2003 Ruling 2002-0164043 - partnership - 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.

Position: Yes.

Reasons:

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

XXXXXXXXXX 2002-016404

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge receipt of your correspondence dated XXXXXXXXXX and the information provided to us during our telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

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

(iii) under objection by the taxpayers or a related person; or

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

In this letter, the following terms have the meanings specified:

(a) "Aco" means XXXXXXXXXX, a company engaged in the business of offering to the public its services as an administrator of private health services plans;

(b) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every statutory reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(c) "Benefit Plan" means the benefits to be provided to the Employer and the Employees under the Benefit Trusts, which are restricted to the following:

(i) a group sickness or accident insurance plan, which may include sickness or accident, disability and income maintenance benefits;

(ii) a private health services plan;

(iii) a group term life insurance policy; and

(iv) any combination of (i) to (iii);

(d) "Benefit Trusts" means collectively the Partners Benefit Trust and the Employees Benefit Trust;

(e) "Employees" has the same meaning as defined in the Management Agreement;

(f) "Employees Benefit Trust" means the health and welfare trust to be established and administered for the benefit of the employees by the Employers;

(g) "Employer" means the following persons collectively in their capacity as partners carrying on the practice of XXXXXXXXXX in the province of XXXXXXXXXX as a limited liability partnership (and shall be deemed to include any additional persons who become partners, and shall be deemed to exclude any of the following persons who cease to be a partner):

XXXXXXXXXX.

(h) "Management Agreement" means the agreement to be entered into by the Employer and Aco that will establish the terms of the Benefit Plan and the administration thereof; and

(i) "Partners Benefit Trust" means the health and welfare trust to be established and administered for the benefit of the partners of the Employer.

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

Facts

1. The Employer is a partnership under the laws of XXXXXXXXXX. The Employer carries on the business of providing XXXXXXXXXX through its office in XXXXXXXXXX. The fiscal period of the Employer ends on XXXXXXXXXX.

2. The Employer employs, XXXXXXXXXX.

Proposed Transactions

3. The Employer and Aco will enter into the Management Agreement and Declaration of Trust with Aco which will establish the Benefit Trusts and set out the terms for the administration of the Benefit Plan.

4. Aco will be the sole Trustee of the Benefit Trusts. Aco deals at arm's length with the Employer.

5. Aco will act independently of the Employer and will be solely responsible for the administration of the Benefit Trusts pursuant to the terms of the Management Agreement.

6. The Partners Benefit Trust and the Employees Benefit Trust will operate as separate trusts and the contributions to the Employees Benefit Trust Fund will not be used to subsidize the Partners Benefit Trust Fund or vice versa.

7. Each Employee will be covered by an "Employee Benefit Agreement" and each Partner will be covered by a "Partner Benefit Agreement".

8. As part of the Benefit Plan, the Employer will arrange for the acquisition of an insurance policy (herein referred to as the "Policy") with a licensed insurance company (herein referred to as the "Insurer") to provide life, disability, and accident benefits for the Employees and the Employer. In addition, the Employer may arrange for insurance under the Policy to cover a portion of the health and dental benefits to be provided under the Benefit Trusts.

9. The relevant terms of the Management Agreement and Declaration of Trust are as follows:

? The Employer is responsible for maintaining a reserve in each of the Benefit Trusts not less than the monthly expected value of the claims, insurance premiums and administration fees (as estimated by Aco based on the average of the prior XXXXXXXXXX months monthly premiums or an equivalent estimate) for the period during which the benefits will be provided.

? The Employer will make monthly contributions to the Benefit Trusts to fund the estimated claims, premiums and administrative fees for that month.

? The contributions made to the Benefit Trusts cannot revert to the Employer or be used for any purpose other than providing the benefits for which the contributions were made.

? The reserves will be used to pay eligible claims, applicable insurance premiums and administration fees until the effective date of termination of the Benefit Trusts. No funds will be returned to the Employer.

? The Benefit Trusts will pay:

(a) health and dental claims eligible for coverage in accordance with the Management Agreement and Declaration of Trust up to the maximum limits established;

(b) premiums to the Insurer as required under the Management Agreement and Declaration of Trust; and

(c) administration fees to Aco in accordance with the Management Agreement and Declaration of Trust.

? Aco will be responsible for collecting the contributions from the Employer and for providing the administration services required by the Benefit Plan.

? Aco will administer the funds of the Benefit Trusts under a pooled trust account, which may include one or several employers.

? Aco will be paid an administrative fee based on the value of the claims paid by the Benefit Trusts and the number of persons entitled to benefits thereunder.

