2003 Ruling 2001-0098963 - HEALTH & WELFARE TRUST

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the proposed trust arrangement will qualify as a health and welfare trust within the requirements of IT-85R2.

Position: Yes.

Reasons:		The health and welfare trust will be structured so that it will comply with the requirements outlined in IT-85R2.  

XXXXXXXXXX 2001-009896

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your request for an advance income tax ruling on behalf of XXXXXXXXXX and your revised advance income tax ruling request received on XXXXXXXXXX. Additional information was provided in your XXXXXXXXXX letter, in your XXXXXXXXXX facsimile and in various telephone conversations with you and your representatives.

We understand that, to the best of your knowledge and that of all officers and directors of the XXXXXXXXXX, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this application for an advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "Arm's length" has the meaning assigned by subsection 251(1) of the Act;

(b) XXXXXXXXXX;

(c) "IT-85R2" is Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees;

(d) "H&WT" is a health and welfare trust as described in IT-85R2;

(e) "Public corporation" has the meaning assigned by subsection 89(1) of the Act;

(f) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(g) The "Company" is XXXXXXXXXX;

(h) The "DOT" is the proposed XXXXXXXXXX;

(i) The "Plan" is the long-term disability plan of the Company;

(j) The "Fund" is the property held in the Trust;

(k) The "Trust" is the trust that will be established to administer the Plan; and

(l) The "Subsidiaries" are XXXXXXXXXX.

Facts

1. The Company is a taxable Canadian corporation and a public corporation. XXXXXXXXXX. The Company carries on a XXXXXXXXXX business. The Company's head office is located in XXXXXXXXXX. The Company's tax account number is XXXXXXXXXX, files its federal income tax returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

2. The Company has established a long-term disability plan for the provision of long-term disability benefits for employees (the "Beneficiaries") of the Company and the Subsidiaries. The Plan is a group sickness or accident insurance plan as described in paragraph 2 of IT-85R2.

Proposed Transaction

3. The Company wishes to establish the Trust for the purpose of administering the Plan and holding funds associated with liabilities incurred under the Plan. The Trust will be established as a H&WT, as described in IT-85R2.

4. The terms of the Trust are described in the DOT and include the following provisions:

(a) Benefits provided through the Trust are restricted to employer-paid group long-term disability benefits;

(b) XXXXXXXXXX trustees (a "Trustee"/the "Trustees") will be appointed from specific classes of individuals or organizations. XXXXXXXXXX (the "Independent Trustee"). Decisions are made by majority vote. In the case of a tie, the Independent Trustee has the deciding vote. In this way, while management and the employees have representation on the board of Trustees, neither management nor employees control the board;

(c) The DOT in no way limits the rights of beneficiaries against the Trustees or the Fund. However, in light of the potential for disputes against the Trustees, the DOT does provide that the Company shall indemnify the Trustees from loss or damage with respect to any claims brought against the Trustees;

(d) Contributions to the Trust shall vest in the Trust and no part of the Fund shall revert to the Company or any other participating employer whether during the existence of the Trust or following its termination. On the wind-up of the Trust, the Fund must be distributed on a pro-rata basis, as determined by the actuary, to Beneficiaries currently entitled to benefit payments under the plan. If there are no Beneficiaries entitled to benefits under the Plan, the Fund will be distributed to a charitable organization;

(e) The Company has the power to amend the Trust. However, no amendment is permitted that would require the Trust to provide benefits other than those permitted of a H&WT as set out in IT-85R2;

(f) The Trustees shall ensure that no Property (as defined in the DOT) of the Fund may be invested in any Securities (as defined in the DOT) of the Company, a person who does not deal at arm's length with the Company, or a person who is a member of a group of persons not dealing at arm's length with the Company. Furthermore, no Property of the Fund may be invested in property that is, or will be, used by the Company or any such persons not dealing at arm's length with the Company;

(g) The Trustees are responsible for monitoring the accuracy and sufficiency of any contributions to the Fund. The Trustees are also responsible for monitoring the adequacy of the Fund to meet and discharge any payments and liabilities under the Plan. Therefore, the Trustees have the right and the obligation to enforce payment by the Company of, as a minimum, the required contributions to the Fund;

