2002 Ruling 2002-0165123 - 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 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 2002-016512

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 also acknowledge the amendments outlined in your XXXXXXXXXX letter and discussed 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) The "Beneficiaries" are the employees, former employees and their eligible dependents entitled to benefits under the Plan;

(c) The "Benefits" are the benefits to be provided to the Beneficiaries and include, without limitation, group term life insurance, private health services and income continuation (for sickness or accident) benefits, all as may from time to time be provided under the Plan;

(d) The "Employer" is XXXXXXXXXX;

(e) The "General Partner" is XXXXXXXXXX;

(f) The "Plan" is the plan to be established by the Employer for the provision of Benefits to the Beneficiaries together with the programs, methods, rules and procedures thereto which have been and will be established by the Employer for the provision and payment of benefits, all as amended or replaced from time to time;

(g) The "Trust" is the proposed H&WT;

(h) The "Trust Agreement" is the proposed Agreement and Declaration of Trust to be entered into by the Employer and the Trustees;

(i) The "Trustees" are XXXXXXXXXX;

(j) The "Trust Fund" means all of the assets held by the H&WT including, without limitation, all sums of money and other property acceptable to the Trustees and delivered to the Trustees from time to time by way of contributions, together with all earnings, profits and increments accruing thereon and property from time to time substituted therefor;

Facts

1. The Employer is a limited partnership formed under the laws of XXXXXXXXXX (the Limited Partnership"). Each limited partner has appointed the General Partner to act as its attorney. The Limited Partnership's business number is XXXXXXXXXX.

2. The Employer has a comprehensive employee benefits program. The Plan will form part of that comprehensive employee benefits program.

3. The Plan will provide a combination of the benefits, relating to the health and welfare of the Beneficiaries, as are referred to in paragraph 1 of IT-85R2 as being eligible for the tax treatment accorded to an employee health and welfare benefit program administered through a trust arrangement, including:

(a) a group insurance plan that is a sickness or accident plan or a disability and maintenance plan;

(b) a private health services plan; and

(c) group term life insurance.

Proposed Transactions

4. The Employer will establish the Trust for the purpose of securing the payment of Benefits under the Plan. The Trust and Trustees will act independently of the Employer. No part of the corpus or income of the Trust Fund can ever revert to the Employer or be used for any purpose other than providing the Benefits. The Trust is irrevocable. Subsequent to the payment of all Benefits to all Beneficiaries, the Trustees shall wind up the Trust and donate any Trust Funds remaining in the Trust to a registered charity. The Trust will terminate at that point in time when all of the Trust Funds have been distributed.

5. Section XXXXXXXXXX of the Trust Agreement provides that there will be at least XXXXXXXXXX Trustees at all times. Trustees may be selected from current or retired employees and officers of the Limited Partnership and others who are suitably qualified and who are independent of the Employer. The Employer may remove a Trustee, appoint successor trustees and/or appoint additional trustees. In circumstances where there are fewer than XXXXXXXXXX trustees for any period exceeding XXXXXXXXXX days, section XXXXXXXXXX of the Trust Agreement will give the Beneficiaries the right to have a court of competent jurisdiction appoint successor trustees.

6. Sections XXXXXXXXXX of the Trust Agreement provide that the duties and responsibilities of the Trustees to hold, manage, invest and administer the Trust Fund may be delegated to any individual Trustee, to any group of Trustees, to an administrator or to any person or persons acting as investment advisor or manager in relation to the investment of the Trust Fund, all as the Trustees deem advisable. In making any such delegation, the Trustees will act in a prudent manner.

7. Section XXXXXXXXXX of the Trust Agreement requires that the Trustees appoint an actuary to give advice and make recommendations in respect of the amount of contributions to be made by the Employer to the Trust. The Trustees will, in accordance with section XXXXXXXXXX of the Trust Agreement, instruct the actuary to deliver annual reports setting out their advice and recommendations in respect of such contributions, taking into account the funded status of the Trust and the requirement to maintain the Trust as a H&WT.

