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: Is the trust exempt from tax pursuant to paragraph 149(1)(k) of the Act as a "benevolent or fraternal benefit society or order"?
Position: No.
Reasons: The trust will likely be taxed as a retirement compensation arrangement.
June 27, 2003
XXXXXXXXXX HEADQUARTERS
XXXXXXXXXX A. Seidel, CMA
Verification and Enforcement Division (613) 957-2058
XXXXXXXXXX Tax Services Office
2003-000018
Benevolent or Fraternal Benefit Society or Order
This is in response to your referral of XXXXXXXXXX's January 13 and February 28, 2003 letters (copies enclosed) concerning the XXXXXXXXXX.
Background
1. The XXXXXXXXXX (the "Trust") was established by XXXXXXXXXX, in consultation with the XXXXXXXXXX, to provide a range of benefits to retired XXXXXXXXXX ("Retirees") of XXXXXXXXXX.
2. The particular benefits to be provided to Retirees are determined by the trustees of the Trust. The particulars of the benefits are set out in the XXXXXXXXXX (the "Plan"). The Plan provides that benefits may include any, or all of, health, welfare, life insurance and related auxiliary benefits. The benefits under the Plan, and any amendments thereto, must be approved by the XXXXXXXXXX.
3. Eligible beneficiaries under the Plan include Retirees who were formerly covered by the collective agreement between the XXXXXXXXXX and XXXXXXXXXX and are currently in receipt of a pension from the XXXXXXXXXX. Current XXXXXXXXXX covered by the collective agreement will be eligible for benefits when they retire and commence to receive a pension from the XXXXXXXXXX.
4. XXXXXXXXXX.
5. The Trust was settled by a single payment from XXXXXXXXXX in XXXXXXXXXX. The amount that XXXXXXXXXX received from the XXXXXXXXXX was the total amount that the XXXXXXXXXX would have had to contribute to its XXXXXXXXXX pension plan had it not been for a contribution holiday. The amount given to XXXXXXXXXX was intended for the benefit of XXXXXXXXXX who were covered by a collective agreement with the XXXXXXXXXX. No individual XXXXXXXXXX member has any right to receive a specific portion of such payment. The amount paid to the Trust was the pro-rata portion of the pension plan contribution holiday amount that was considered to relate to the Retirees pensions.
6. The Trust provides for XXXXXXXXXX trustees who are responsible for determining the benefits to be paid and for administering the Plan. XXXXXXXXXX trustees are appointed by XXXXXXXXXX and XXXXXXXXXX trustees are appointed by XXXXXXXXXX. One of the XXXXXXXXXX trustees must be a senior member, i.e. retired but continuing to provide services to the XXXXXXXXXX.
7. The Trust provides that no Retiree has any right, title or interest in or to the assets of the Trust except as specifically provided for in the Trust (i.e. the benefits provided for in the Plan and that are in force from time to time).
Taxpayer's Views
Under the Income Tax Act (the "Act") a Trust is generally subject to tax on the portion of its income, as otherwise determined, which is not payable to a beneficiary in the year. For tax purposes, a trust is taxed as an individual.
Amounts paid to Retirees under the terms of the Plan are paid to them because of their entitlement to benefits under the Plan and not because they are entitled to a distribution of the income of the Trust. The income of the Trust is not payable to Retirees in the capacity of an "income beneficiary" such that subsections 104(12) and (13) of the Act would not be applicable to the income of the Trust. The Retirees are entitled to benefits because of a contractual arrangement between the Retirees and the XXXXXXXXXX. Therefore, any income earned in the Trust is subject to tax in the Trust.
The terms of the XXXXXXXXXX made as of the XXXXXXXXXX created an entity to operate the Plan. It is the taxpayer's view that this Trust is exempt from tax on its taxable income pursuant to paragraph 149(1)(k) of the Act. Paragraph 149(1)(k) of the Act provides that no tax is payable on the taxable income of a "benevolent or fraternal benefit society or order". Subsection 149(3) of the Act provides that the exemption under paragraph 149(1)(k) of the Act does not apply in respect of any taxable income from carrying on a life insurance business. No part of the benefits provided by the Trust would be considered to be the carrying on of a life insurance business. Finally, the Act does not appear to restrict the exemption to a particular legal structure, e.g. a corporation or a "mutual benefit society", as defined for purposes of insurance legislation.
