2002 Ruling 2002-0124183 - HEALTH & WELFARE TRUSTS

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 transactions will result in the creation of a "health and welfare trust" within the meaning thereof in IT-85R2.

Position: Yes.

Reasons:

The proposed health and welfare trust will satisfy all of the requirements in IT-85R2.

XXXXXXXXXX 2002-012418

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter, dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above named taxpayer. We acknowledge receipt of the XXXXXXXXXX letter outlining the revisions to the original advance income tax ruling request. We also acknowledge receipt of the additional information provided in our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge, 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") 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) "H&WT" is a health and welfare trust as described in Interpretation Bulletin IT-85R2;

(b) "Private health services plan" has the meaning assigned by subsection 248(1) of the Act;

(c) "Retirement compensation arrangement" has the meaning assigned by subsection 248(1) of the Act;

(d) The "Association" is the XXXXXXXXXX;

(e) The "Beneficiaries" are the retired employees, their spouses and eligible dependents entitled to benefits under the Covered Plans;

(f) The "Covered Plans" are the existing health and dental care coverage provided by the Association;

(g) The "Trust" is the proposed XXXXXXXXXX;

(h) The "Trust Agreement" is the XXXXXXXXXX to be entered into by the Association and the Trustee;

(i) The "Trustee" will be XXXXXXXXXX.

Facts

1. The Association is a XXXXXXXXXX and therefore a non-taxable entity pursuant to paragraph XXXXXXXXXX of the Act. Its business number is XXXXXXXXXX, its taxation center is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

2. The Association provides to its retirees, including their spouses and eligible dependents, comprehensive health care coverage and dental care coverage pursuant to the Covered Plans.

3. The Covered Plans qualify as a private health services plan. Therefore, the benefits derived from the Covered Plans do not give rise to a taxable benefit to the Beneficiaries by virtue of subparagraph 6(1)(a)(i) of the Act.

4. The cost of the Covered Plans is fully paid by the Association. The Covered Plans are provided through insurance policies purchased from a duly licensed insurance company. Therefore, if the Association were to cease to exist, the current and future retirees could end up with no health care or dental care coverage.

Proposed Transactions

5. The Association will establish the Trust to administer the Covered Plans. The Trust will be independent of the Association. No part of the corpus or income of the Trust can ever revert to the Association and the Trust is irrevocable until the purpose of the Trust has been fully attained.

6. The Association and the Trustee will enter into the Trust Agreement pursuant to which:

(a) The Trustee will receive and administer the Association's contributions to the Trust;

(b) The Trustee will pay the insurance company the required premiums in respect of the Covered Plans;

(c) The Trustee will hold, maintain, administer, invest and re-invest the funds of the Trust;

(d) The Trustee will administer the Trust as a H&WT in accordance with the terms of the Trust Agreement.

7. The "Trust Fund" will consist of the following:

(a) the contributions made by the Association; and

(b) the income derived from the investments made with the Trust's funds;

less

(c) the expenses incurred to administer the Covered Plans and the Trust Fund; and

(d) the premiums paid to an insurer to purchase applicable insurance policies.

8. The Trust will be administered by the Trustee as a separate entity and in accordance with the duties and obligations outlined in the Trust Agreement. Therefore, the Trust Fund will not be recorded in the Association's financial statements.

9. Notwithstanding the establishment of the Trust, the terms of the Covered Plans and the funding policy with respect to the Covered Plans shall remain the sole responsibility of the Association, at its sole discretion, unless the Association ceases to exist.

