24 February 2010 External T.I. 2009-0343541E5 - 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: Can a health and welfare trust distribute funds to an employee's RRSP?

Position: No.

Reasons: Only certain health benefits can be provided through an employer's health and welfare trust.

XXXXXXXXXX 								2009-034354
									Michael Cooke, C.A.
February 24, 2010

Dear XXXXXXXXXX :

Re: Health and Welfare Trusts

We are writing in response to your letter of May 13, 2009, wherein asked for our opinion on the taxable status of a health and welfare trust that permits a transfer of funds to an employee's registered retirement saving plan ("RRSP").

Our Comments

The situation described in your correspondence appears to involve completed transactions involving specific taxpayers. As described in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, inquiries about the income tax consequences of completed transactions involving specific taxpayers should be handled by the relevant Tax Services Office. A list of TSOs is available on the "Contact Us" page of the Canada Revenue Agency's ("CRA") website where you can also find any publications mentioned herein. Notwithstanding the foregoing, we are prepared to offer the following comments.

Paragraph 6(1)(a) of the Act generally taxes the value of any benefits an individual may receive or enjoy in the year by virtue of employment. However, there are exceptions from paragraph 6(1)(a) of the Act, such as where the employer provides certain health and welfare benefits to its employees through contracts of insurance. However, where these types of benefits are not provided by an employer to its employees directly through a contract of insurance, there are no specific provisions in the Act to exclude from an employee's income the benefit arising on the provision of such benefits through a trust arrangement.

Notwithstanding the above, the CRA will administratively allow employees to benefit from the above treatment as long as the particular trust arrangement established by the employer qualifies as a health and welfare trust as described in Interpretation Bulletin, IT-85R2, Health and Welfare Trusts for Employees. As noted in paragraph 6 of IT-85R2, "To qualify for treatment as a HWT 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". Consequently, where the funds of a trust, that is otherwise purported to be a HWT, are transferred to an employee's RRSP, the particular trust would not qualify as a HWT since the benefits provided by such trust would not be restricted to the type of benefits described in paragraph 1 of IT-85R2 (i.e., a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy, or any combination thereof).

If a trust used by an employer to provide employees with benefits fails to qualify as a HWT for the reason described above, or because it fails to meet any of the conditions outlined in IT-85R2, there may be various adverse tax consequences to the employees and the employer. For example, an employer's contribution to a trust is generally non-deductible because it is considered to be a contribution of capital. However, in order to ascertain the tax implications with any degree of specificity, a determination would have to be made as to the nature of the particular trust or fund.

If, for example, the particular trust arrangement is determined to be an employee benefit plan ("EBP"), the amount an employer may deduct is limited by paragraph 18(1)(o) and section 32.1 of the Act to the amounts included in the income of its employees in the year. In addition, although the employer's contributions to an EBP would not be taxable to the employee because of a specific exception in subparagraph 6(1)(a)(ii) of the Act, all amounts received out of or under an EBP would be included in the employee's income by virtue of paragraph 6(1)(g) of the Act (subject to certain exceptions). Please refer to Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts for more information in this regard.

As noted above, your local TSO would have to examine all relevant documentation and the transactions undertaken by the trust in order to determine the appropriate characterization and resulting tax implications. We trust our comments will be of assistance to you.

Yours truly,

Renée Shields
Manager
Business and Personal Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch