28 October 1994 External T.I. 942445A - HEALTH AND 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.

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 a health and welfare trust agreement is described in IT-85R2.

Position TAKEN:

Deficiencies were mentioned.

Reasons FOR POSITION TAKEN:

The comments are essentially based on past correspondence. In addition general were made in respect of wage loss replacement plans and private health services plans.

M. Eisner
XXXXXXXXXX 942445
(613) 957-2138

Attention: XXXXXXXXXX

October 28, 1994

Dear Sirs:

Re: Health and Welfare Trusts

This is in reply to your letter of July 5, 1994 addressed to our Toronto District Taxation Office wherein you requested the Department's views on the acceptability of an agreement, which accompanied you letter, as a health and welfare trust. We apologise for the delay in replying.

A health and welfare trust as contemplated by Interpretation Bulletin IT-85R2 "Health and Welfare Trusts" must satisfy the conditions set out in that publication. Such a trust would involve an employer who makes contributions, the employer's employees who are the beneficiaries covered under the plans administered by the trust, and trustees who administer the trust. In view of the nature of a health and welfare trust (H & W trust), such an agreement generally includes terms relating to the purpose of the trust, the benefits to be provided under the trust, the powers of trustees, costs of operating the trust, the appointment, removal and retirement of trustees, meetings of trustees, termination of the trust and amendment of the trust agreement. In addition, the terms of the trust must be consistent with the conditions set out paragraphs 5 and 6 in IT-85R2 and specific terms must be included with respect to the conditions set out in (a) to (e) below. The conditions set out in IT-85R2 are as follows:

(a) the contributions must be enforceable by the trustees of the H & W trust should the employer decide not to make the payments;

(b) the trustee(s) must act independently of the employer (i.e., the employer must not have control over the trust);

(c) the trust funds cannot be used for any purpose other than providing benefits in respect of (i) a group sickness or accident insurance plan; (ii) a private health services plan, (iii) a group term life insurance policy, or (iv) any combination of (i) to (iii);

(d) the trust funds cannot revert to the employer; and

(e) the employer's contributions must not exceed the amount required to provide the benefits.

In connection with (c) and (d) above, we require that the trust document contain a clause that 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 employer,
(b) a person who does not deal at arm's length with the employer or
(c) a person who is a member of a group of persons not dealing at arm's length with the employer,

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 employer or any person who does not deal at arm's length with the employer or who is a member of a group of persons not dealing at arm's length with the employer. The trust should stipulate that a group of persons will be deemed not to be dealing at arm's length with the employer if the persons in the group are related (within the meaning of the Income Tax Act) and collectively, they control the Employer.

In view of the above comments, it is not possible to regard the agreement submitted acceptable with respect to a H & W trust described in IT-85R2. As a further comment, legal terminology is normally used in the preparation of a H & W trust as a consequence of the nature of such a trust.

We also note that where a funding arrangement with respect to a H & W trust involves self-insurance, the trustees, in consultation with an actuary, will determine, on an actuarial basis, the level of contributions required to be made to the H & W trust in order to adequately fund the H & W trust benefits. For your further information, we are also making the following comments on a group sickness or accident insurance plan and a private health services plan:

(a) The Department's general position on private health services plans is set out in Interpretation Bulletin IT-339R2 which has been enclosed. We would also emphasize the requirement in paragraph 4 of IT-339R2 which indicates that expenses covered by a private health services plan must be in respect of hospital care and expense or medical care and expense, which would normally otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Income Tax Act (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 health care plan. The wording in this document should be consistent with the requirements in subsection 118.2(2) and Regulation 5700 of the Act.

(b) Pursuant to section 67 of the Act, the quantum of a benefit provided to any particular employee in respect of a private health services is only deductible by the employer to the extent that it is reasonable. Where there is no limitation in respect of amounts that will be reimbursed to an employee in respect of a private health services plan, this may be an indication that the quantum of the benefit does not satisfy the reasonableness test.

(c) General comments on a group sickness or accident insurance plans have been included in Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" which has been enclosed. In particular, we refer you to paragraphs 5, 6, and 7 under the heading "Meaning of Wage Loss Replacement Plans" (a wage loss replacement plan described in these paragraphs would include a group sickness or accident insurance plan). We also note that, pursuant to comments in paragraph 7, a wage loss replacement plan is not considered to include benefits such as continuing wage or salary payments based on sick leave debits.

(d) In the case where an individual is both an employee and a shareholder, it is a question of fact whether a benefit has been conferred on the individual in the capacity of a shareholder or in the capacity of an employee. However, where a benefit is conferred on such an individual, the benefit will be presumed to have been conferred upon him or her by reason of being a shareholder unless the individual is able to establish otherwise (i.e., that the benefit was received in his or her capacity as an employee).

Where a benefit is conferred on an individual in his or her capacity as a shareholder, those benefits would be taxed in the individual's hands pursuant to subsection 15(1) of the Act and the exceptions under subparagraph 6(1)(a)(i) of the Act relating to certain employment benefits such as the employer's contribution to a group sickness or accident insurance plan or a private health services plan would not apply. In addition, the related expense would not be deductible in computing the employer's income since the payment is not incurred by the employer for the purposes of gaining or producing income from a business or property as required under paragraph 18(1)(a) of the Act.

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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