The CCRA has issued an Interpretation Bulletin dealing with health and welfare trusts for employees (IT-85R2, Health and Welfare Trusts for Employees). This bulletin provides for the taxation of any investment income earned by the trust. Such income is included in the income of a beneficiary (where the trust provides that benefits are first paid out of income) with any remaining investment income taxed in the trust. This position is consistent with the views expressed above with respect to the Plan, i.e. the income of the Trust is included in the taxable income of the trust and is only exempt from tax on such taxable income under paragraph 149(l)(k) of the Act. A health and welfare trust administered by an employer would not qualify for tax exemption as a "fraternal benefit society" whereas the Plan administered by Trustees for the benefit of current and future retirees would appear to qualify as a "benevolent or fraternal benefit society or order".
Issue
Is the Trust a "benevolent or fraternal benefit society or order" within the meaning thereof in paragraph 149(1)(k) such that the income earned by the Trust in a taxation year is exempt from tax?
The Act does not define the expression "a benevolent or fraternal benefit society or order" as referred to in paragraph 149(1)(k) of the Act. Black's Law Dictionary describes a "fraternal benefit association or society" as "one whose members have adopted the same, or a very similar, calling, avocation, or profession, or who are working in union to accomplish some worthy object, and who for that reason have banded themselves together as an association or society to aid and assist one another, and to promote the common cause. ... An association having a representative form of government and a lodge system with a ritualistic form of work for the meeting of its chapters, or other subordinate bodies. ... A society or voluntary association organized and carried on for the mutual aid and benefit of its members, not for profit; which ordinarily has a lodge system, a ritualistic form of work, and a representative government, makes provision for the payment of death benefits and (sometimes) for benefits in case of accident, sickness, or old age, the funds being derived from dues paid or assessment levied on the members."
Blacks Law Dictionary defines "benevolent" as "philanthropic; humane; having a desire or purpose to do good to man; intended for conferring of benefits, rather than for gain or profit; loving others and actively desirous of their well being." It goes on to state that "[T]his word, as applied to objects or purposes, may refer to those which are in their nature charitable, and may also have a broader meaning include objects and purposes not charitable in the legal sense of that word. Acts of kindness, friendship, forethought or goodwill might properly be described as benevolent. ... where the word is used in connection with other words explanatory of its meaning, and indicating the intent of the donor to limit it to purposes strictly charitable, it has been held to synonymous with or equivalent to, "charitable".
The arrangement between the Retirees, XXXXXXXXXX and XXXXXXXXXX is a contractual arrangement between the XXXXXXXXXX and the union representing the Retirees and flows from the previous employer/employee relationship. This type of post-retirement arrangement is not uncommon. The relationship between the Trust and the Retirees does not fall within the definition of a "fraternal benefit" organization. In this particular case, the Retirees cannot be considered to have "banded themselves together as an association to aid and assist one another and to promote the common cause". The Retirees are only entitled to benefits under the Plan by virtue of their former employment with the XXXXXXXXXX, there is no means for Retirees to "aid and assist" other Retirees and the Trust does not exist to "promote a common cause". The funding of the Trust appears to be at the total discretion of the XXXXXXXXXX, there are no dues paid, or assessments levied against, the Retirees.
The definition of "retirement compensation arrangement" in subsection 248(1) of the Act include, subject to certain exclusions, "a plan or arrangement under which contributions (other than payments made to acquire an interest in a life insurance policy) are made by an employer or former employer of a taxpayer, ... to another person or partnership (in this definition and in Part XI.3 referred to as the "custodian") in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of, the retirement of the taxpayer". The arrangement between the XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX and the Retirees is clearly an arrangement that fits within this definition. The exclusions in the definition include various plans and trusts as enumerated therein, an insurance policy, arrangements that are for the benefit of non-residents and a salary deferral arrangement. We have not been provided with sufficient information with respect to the actual benefits provided under the Plan to determine whether any of these exclusions would apply. Where the Trust is considered to be a "retirement compensation arrangement", the Trust will compute its taxes payable under subsection 207.7(1) of the Act.
Interpretation Bulletin IT-85R2 - Health and Welfare Trusts for Employees ("IT-85R2") describes the tax treatment accorded to an employee health and welfare benefit program that is administered by an employer through a trust arrangement and that is restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy or any combination of the above. In this particular case, the Trust is not being administered by the employer but by XXXXXXXXXX and XXXXXXXXXX. It is therefore our view that the Trust could not qualify as a health and welfare trust within the meaning thereof in IT-85R2.
We hope our comments are of assistance. If you wish to discuss any of the above further, or if we can be of any further assistance, do not hesitate to contact us at the above number.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library 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.
Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
enclosures
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