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.

Principal Issues: Does the "fund" qualify as a "benevolent or fraternal benefit society or order" such that it is exempt from paying tax under Part I pursuant to paragraph 149(1)(k) of the Act.

Position: No.

Reasons: The "fund" does not meet the requirements of paragraph 149(1)(k) of the Act.

A. Seidel
XXXXXXXXXX (613) 957-2058
2003-004890
October 28, 2004

Dear XXXXXXXXXX:

Re: Benevolent or Fraternal Benefit Society or Order

We are writing in response to your November 10, 2003 and April 30, 2004 letters concerning the application of paragraph 149(1)(k) of the Income Tax Act (the "Act") to a trust established to provide "health and welfare" benefits to retired employees.

Background

1. The XXXXXXXXXX (the "Fund") was established by XXXXXXXXXX, in consultation with the XXXXXXXXXX, to provide a range of benefits to retired faculty ("Retirees") of XXXXXXXXXX (the "University").

2. The particular benefits to be provided to Retirees are determined by the trustees of the Fund. 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 University and XXXXXXXXXX and are currently in receipt of a pension from the University. Current faculty covered by the collective agreement will be eligible for benefits when they retire and commence receipt of a pension from the University.

4. Post retirement health care benefits for Retirees, as provided for in the collective agreement for Retirees of the University, have been considerably reduced in recent years. The Plan has therefore been restricted to providing health care benefits that are supplementary to those provided to Retirees by the University.

5. The Fund was created by a single payment from XXXXXXXXXX in XXXXXXXXXX. The amount that XXXXXXXXXX received from the University was the total amount that the University would have had to contribute to its faculty pension plan had it not been for a contribution holiday. The amount given to XXXXXXXXXX was intended for the benefit of faculty members who were covered by a collective agreement with the University. No individual faculty member has any right to receive a specific portion of such payment. The amount paid to the Fund was the pro-rata portion of the pension plan contribution holiday amount that was considered to relate to the Retirees' pensions.

6. The Fund provides that there be XXXXXXXXXX trustees who are responsible for determining the benefits to be paid from the Fund and who administer the Plan. XXXXXXXXXX. One of the XXXXXXXXXX trustees must be a senior member, i.e. retired but continuing to provide services to the University.

7. The Fund provides that no Retiree has any right, title or interest in or to the assets of the Fund except as specifically provided for in the Fund (i.e. the health care benefits provided for in the Plan and that are in force from time to time).

Issue

What is the status of the Fund for income tax purposes? Is it a trust, a "retirement compensation arrangement", as defined in subsection 248(1) of the Act, a "benevolent or fraternal benefit society or order", within the meaning thereof in paragraph 149(1)(k) of the Act, such that the income earned by the Trust in a taxation year is exempt from tax, or some other entity?

Fund's Representative's View

The terms of the Agreement and Declaration of Trust made as of XXXXXXXXXX created an entity to operate the Plan. It is the Fund's representative's view that this entity is a trust and that the trust is a "benevolent or fraternal benefit society or order" that 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". To arrive at this conclusion, the Fund's representative argues that the current and retired faculty have "banded" together to provide supplementary health coverage for retirees.

Our Comments

As indicated in our telephone conversation (Seidel/XXXXXXXXXX), we also requested the views of our legal advisors with respect to the status of the Fund.

In trust law, a trust is not a separate legal person. The Act deems a trust to be an individual in respect of the trust property. To determine whether a trust exists in trust law, three certainties must be present. They are certainty of intention, certainty of subject matter and certainty of objects. Since there are no specific beneficiaries of the Fund, and since no Retiree has any right, title or interest in the Fund, the "trust" does not satisfy the "certainty of objects" test and would therefore not be considered to be a trust under trust law.

The Fund, however, is subject to the laws of XXXXXXXXXX, the Fund could be construed as a power to appoint the income and/or capital of the Fund. Although the issue is not free from the doubt, the better view is that a power to appoint income and/or capital is not a trust.

Since the Fund is not a trust for trust law purposes, it would not be deemed to be an individual in respect of the trust property for income tax purposes. Accordingly, the provisions of sections 104 through 108 of the Act would not apply to the Fund.

As indicated in our June 27, 2003 memorandum to the XXXXXXXXXX Tax Services Office, a copy of which was sent to you on the same date, it is our view that the Fund is not a "retirement compensation arrangement", within the meaning thereof in subsection 248(1) of the Act, a "health and welfare trust", as described in Interpretation Bulletin IT-85R2, or "a benevolent or fraternal benefit society or order", as described in paragraph 149(1)(k) of the Act. Therefore, provided that the Fund continues to restrict its activities to the reimbursement of medical and dental expenses as provided for under the Plan, the Fund is considered to be established as the payor of such reimbursements and will not be subject to income tax on any income earned by it.

To date, the Fund has been restricted to administering medical and dental benefits under a private health services plan. Under the Plan administered by the Fund, Retirees are only entitled to a reimbursement of those actual medical and dental expenses incurred that qualify for reimbursement under the Plan. Provided that the amount(s) received by a Retiree is/are restricted to the reimbursement of actual medical and dental expenses, such amounts would not be required to be included in computing income, for income tax purposes, of the Retiree.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch