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
An employer leaves a multi-employer health and welfare trust. Under the multi-employer trust, each employee had an account from which funds were used to purchase benefit coverage from insurance coverage. As the employer is currently paying for the benefits directly, the multi-employer trust wishes to pay out the balance in each account directly to the employees. Is this allowable?
Position TAKEN
No.
Reasons:
Paragraph 6 of interpretation bulletin IT-85R2, Health and Welfare Trusts for Employees, states that the funds cannot be used for any purpose other than providing health and welfare benefits for which the contributions are made.
XXXXXXXXXX 2003-002260
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Fund")
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling in respect of proposed transactions. We also acknowledge your correspondence of XXXXXXXXXX, and our various 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 tax return of the Fund or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the Fund or a related person;
(iii) under objection by the Fund or a related person;
(iv) before the Fund or, if a judgement has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Our understanding of the facts and proposed transactions is as follows:
STATEMENT OF FACTS:
1. The Fund is resident in Canada. Its address is:
XXXXXXXXXX.
2. The Fund files its tax returns at the XXXXXXXXXX.
3. The Fund was established pursuant to an Agreement and Declaration of Trust made as of XXXXXXXXXX, (the "Trust Agreement") and amended from time to time.
4. Pursuant to the Trust Agreement, various individuals act as Trustees of the Fund (the "Trustees").
5. The Fund was established as a health and welfare trust to provide the health and welfare benefits contemplated by interpretation bulletin IT-85R2, Health and Welfare Trusts for Employees, dated July 31, 1986.
6. The Trustees have adopted the Plan of Benefits (the "Plan"), which consists of an insurance contract for weekly indemnity benefits, major medical and dental benefits, life insurance, accident and long-term disability benefits.
7. Information and rules of the Plan are provided to the members in the form of a booklet (the "Booklet") that covers all of their benefits.
8. The Fund was created pursuant to collective bargaining agreements.
9. The Fund provides the benefits under the Plan to members of XXXXXXXXXX (the "Union").
10. The Fund is a multi-employer health and welfare trust where numerous employers (the "Employers") contribute for employees who are union members covered under the collective agreement with the Union (the "Members").
11. Each Member has an "account" towards which contributions made by the Employers are credited. Each month, there is a withdrawal from the account for the amount necessary to purchase the Member's benefit coverage with the Fund's insurance carriers. As set out in the Booklet, the full coverage benefit premium deduction for a Member under the age of 65 who is employed is currently $XXXXXXXXXX per month.
12. Each Member accumulates dollars in his or her Plan account to a maximum of $XXXXXXXXXX, which is sufficient to maintain full coverage for 12 months in the event that the Member is unemployed. Contributions in excess of this amount are transferred to the general reserves of the Fund.
13. XXXXXXXXXX. (the "Exiting Employer") has terminated its participation in the Fund via collective bargaining and is providing its own insurance benefit plan to the Members it employs, which are to be the same benefits as are provided under the Fund. The funds representing the accounts of Members of the Exiting Employer have remained in the Fund.
14. Pursuant to the provisions of the Trust Agreement, contributions cannot be refunded to the Employers or the Members.
PROPOSED TRANSACTIONS:
15. The Trustees of the Fund propose to amend the Plan and the Trust Agreement to provide a return of each Member's account balance in a lump sum form for Members of the Exiting Employer. The balances will then be paid to these Members.
16. The return of each Member's account will be reported on a T4A Supplementary to the Member and will be taxable as income in the hands of the Member in the year in which the funds are paid.
PURPOSE OF PROPOSED TRANSACTIONS:
The purpose of the proposed transactions is to eliminate the duplicate coverage for the Members employed by the Exiting Employer and to ensure that the value of the contributions earned by these members is attributed to them.
RULING REQUESTED:
You have requested that we provide a ruling that the proposed transactions will not affect the Fund's status as a health and welfare trust.
We are unable to provide the ruling requested. The proposed transactions will result in payments being made to the Members for a purpose other than to provide health and welfare benefits. Paragraph 6 of IT-85R2, Health and Welfare Trusts for Employees, states that "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." Accordingly, the proposed transactions do not fit within our administrative guidelines as discussed in the interpretation bulletin.
An invoice for the time spent considering this Advance Income Tax Ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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