26 November 2004 External T.I. 2004-0093641E5 - AMT Health and 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.

Principal Issues: Whether a HWT that is not permitted to deduct expenses in excess of gross income in accordance with paragraph 12 of IT-85R2 can do so and create a loss for AMT purposes?

Position: Yes.

Reasons: Paragraph 12 of IT-85R2 refers to a loss for purposes of Division C of Part I. Adjusted taxable income for purposes of AMT is determined under Division E.1. Where a HWT has expenses that were otherwise deductible and not allowed because of the limitation discussed in paragraph 12 of IT-85R2, it should be permitted to use those expenses to offset the impact of AMT, if any.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-941-7239
2004-009364
November 26, 2004

Dear XXXXXXXXXX:

Re: Application Of Alternative Minimum Tax To A Health And Welfare Trust

We are writing in response to your letter of August 31, 2004, wherein you asked for our opinion on whether the alternative minimum tax ("AMT") rules in Division E.1 of Part I of the Income Tax Act (the "Act") apply to a health and welfare trust ("HWT").

Your letter described a HWT that, in accordance with paragraph 12 of Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees, was only allowed to deduct expenses to the extent of its gross income. In the example described in your letter, the gross income of the HWT was $100,000. This amount included a capital gain of $25,000. The HWT had otherwise deductible expenses of $125,000. Because the HWT was not permitted to deduct expenses in excess of its gross income, its loss was nil for purposes of Division C of Part I of the Act. If taxable income were entered as nil on line 23 on Schedule 12 of the T3 return, the HWT would be subject to AMT because of the capital gain. However, if the actual loss were used the HWT would not be subject to AMT.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

In calculating a taxpayer's AMT, it is necessary to determine the taxpayer's "adjusted taxable income". Adjusted taxable income is determined under subsection 127.52(1) of the Act which, in part, indicates that "an individual's adjusted taxable income for a taxation year is the amount that would be the individual's taxable income for the year or the individual's taxable income earned in Canada for the year, as the case may be, if it were computed on the assumption...". The provision then enumerates a number of assumptions on how to calculate adjusted taxable income, including an adjustment that accounts for the non-taxable portion of a capital gain.

As noted in your letter, a HWT is not permitted to deduct expenses in excess of gross income and therefore, cannot create a loss for purposes of Division C. However, in determining adjusted taxable income for purposes of AMT, the HWT will be permitted to deduct all expenses that were otherwise deductible and not allowed because of the limitation discussed in paragraph 12 of IT-85R2. Please note that IT-85R2 will be amended to clarify the application of AMT in these circumstances.

We trust our comments will be of assistance to you.

Yours truly,

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