10. The Association will notify the Trustee, in writing, of the funding policy to be adopted to fund the Trust. The funding policy will indicate if the Covered Plans are to be funded on a pay-as-you-go basis or an actuarial basis. The Trustee will be bound by the funding policy adopted by the Association. It shall be the duty of the Association, on the advice of an actuary, to determine the level of contributions to be made to the Trust (the "Required Contributions") to appropriately fund the premiums to be paid for insurance under the Covered Plans. The Required Contributions for any Covered Plan shall be determined on a pay-as-you-go basis unless the Association has notified the Trustee that such Required Contributions are to be determined on an actuarial basis. The actuary will use the following principles in determining the Required Contributions to the Trust:

(a) Each component of the Covered Plans shall be separately determined;

(b) The Required Contributions will be determined on a pay-as-you-go basis unless the Association has notified the Trustee that it is to be determined on an actuarial basis;

(c) For pay-as-you-go components of the Covered Plans, the actuary will estimate the expected premiums and taxes payable in a year;

(d) For actuarially determined components of the Covered Plans, the actuary will determine the contributions required to adequately fund the premiums to be paid for coverage under the Covered Plans. The Association will establish, in consultation with the actuary, an appropriate period for the elimination of funding excesses and deficiencies. This will be achieved by making suitable adjustments to the Required Contributions for any particular year or years;

(e) At intervals not exceeding XXXXXXXXXX years, the actuary will perform a valuation of the Trust.

11. The Trustee will be empowered to enforce collection of Required Contributions.

12. All Required Contributions will be irrevocably committed to the Trust and can never revert back to the Association, including the time of the Trust's termination.

13. Subject to any investment policy adopted for the Trust pursuant to the provisions of the Trust Agreement, or the directions of any investment advisor appointed pursuant to the Trust Agreement, the Trustee will invest and re-invest the capital and income of the Trust using the "prudent person" approach. In no event shall the Trustee be permitted to grant any of the assets of the Trust to, or permit that assets of the Trust be invested in any kind of indebtedness issued by, the Association or a related person.

14. The Covered Plans transferred to the Trust will be identical to the Covered Plans currently in existence. The Association may add other health and welfare type benefits, modify protection levels and modify eligibility rules for retirees to participate, all at the sole discretion of the Association. However, benefits administered by the Trust will in all circumstances be limited to those described in paragraph 1 of Interpretation Bulletin IT-85R2.

15. In the event that the Association is wound up, such duties shall become the immediate responsibility of the Trustee pursuant to Article XXXXXXXXXX of the Trust Agreement.

Purpose of the Proposed Transactions

The Association will establish a H&WT for the following reasons:

(a) The Association will provide, to its current and future retirees (including retirees' spouses and eligible dependents), health and welfare benefits that will be renewed annually during the lifetime of the retirees in respect of the Covered Plans.

(b) The maintenance of the Covered Plans, for the lifetime of the retirees, will be undertaken by the Association. However, should the Association cease to exist, or fail to have sufficient assets to provide for the post-retirement health and welfare benefits, the Trust will replace the Association in the maintenance of the Covered Plans.

(c) The establishment of an irrevocable trust arrangement, under which the Trustee will receive, hold and invest contributions from the Association and pay annual insurance premiums in respect of the Covered Plans, will enable the Association to meet its objective of securing benefits under the Covered Plans for the Beneficiaries.

(d) The Association intends that the Trust be a H&WT, pursuant to the administrative guidelines as published in Interpretation Bulletin IT-85R2, so that any benefit derived from the contributions of the Association to the Trust, in respect of the Covered Plans, will not be taxable to the Beneficiaries pursuant to subparagraph 6(1)(a)(i) of the Act.

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 Association, including the time at which the Trust is wound up;

(iii) The Trust Fund is 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 Association;

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

B. In any taxation year in which the Association's Required Contributions to the Trust, as described in paragraph 10 above, exceed the amount needed to provide the current year benefits paid to the Beneficiaries, 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 within the meaning thereof in subsection 248(1) of the Act.

D. The Beneficiaries entitled to benefits under the Covered Plans will not be required to include any amount in their income pursuant to sections 5, 6 or 56 of the Act, or otherwise, as a consequence of the contributions by the Association to the Trust, the acquisition by the Trust of insurance policies or the payment of health and dental benefits to a Beneficiary.

E. The Trust will be subject to tax, under section 104 of the Act, on the net income of the Trust. The Association's Required Contributions to the Trust will not be included in computing income of the Trust. The payment of the premiums by the Trust to an insurer to purchase insurance policies, as described in paragraphs 6(b) and 7(d) above, will not be deductible in computing the income of the Trust.

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.

Yours truly,

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

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