare Trust ("HWT")
This is in reply to your memorandum dated May 4, 2001 in which you asked for our comments on the acceptability of the above named trust agreement, which accompanied your letter, as a HWT. We note that the XXXXXXXXXX HWT is currently in existence.
As stated in paragraph 6 of Interpretation Bulletin IT-85R2, to qualify for treatment as a health and welfare trust, (1) the funds of the trust cannot revert to the employer, (2) the trust funds cannot be used for any purpose other than providing health and welfare benefits (3) the employer's contributions to the fund must not exceed the amount required to provide the benefits, (4) the payments by the employer cannot be made on a voluntary or gratuitous basis and must be enforceable by the trustees should the employer decide not to make the payments, and (5) the trustee must act independently of the employer.
Our comments on the above requirements are set out below:
1 and 2. To comply with requirements (1) and (2) that the funds of a HWT cannot revert to the employer or be used for any other purpose other than providing health and welfare benefits for which the contributions are made, the Canada Customs and Revenue Agency ("CCRA") has taken the position that none of the trust property may be used by the employer or a person related to the employer. In this respect, the trust agreement must contain a clause restricting the type of investments it can make.
With respect to the above comments, the CCRA has suggested (9126387(E), and 910933(E)) that the following wording could be incorporated into a trust agreement:
"No property of the trust, whether such property is acquired from the capital or income of the trust, shall be invested in the shares, notes, bonds, debentures or similar indebtedness issued by:
(a) the company,
(b) a person who does not deal at arm's length with the company, or
(c) a person who is a member of a group of persons not dealing at arm's length with the company,
nor shall any such property of the trust be invested in property which is or will be used directly or indirectly, solely or otherwise, by the company or any person who does not deal at arm's length with the company or who is a member of a group of persons not dealing at arm's length with the company. For the purposes of this agreement, a group of persons is deemed not to be dealing at arm's length with the company if the persons in the group are related (within the meaning of the Income Tax Act) and collectively, they control the company."
The XXXXXXXXXX HWT does not contain such a clause. In fact XXXXXXXXXX states in part, "XXXXXXXXXX". These statements are contrary to requirements (1) and (2) above. For example, the trust funds may be invested in a vacation property that may be used for personal purposes.
We also have concerns about Article XXXXXXXXXX of the Trust Agreement. Normally, the termination clause of a HWT agreement specifies that upon termination of the trust, any excess funds, after all liabilities have been settled, go to a charitable organization. Article XXXXXXXXXX allows for the Trust Fund to transfer to a currently unnamed Final Repository, upon termination of the trust. This leaves the possibility that the trust funds may revert back to XXXXXXXXXX or a person related to XXXXXXXXXX.
3. It is our position that employer contributions to a HWT trust which exceed the amount necessary to provide current year coverage will be denied pursuant to subsection 18(9) of the Income Tax Act (the "Act"). However, it is our view that the fact that excessive contributions have been made will generally not, in and of itself, result in the disqualification of a trust as a HWT, if the contributions are based on an actuarial determination of the amounts necessary to fund future health and welfare benefits.
4. The trust agreement does contain terms relating to the enforceability of XXXXXXXXXX contributions.
5. The trustee(s) must act independently of XXXXXXXXXX. The trust agreement should contain a clause that ensures that the trustee(s) will be independent from XXXXXXXXXX. Article XXXXXXXXXX does not exclude the possibility of XXXXXXXXXX or a person related to XXXXXXXXXX from becoming trustee(s). Also, as discussed in our telephone conversation of August 20, 2001 (Bolton/Harkin), you have not excluded the possibility that XXXXXXXXXX and the trustee, XXXXXXXXXX, are related.
Other Considerations
A) The determination of whether a benefit is received by an employee-shareholder in his/her capacity as an employee or as a shareholder involves a finding of fact. Our general presumption is that an employee-shareholder receives a benefit by virtue of his or her shareholdings in those situations where the shareholder, or shareholders, can significantly influence business policy, except where the individual is able to establish otherwise. Exceptions to this presumption would be a situation where the benefit is available to all employees of the corporation or a situation where the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.
In examining a particular case, a negative answer to one or more of the following queries would suggest that the benefits are provided to the recipient in his or her capacity as a shareholder:
(a) Is participation in the plan made available to all employees, including those who are neither a shareholder nor related to a shareholder? If not, is there a logical reason to exclude some employees?
(b) Are the benefits available under the plan the same for all employees of the business, in their nature, quantum and cost-sharing ratio?
(c) When all participating employees are also shareholders, is the benefit coverage similar to coverage given to non-shareholder employee groups for similar size businesses who perform similar services and have similar responsibilities?
If the benefit is received by an employee-shareholder in his/her capacity as a shareholder the benefit in question would be taxed in the shareholder's hands pursuant to subsection 15(1) of the Act and the exceptions under subparagraph 6(1)(a)(i) of the Act would not apply. Where subsection 15(1) of the Act applies, the payment of the premiums in question by the corporation would not be deductible in computing the corporation's income since the payment is not incurred by the corporation for the purpose of gaining or producing income from a business or property as required under the exception in paragraph 18(1)(a) of the Act.
B) In response to your concerns that the XXXXXXXXXX HWT may not be an insurance policy because XXXXXXXXXX is "not in the business of insurance", note that paragraph 7 of IT-428 states that it is not necessary that there be a contract of insurance with an insurance company with respect to group sickness or accident insurance plans. If, however, insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. It is our opinion that XXXXXXXXXX HWT meets this criterion.
Conclusion
The above comments, and in particular points 1, 2 and 5, indicate that the XXXXXXXXXX HWT should not be regarded as a HWT described in IT-85R2.
We trust the above comments are of assistance.
Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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