8. Pursuant to sections XXXXXXXXXX of the Trust Agreement, the Employer will, for the purposes of funding the Benefits under the Plan and at the demand of the Trustees, make contributions to the Trust in the amount recommended by the actuary.

9. Section XXXXXXXXXX of the Trust Agreement provides the Trustees with the full power and authority to require the Employer to make all contributions necessary to provide the Benefits under the Plan. The Trustees will also have the power to take any action they deem appropriate to enforce such authority.

10. If, at any time, an actuary determines that the Trust Fund has surplus assets, and that further contributions would jeopardize the status of the Trust as a H&WT, the actuary will recommend that no further contributions be made to the Trust during the period covered by the report.

11. Pursuant to section XXXXXXXXXX of the Trust Agreement, Benefits will be paid out of the Trust Fund under the terms of an insurance contract and/or an administrative services agreement (which the Trustees will purchase with funds from the Trust Fund) and/or by an agent (which may be the Employer) acting on behalf of the Trustees.

12. The Employer will have no right to, title to or interest in, the Trust Fund. Section XXXXXXXXXX of the Trust Agreement specifically provides that the Trust shall not be amended to provide for a reversion of any portion of the Trust Fund to the Employer. However, section XXXXXXXXXX of the Trust Agreement provides that a contribution made by the Employer as a result of a mistake may be returned by the Trustees to the Employer, out of any surplus of the Trust Fund, as certified by an actuary.

13. Section XXXXXXXXXX of the Trust Agreement provides that no investments of property of the Trust will be made in the Employer, the General Partner or any person not dealing at arm's length with those persons. It also provides that none of the Trust Fund will be used, directly or indirectly, by any such persons. The Trustees will ensure that all investments conform to this investment policy.

14. Section XXXXXXXXXX of the Trust Agreement deals with the termination of the Trust. It includes a provision that the Employer may determine a date, the "Claims Cut-Off Date", by which claims for Benefits under the Plan must be filed by Beneficiaries. From and after the Claims Cut-Off Date, the Trustees will pay out Benefits only in respect of claims filed before the Claims Cut-Off Date. Payments will continue to be made until Benefits are no longer payable under the Plan. Alternatively, the Trustees may enter into an agreement with a life insurance company for the continuation of the payment of Benefits in respect of claims arising before the Claims Cut-Off Date.

15. At any time, should the Trustees determine, acting on the advice and recommendations of an actuary, that the Trust Fund shall be insufficient to satisfy all of the Benefits, and should such deficiency not be paid in full to the Trustees by the Employer due to the inability of the Employer to pay, the Trustees, in their sole and absolute discretion, may reduce the Benefits payable to a Beneficiary. The Trustees will communicate any such changes to the Beneficiaries and the Employer.

Purpose of the Proposed Transactions

The Employer will establish a H&WT to:

(a) provide, to its current and former employees and their eligible dependents, the Benefits proposed in the Plan;

(b) establish an irrevocable trust arrangement, under which the Trustees will receive, hold and invest contributions from the Employer;

(c) enable the Employer to meet its objective of securing benefits under the Plan for the Beneficiaries; and

(c) ensure that any benefit derived from the contributions of the Employer to the Trust, in respect of the Plan, will not be taxable to the Beneficiaries pursuant to paragraph 6(1)(a) 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 Employer, 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 contributions are made;

(iv) The contributions to the Trust are not voluntary or gratuitous;

(v) The contributions to the Trust are enforceable by the Trustee; and

(vi) The Trustees act independently of the Employer:

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

B. In any taxation year in which the Employer's contribution to the Trust, as described in paragraph 8 above, exceeds 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. Other than in respect of a group term life insurance policy, the Beneficiaries entitled to benefits under the Plan will not be required to include any amount in their income, pursuant to section 5 or 6 of the Act, as a consequence of the contributions by the Employer to the Trust or the acquisition by the Trust of insurance policies.

D. The Trust will be subject to tax, under section 104 of the Act, on the net income of the Trust. The Employer's 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 paragraph 11 and 14 above, will not be deductible in computing the income of 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 Employer 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.

Yours truly,

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