13 February 2002 External T.I. 2002-011815A - HEALTH & WELFARE TRUST-SURPLUS

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: what is legislative basis for position that H&W trust funds may not revert to employer?

Position: 18(1)(o) and (e)

Reasons: 18(1)(o) and (e)

					February 13, 2002

Mr. Andre Turgeon		HEADQUARTERS
	Offshore Trust Project	Denise Dalphy, LL.B.
	Laval TSO			(613) 941-1722

2001-011815

Health and Welfare Trusts Surplus Funds

This is in response to your e-mail of January 14, 2002 wherein you enquired about the legislative basis for the position described in Interpretation Bulletin IT-85R2 ("IT-85R2"), namely that surplus funds of such a trust cannot revert to the employer.

Paragraph 6 of IT-85R2 provides, in part:

"6. 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."

We disagree with the comments that you have received that posit that there is no legislative basis for the above position. Although we do not have all the details relating to the situation that you are considering, it is our view that a plan that does not satisfy the aforementioned criteria would not be subject to the income tax treatment described in IT-85R2, since it would not comply with the Income Tax Act (the "Act").

In particular, paragraph 18(1)(o) of the Act provides that no deduction may be made in computing the income of a taxpayer from a business or property that is an amount paid or payable as a contribution to an "employee benefit plan". Subsection 248 (1) of the Act defines an "employee benefit plan" and, inter alia, provides that a plan is not an "employee benefit plan" if it is "(a) a fund or plan referred to in subparagraph 6(1)(a)(i) or paragraph 6(1)(d) or (f)". Paragraphs (b) to (e) of this definition also "carve-out" certain other arrangements. In our view, if a plan allows amounts contributed to a trust to revert to the employer, the plan would not fall within (a) of the definition "employee benefit plan", and this "carve-out" from the definition will not apply.

Further, it is also a possibility, depending on the facts, that paragraph 18(1)(e) of the Act may apply to deny a deduction when an amount is contributed to the trust. Finally, we agree with you that the fact that the trust is set up for two employees who are spouses and are the sole shareholders of the corporation is quite important, and as you have mentioned, the comments in technical interpretation E9433745 (which discusses whether benefits are provided qua shareholder or qua employee as well as our presumption that benefits are provided qua shareholder) must be considered.

We hope this opinion will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.We hope the above opinion will assist you. If you would like to discuss this matter, please contact the writer.

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

- 2 -