24 July 1991 Income Tax Severed Letter 911538 - [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.

Revenue Canada Taxation

Head Office

911538 Marc Vanasse (613) 952-0243

Attention: XXXX

July 24, 1991

Dear Sirs:

Re: Health and Welfare Trust

Your letter dated May 14, 1991, wherein you requested our opinion as to the acceptability of the trust agreement as a health and welfare trust, has been forwarded to us for our reply.

The particular circumstances outlined in your letter and the accompanying document on which you have asked our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. We are therefore not in a position to give you a definitive answer to your question. However, we can offer you the following comments which may be of assistance.

1. As mentioned in paragraph 6 of Interpretation Bulletin IT-85R2 , the trustee (Employee Benefit Planning Associates) must act independently of the employer. The trust agreement should contain a clause that ensures that the trustee(s) will be independent from the employer(s).

2. There is no mention in the trust agreement of the powers of the trustees with respect to the investments of the funds 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 agreement:

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. With respect to the termination aspect contained in the trust agreement, article 11 would not be acceptable. In order to further comply with the requirement that the trust funds cannot revert to the employer, Health and Welfare Trust agreements normally have a clause which specifies that upon termination of the trust, any excess funds, after all liabilities have been settled, go to a designated charitable organization.

4. 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 term life insurance policy, or c) a group sickness or accident insurance plan.

As we do not have sufficient information on the dental plan and the supplemental health care plan we are unable to comment as to whether either of these plans qualify as a private health services plan (PHSP) as defined in subsection 248(1) of the Income Tax Act (the "Act") and discussed in IT-339R2 .

Under the definition in subsection 248(1) of the Act, a PHSP must be a contract or plan of insurance in respect of hospital and medical expenses. We do not have enough information to determine if the plan is a contract or plan of insurance and therefore, we are not prepared to comment on this issue. In addition, as stated in paragraph 4 of interpretation Bulletin IT-339R2 the coverage under the plan must be in respect of hospital care and expense, or medical care and expense, which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act for the purposes of the medical expense tax credit. It is important that a plan document exist which would outline the medical expenses covered by the supplemental health care plan. The wording in this document should be consistent with the words used in subsection 118.2(2) and regulation 5700 of the Act.

5. In closing, we should mention that the Department generally considers that coverage for an employee/shareholder under insurance plans, such as a private health services plan, a group term life insurance plan and a group sickness and accident insurance plan, would be received by virtue of the individual's shareholdings rather than by virtue of employment. Consequently, the benefit in question could be taxed in the shareholder's hands pursuant to subsection 15(1) of the Act and the exceptions under subparagraph 6(1)(a)(i) of the Act would not apply. Where subsection 15(1) of the Act applies to tax the shareholder because the benefit was received by him in his capacity as a shareholder and not as an employee, the payment of the premiums in question by the corporation would not be deductible in computing the corporation's income since the payment is not incurred by the corporation for the purpose of gaining or producing income from a business or property as required under the exception in paragraph 18(1)(a) of the Act.

Yours truly,

for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

cc. Mr. Simon Ward, Calgary D.O./Source Deduction Section Mr. Paul Remillard, Head Office/Source Deductions