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:
whether rollover of trust property from one Health and Welfare trust into a new health and welfare trust can be done without tax consequences
Position TAKEN:
-the settlement of a new trust will fall within the exempting language of paragraph 54(c)(v) of the Act only if the rights and attributes of beneficial ownership under the new trust are the same as the rights and attributes of beneficial ownership immediately prior to settling the new trust.
Reasons FOR POSITION TAKEN:
941285
XXXXXXXXXX Sandra Short
Attention: XXXXXXXXXX
August 5, 1994
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your request of May 9, 1994 which asks that the Department confirm the acceptability of the XXXXXXXXXX new trust document. You also have requested that we confirm that the funds from the old trust can be rolled over into the new trust without any tax consequences. We acknowledge receipt of a copy of the old trust document and the new document and our telephone conversations of June 1 and 3, 1994 (Fuoco/XXXXXXXXXX).
As your submission relates to an actual taxpayer and a proposed transaction, which would normally be the subject of an advance income tax ruling, we are unable to comment on the specifics of the situation. We are, however, prepared to offer the following general comments which relate to Health and Welfare Trusts and variations of a trust.
In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
As discussed in paragraph 1 of Interpretation Bulletin IT-85R2, the tax treatment which is accorded an employee health and welfare benefit program that is administered by an employer or group of employers through a trust arrangement must be restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy or any combination thereof. Ordinarily, we would expect to see an explicit statement to that effect in the trust document. For example, a statement which says that the purpose of a plan is to provide life insurance, hospitalization insurance, sick benefit insurance and medical, surgical, dental and drug expense insurance is not considered explicit in that it is not clear that the type of life insurance to be provided is solely group term life insurance, that the only medical, surgical, dental and drug expense insurance to be purchased will be to only cover those medical, surgical, dental and drug expenditures as permitted under subsection 118.2(2) of the Act.
One of the conditions necessary in order for an employer to obtain a deduction for contributions to the trust is that the trustees have the right and obligation to enforce the payment of such contributions as are necessary to maintain the plan. Giving trustees the discretion to enforce payment of contributions may be viewed as not necessarily giving trustees an obligation to enforce the payment of contributions.
A Health and Welfare trust agreement should contain a statement to the effect that the trust property cannot be used directly or indirectly, solely or otherwise by the employer, a person who does not deal at arm's length with the employer or a person who is a member of a group of persons not dealing at arm's length with the employer.
As discussed above, benefits available under a health and welfare plan must be restricted to those described in paragraph 1 of the above noted bulletin in order to qualify as a health and welfare trust. Where a health and welfare trust is wound up, it is our view that any funds left in the trust upon windup which are not distributed to a "qualified donee" (as that term is defined in paragraph 149.1(l)(h) of the Act) must be used solely to provide the type of benefits as required by the plan to the employees entitled to receive those benefits at the time the plan is wound up. Such benefits would not include pension benefits. Where the windup provisions of a plan permit other uses of the funds, the plan will not be accorded the treatment described in the bulletin and will in all likelihood be treated as an employee benefit plan from the inception of the plan.
Subparagraph 54(c)(iii) of the Act states that a disposition of property includes any transfer of property to a trust except as provided in subparagraph 54(c)(v) of the Act. Subparagraph 54(c)(v) of the Act states that a disposition of property is not considered to include any transfer of property "by virtue of which there is a change in the legal ownership of the property without any change in the beneficial ownership thereof...".
A change in legal ownership can result from several different actions including, in our view, a change in the number of trustees which are party to a trust agreement.
The settlement of a new trust will fall within the exempting language of paragraph 54(c)(v) of the Act only if the rights and attributes of beneficial ownership under the new trust are the same as the rights and attributes of beneficial ownership immediately prior to settling the new trust. You may wish to review both trust documents to ensure that this requirement is met.
It is our opinion that, in general, a fundamental change in the terms of the trust has not taken place where the old trust is amended or resettled to reflect a change to administrative matters (such as the number of meetings to be held and how the meetings are to be conducted). In addition, provisions for naming replacement trustees, or extending or amending powers of the trustees would not normally, in and by themselves, create a taxable event.
Revenue Canada does not require registration of a Health and Welfare Trust. It is a question of fact whether a particular trust qualifies for treatment as a Health and Welfare trust.
These comments represent our general views with respect to the subject matter of your letter. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular IC 70-6R2 and the Special Release attached thereto dated September 30, 1992, are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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