(h) Section XXXXXXXXXX of the DOT deals with the contributions that the Company will make to the Trust. Subsection XXXXXXXXXX deals with the "Required Contributions" and subsection XXXXXXXXXX deals with "Additional Contributions";

(i) The Company must adopt a funding policy with respect to the cost of claims incurred in any year. The Company is required to make contributions sufficient to meet this funding policy. The "Required Contributions" to the Trust shall not be less than the actual payments due and payable out of the Trust in respect of liabilities associated with claims incurred in the current or a prior year plus the expenses of the Trust. A "claim" is incurred when an individual becomes totally and permanently disabled. As a result of a claim, an individual becomes entitled, under the terms of the Plan, to disability payments from the Trust;

The DOT provides that the Trustees may, on the advice of an actuary, permit the Company to make "Additional Contributions" to the Trust provided such contributions do not result in an "actuarial surplus" in the Trust. An "actuarial surplus" generally arises, with respect to any year, where the market value of the fund exceeds the actuarially determined cost of all future benefit payments under the plan with respect to claims incurred in or prior to that year. The Company may, on the advice of an actuary, direct that any "actuarial surplus" be used to satisfy the Company's, or a Subsidiaries', contributions under the Plan. The purpose of this provision is to confirm, for trust law purposes, that the Company and/or a Subsidiary may take contribution holidays. The Company may also direct that an "actuarial surplus" be used to provide new or improved health and welfare trust type benefits or extend the class of participating employees.

Purpose of the Proposed Transactions

The Company has a long-term disability plan that provides benefits to employees who become permanently and totally disabled. The Company wishes to establish a Trust to administer the Plan and to hold the funds and property required to meet the liabilities incurred under the Plan.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. Provided that:

(i) The benefits administered by the Trust are restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy, or any combination thereof;

(ii) No portion of the Trust Fund can revert to the Company or its Subsidiaries, including the time at which the Trust is wound up;

(iii) The Funds and Property of the Trust are used to provide the health and welfare benefits for which the Required Contributions are made;

(iv) The Required Contributions are not voluntary or gratuitous;

(v) The Required Contributions are enforceable by the Trustee; and

(vi) The Trustees act independently of the Company and its Subsidiaries:

the Trust will qualify as a H&WT, as described in IT-85R2.

B. In any taxation year in which a contribution to the Trust exceeds the amount needed to provide the current year benefits paid to the Beneficiaries under the Plan, which includes all of the "Additional Contributions", such excess funding will be subject to the application of subparagraph 18(9)(a)(iii) of the Act.

C. The Trust will not be a "retirement compensation arrangement", an "employee benefit plan" or a "salary deferral arrangement", within the definitions thereof in subsection 248(1) of the Act.

D. Other than in respect of a group term life insurance policy, the Beneficiaries will not be required to include any amount in their income, pursuant to sections 5 or 6 of the Act, as a consequence of the contributions by the Company or its Subsidiaries to the Trust.

E. The Beneficiaries entitled to benefits under any group term life insurance policy included in the Plan will be required to include in income, pursuant to subsection 6(4) of the Act, the amount of the benefit computed pursuant to subsection 2702(1) of the Income Tax Regulations (the "Regulations"), as a consequence of the contributions by the Company or its Subsidiaries to the Trust.

F. Payments from the Trust to a Beneficiary, that are in accordance with the Plan and in respect of the loss of all or a part of a Beneficiary's income from an office or employment, will be included in computing the income of the recipient in the year received pursuant to paragraph 6(1)(f) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency ("CCRA") on May 17, 2002, and are binding on the CCRA provided that the proposed transactions are implemented on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Additional Comments

As outlined on page 32 of the 2001-2002 Employers' Guide for Payroll Deductions (Basic Information), it is the CCRA's current administrative practice to have the trustee or insurance company report the group long-term disability benefit payments, as described in paragraph 4(a) above, from a H&WT on a T4A information slip but the H&WT is not required to withhold income tax from such payments.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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