1 August 2013 Internal T.I. 2013-0484061I7 - Alternative Minimum Tax - Health & 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: Whether a HWT is permitted to deduct expenses in excess of gross trust income when determining adjusted taxable income for purposes of the AMT?

Position: Yes.

Reasons: Previous positions.

August 1, 2013

Individual Returns Directorate Income Tax Rulings
Directorate
Assessment and Benefit Business and Employment Division
Services Branch Tom Baltkois

Attention: Ann Charron 2013-048406

Alternative Minimum Tax – Health & Welfare Trusts

We are writing in response to your email dated March 27, 2013, in which you requested further clarification of the comments in our technical interpretation # 2004-009364, issued November 26, 2004. In particular, you would like know if there is any legislative authority which permits a health and welfare trust ("HWT") to compute "adjusted taxable income" for purposes of the alternative minimum tax ("AMT") under section 127.5 of the Income Tax Act ("the Act"), without reference to paragraph 12 of Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees.

Our Comments

As you are aware, the position of the Canada Revenue Agency ("CRA") on the taxation of HWTs is discussed in IT-85R2. In general terms, a health and welfare benefit program that is administered by an employer through a trust arrangement may be considered a HWT where it meets the conditions outlined in the bulletin.

There are no specific provisions of the Act which detail how to compute the income of a HWT; these rules are primarily outlined in IT-85R2. At issue is the application of paragraph 12 of IT-85R2, which specifies that a HWT may only deduct expenses to the extent of its gross trust income. This position is intended only to apply for purposes of computing income under Division C of the Act.

Document 2004-009364 clarified that while a HWT is not permitted to create a loss for purposes of Division C of the Act, it may deduct all expenses that were otherwise deductible and not allowed because of the limitation discussed in paragraph 12 of IT-85R2, when determining "adjusted taxable income" under subsection 127.52(1) of the Act. This position recognizes the fact that a HWT is not permitted to carry forward losses and generally would not be in a position to recover any AMT paid, in future years.

We note that the rules enacted for employer life and health trusts ("ELHTs") are based to a large extent on CRA's positions regarding HWTs. Pursuant to subparagraph 127.55(f)(vi) of the Act, ELHTs are not subject to AMT.

Document 2004-009364 reflects the CRA's current position concerning the calculation of a HWT's income for purposes of the AMT. It is anticipated that the income tax folio that will be drafted to replace IT-85R2 will clarify the application of AMT in these circumstances. However, it is our understanding that there will not likely be any legislative amendments made to the Act.

We trust these comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch