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.
Dear Sirs:
Re: Health and Welfare Trust
Your letter dated March 20, 1991, wherein you requested our opinion on several questions with respect to Health and Welfare Trusts, has been forwarded to us by P. Hyland (Correspondence Area/Revenue Canada) for our reply. We will answer each question in the order in which they were raised.
1. You have stated that since Interpretation Bulletin IT-85R2 refers to "insurance" plans, would self-insured arrangements with no insurance company qualify for treatment as a health and Welfare Trust.
As stated in paragraph 1 of IT-85R2, in order to qualify as a Health & Welfare Trust, the benefit programs funded through the trust must be restricted to one or more of the following plans:
a) a private health services plan,
b) a group sickness or accident insurance plan, or
c) a group term life insurance policy.
As mentioned in IT-339R2 (Meaning of "Private Health Services Plan"), the Department has accepted self-insured arrangements if the employer or trust is obligated to reimburse, under contract, expenses incurred by the employees or their dependants.
Paragraph 7 of IT-428 states that it is not necessary that there be a contract of insurance with an insurance company with respect to group sickness or accident insurance plans. If, however, insurance is not provided by an insurance company, the plan must be one that is based on insurance principles , i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims.
The Department has also accepted that health and welfare trusts may provide group term life insurance policies to employees on a self-insurance basis.
2. You have also asked whether limitations exists on the investment of the funds held in the trust.
To comply with the requirement in paragraph 6 of IT-85R2, that the funds of the trust cannot revert to the employer or be used for any other purpose other than providing health and welfare benefits for which the contributions are made, the Department has taken the position that none of the trust property may be used by the employer or a person related to the employer. In this respect, the trust agreement must contain a clause restricting the type of investments it can make. The following wording could be incorporated in the trust document:
"No property of the trust, whether such property is acquired from the capital or income of the trust, shall be invested in the shares, notes, bonds, debentures or similar indebtedness issued by:
(a) the company,
(b) a person who does not deal at arm's length with the company,or
(c) a person who is a member of a group of persons not dealing at arm's length with the company,
nor shall any such property of the trust be invested in property which is or will be used directly or indirectly, solely or otherwise, by the company or any person who does not deal at arm's length with the company or who is a member of a group of persons not dealing at arm's length with the company. For the purposes of this agreement, a group of persons is deemed not to be dealing at arm's length with the company if the persons in the group are related (within the meaning of the Income Tax Act) and collectively, they control the company".
3. You have asked whether disabled life reserves on an income replacement plan which are held for payments that may be made to existing claimants would be considered contingency reserves. As confirmed during our telephone conversation of June 4, 1991 Vanasse 19(1) the amount that may be paid has been determined through actuarial studies.
Paragraph 14 of IT-85R2 states that the trust cannot deduct in computing trust income amounts that are transferred to a contingency reserve although actuarial studies may recommend the establishment of such a reserve. In our view, the disabled life reserve amount which has been determined (which may or may not be paid to claimants) constitutes a contingency reserve. However, the employer's contribution to the trust with respect to the existence of a contingency reserve may be deductible if the amount is determined on an actuarial basis. The deductibility for the corporation will be subject to the provisions of section 67 and paragraph 18(1)(a) of the Income Tax Act.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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