8 July 1994 External T.I. 9408685 - CRITERIA FOR ESTABLISHING A H&W 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

H&W trust
1. meaning of contingency reserves
2. degree of independence required of the trustees
3. reversion of funds to employer on windup of trust

Position TAKEN:

1&2 -questions of fact 3. no

Reasons FOR POSITION TAKEN:

position has been well established in other letters

A. Humenuk
XXXXXXXXXX 940868

Attention: XXXXXXXXXX

July 8, 1994

Dear Sirs:

Re: Health and Welfare Trusts

We are replying to your letter of April 7, 1994 concerning the administration of a health and welfare trust.

We would comment at the outset that we are reluctant to express an opinion about a plan in the absence of having reviewed its governing documents. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. However, based on the information provided by you in your letter and the additional information obtained during our telephone conversation, we would offer the following general comments.

The term "health and welfare trust" is used in Interpretation Bulletin IT-85R2 "Health and Welfare Trusts" to describe a trust which is used to administer certain employer-provided plans, the benefits from which are not required to be included in the employees' income. A trust which does not qualify as a health and welfare trust will likely be an employee benefit plan or an employee trust as described in Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts".

You ask whether an employer can contribute funds to the disability plan portion of a health and welfare trust in order to create a reserve to anticipate liabilities for a plan member who is disabled and awaiting qualification for benefits. As stated in paragraph 14 of the bulletin, the transfer of funds to establish contingency reserves is not deductible by the employer. In our telephone conversation of July 6, 1994 (XXXXXXXXXX/Humenuk), you state that your client intends to establish a pay-as-you-go plan where the employer is only required to contribute to the plan when an employee becomes disabled and is awaiting qualification for benefits. You are concerned that a contribution of the amount expected to be paid to the disabled employee could be considered to be a contingency fund since there is no guarantee that the employee will qualify for all or any part of the amount so contributed at the end of the waiting period.

It is a question of fact as to whether the contributions to a plan are reasonable in relation to the amount required to provide the benefits on an annual basis or whether such contributions are made with the intent of creating a surplus or reserve for future benefits. Since an employer's contributions to the fund must not exceed the amounts required to provide the benefits, it is necessary to be able to somehow support the amount of the contribution. This can be done through the use of a professional actuary. Any excess contributions will not be deductible.

While you recognize that the trustee of the trust must act independently of the employer in order for the trust to qualify as a health and welfare trust, you ask whether the employer can appoint all of the trustees provided that they represent the employer and employees equally.

It is a question of fact as to whether an employer effectively controls a trust through the ability to appoint all of its trustees. While directed primarily at the control of corporations, the comments in Interpretation Bulletins IT-64 "Corporations: Association and Control - After 1988" and IT-419 "Meaning of Arm's Length" on de facto and de jure control may be of assistance to you in this regard. However, where the facts show that the trustees do act independently of the employer by representing both the employer and employees, the fact that the employer has appointed all the trustees will not in itself disqualify the trust as a health and welfare trust.

While recognizing that IT-85R2 is clear on the question of funds reverting to the employer, your last question deals with whether the funds in a trust can revert back to the employer upon the wind up of the plan. In order for a trust to qualify as a health and welfare trust it must ensure that trust funds cannot revert to the employer or be used for any other purposes other than providing the health and welfare benefits for which the contribution was made either while the plan is in operation or upon its winding-up.

We have enclosed copies of the bulletins and circular mentioned in our letter.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch