5 May 2005 External T.I. 2005-0121151E5 - Health and Welfare Trusts

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: A variety of issues affecting the status of trusts as health and welfare trusts.

Position: General comments provided.

Reasons: Such determinations are always questions of fact.

Randy Hewlett
XXXXXXXXXX 613-941-7239
2005-012115
May 5, 2005

Dear XXXXXXXXXX:

Re: Health And Welfare Trust

We are writing in response to your letters of March 3, 2005, wherein asked for several technical interpretations on whether a health and welfare trust existed in the hypothetical fact patterns described in your letters.

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.

We are unable to provide you with written technical interpretations on whether the fact patterns described in your letters result in the creation of a health and welfare trust. Such a determination will always be a question of fact. The Canada Revenue Agency's position on the taxable status of health and welfare trusts is discussed in Interpretation Bulletin, IT-85R2 - Health and Welfare Trusts for Employees. We are prepared, however, to offer the following general comments on the basis of what we understand your main concerns to be:

(a) Will a plan that provides health and welfare benefits to retired employees be considered a "retirement compensation arrangement"?

No. To qualify as a health and welfare trust, the benefits provided for thereunder must be provided under a plan of insurance, whether self-funded or through a third party insurance provider. Contributions made by an employer or former employer of a taxpayer to an insurance plan that provides health and welfare benefits is not considered to be a retirement compensation arrangement.

(b) Can a plan that requires an employer to contribute X dollars per hour worked by employees under the terms of a union contract, qualify as a health and welfare trust?

Yes. In and by itself, plans funded in such a manner will not be excluded from being considered a health and welfare trust. The CRA's general position on funding is described in paragraph 6 of IT-85R2, which states that an employer's contributions must not exceed the amount required to provide the health and welfare benefits. Excess contributions do not necessarily mean that the plan is disqualified as a health and welfare trust, however, there could be tax implications for the employer in terms of its deductibility of contributions.

Ideally, the trust should have a mechanism to correct, in a timely manner, excess contributions that are made by an employer. This can generally be accomplished by a contribution holiday for the employer or an increase in benefits coverage for employees. We would also like to note that where the terms of the trust provide that excess contributions are to be paid to employees, the trust would generally not qualify as a health and welfare trust. We would not, however, be concerned with a situation in which the excess contributions are paid to the employees in the same taxation year in which the employer deducts the contributions. Of course, the amount paid to employees would be taxable employment income in the year of receipt.

(c) Can a plan where the trustees have discretion on use of the funds and the benefits to be paid, qualify as a health and welfare trust?

Yes. This is the type of trust arrangement envisaged by the CRA's administrative position, i.e., one where the trustees act independently of the employer as opposed to the employer controlling use of the funds, and where the terms of the trust provide that contributions will not revert back to the employer under any circumstances or be used for any purpose other than providing health and welfare benefits to employees or former employees.

(d) Can an otherwise qualifying health and welfare trust that provides benefits to both current employees and retirees based on contributions by the employer of X dollars per hour worked by employees, be split into two separate trusts, one for current employees and one for retirees, where the employer contributes a pro-rata portion of every dollar to each trust?

In and by itself, such an arrangement would not affect the status of the trusts as health and welfare trusts.

(e) Can an employer that contributes X dollars per hour worked by employees to a qualifying health and welfare trust to fund benefits for current employees and retirees, change the terms of the trust such that a separate contribution of Y dollars per hour is made to fund benefits for retirees?

In and by itself, an arrangement where an employer contributes separate amounts to fund differing levels of benefits coverage for current employees and retirees, will not disqualify the trust as a health and welfare trust.

(f) Can a plan that is contributed to by multiple employers qualify as a health and welfare trust?

Yes. Such arrangements are quite common. Again, we would caution that employers must be careful not to over contribute to such a trust. Further, in the event that there is an over contribution, the trust should contain a mechanism to correct the matter in a timely manner.

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