? Aco has the right to enforce the collection of contributions from the Employer.

? Aco, as Trustee, is solely responsible for the administration of the Benefit Trusts.

? Health and dental benefits covered under the Benefit Plan may be provided either in the nature of a totally self-insured arrangement or as a combination of a self-insured arrangement and a policy purchased from a licensed insurance company.

? The Benefit Trusts will make all the premium payments to the Insurer under the Policy.

? Claims submitted by the Employees to Aco will be forwarded to the Insurer for payment under the terms of the Policy.

? The Benefit Trusts will pay the portion of the eligible claims not payable under the Policy up to the limits set forth in the Benefit Plan.

? Aco and/or the Insurer may make eligible claim payments either to the Employee or directly to the healthcare or dental provider.

10. The Employer will establish a reserve for each of the Benefit Trusts by paying to Aco an amount equal to the estimated monthly value of the claims, insurance premiums and administration fees payable by each Trust.

11. The Employer will make monthly contributions to the Benefit Trusts that are necessary for the operation and administration of the Benefit Plan including premiums payable to the Insurer, amounts estimated to be required to pay benefits for the ensuing month and administration fees. The Employer may make an early contribution if it is necessary to cover a deficiency in respect of the provision of benefits to the beneficiaries of the Benefit Trusts.

12. Aco will act independently of the Employer and will be solely responsible for the administration of the Benefit Trusts pursuant to the terms of the Management Agreement.

Purpose of the Proposed Transactions

13. The purpose of the proposed transactions is to set up separate health and welfare trusts for the benefit of the Employer and the Employees.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows.

A. The proposed Benefit Trusts will each be a Health and Welfare Trust as described in paragraphs 5 -7 of IT-85R2, if:

(i) the benefits administered by the Benefit Trusts are restricted to:

(1) a group sickness or accident insurance plan, which may include sickness or accident, disability and income maintenance benefits,
(2) a private health services plan,
(3) a group term life insurance policy, and
(4) any combination of (1) to (4);

(ii) no portion of the Benefit Trusts funds can revert to the Employer, including at the time at which either of the Benefit Trusts is wound up;

(iii) the Partners Benefit Trust Funds and Employees Benefit Trust Funds are used to provide the health and welfare benefits for which the required contributions are made;

(iv) the Partners Benefit Trust Funds and Employees Benefit Trust Funds are administered independently of the Employer and no funds are transferred between these Benefit Trust Funds;

(v) the required contributions are not voluntary or gratuitous;

(vi) the required contributions can be enforced by the Trustee;

(vii) the contributions paid by the Employer are not included as medical expenses of an Employee or Employer under paragraph 118.2(3)(b) of the Act; and

(viii) the amounts of the contributions relate closely to the coverage provided by the Benefit Plan and are based on calculations provided by the Trustee.

B. Provided that the requirements of paragraphs 20.01(1)(a) and 20.01(1)(b) of the Act are met, and subject to ruling D below, an amount payable in respect of a taxation year by the Employer to the Partners Benefit Trust, as a premium, contribution or other consideration under a private health services plan, will be deductible in computing the income of the Employer for that year up to the limits established in subsection 20.01(2) of the Act.

C. Subject to the limitations imposed by subsections 18(9.01) and section 67 of the Act, and subject to ruling D below, an amount payable in respect of a taxation year by the Employer to the Employee Benefit Trust will be deductible in computing the income of the Employer in that year.

D. Where, in respect of any taxation year of the Employer, an amount payable by the Employer to any of the Benefit Trusts can reasonably be regarded as being related to the provision of benefits after the end of the taxation year, such amount will not be deductible in that year because of subparagraph 18(9)(a)(iii) of the Act.

E. Other than in respect of a group term life insurance policy, the Employees 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 Employer to the Benefit Trusts.

F. The Partners 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 Employer to the Benefit Trusts.

G. Employees entitled to benefits under any group term life insurance policy included in the Benefit 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 as a consequence of the contributions by the Employer to the Employee Benefit Trust.

H. The Employees Benefit Trust and the Partners Benefit Trust will be subject to tax under section 104 of the Act, on the net income of the respective Benefit Trust. The Employer's initial contribution (described in paragraph 10 above) and the subsequent monthly contributions (described in paragraph 11 above) to the Benefit Trusts will not be included in computing the income of the Benefit Trusts.

I. Payments from the Employees Benefit Trust to an Employee, that are in respect of the loss of all or a part of 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.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency ("CCRA") provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.

Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:

(a) the reasonableness of any expenditure referred to in this letter; or

(b) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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