17 June 1996 Internal T.I. 9607477 - CANNOT CREATE LOSS IN 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:

losses claimed in a health and welfare trust

Position:

the administrative position taken in it-85r2 with respect to the normal operating expenses of the trust and the taxable amounts paid to beneficiaries does not extend to permitting the trust to create a non-capital loss which would not otherwise exist

Reasons:

prior corres e932710

June 17, 1996
XXXXXXXXXX Headquarters
Tax Services Office A. Humenuk
Verification and Enforcement (613) 957-8953
Division
Attention:XXXXXXXXXX
960747

XXXXXXXXXX- (the Trust)

We are replying to your memorandum of February 15, 1996, concerning the taxation of the above noted trust.

The Trust was set up in XXXXXXXXXX to provide life insurance, accidental death and dismemberment insurance, weekly indemnity benefits under a group sickness and accident insurance plan, major medical, vision and drug benefits to the employees of participating employers. In computing the income of the Trust for tax purposes, the Trust has reported substantial losses for the years 1990 to 1993. In your review of these losses, you have determined that although the trustees did not include the employers' contributions to the Trust in its income, they deducted the administrative expenses associated with the collection of those contributions as well as other administrative expenses.

You have asked for our views on your proposal to limit the deduction of expenses to the total of expenses laid out to earn the investment income and a reasonable amount, not exceeding $2,000 per year, for trust management fees.

XXXXXXXXXX

Subject to the comments below, it is our view that the Trust in question is a multi-employer health and welfare trust as described in Interpretation Bulletin IT-85R2 "Health and Welfare Trusts for Employees." In our conversation of May 13, 1996 (XXXXXXXXXX/Humenuk), you indicated that you are satisfied that it is only employees of the participating employers who are covered by the benefit plan administered by the Trust. Nevertheless, in response to your question concerning coverage for XXXXXXXXXX who are not considered employees, XXXXXXXXXX, one of the trustees of the plan, confirmed that, while special arrangements might be possible to provide coverage for a self-employed individual, a separate assessment would be required to determine the level of contributions required for such coverage. In the event that the Trust undertakes to provide coverage for a self-employed individual, the tax treatment described in IT-85R2 may not apply. However, as long as the trustees separately identify and account for the contributions, income and benefits related to such coverage, it would be reasonable to apply the principle set out in paragraph 4 of IT-85R2.

As stated in paragraphs 11 to 14 of IT-85R2, a health and welfare trust is permitted to deduct various expenses, including the normal operating expenses of the trust, to the extent of its gross income. This position was taken in 1973 after extensive consultation with industry representatives. However, since there is no authority in the Act to limit expenses described in paragraph 12 a) of IT-85R2 to the gross income of the trust, it is possible but not likely for a health and welfare trust to incur a non-capital loss. A health and welfare trust may realize a non-capital loss if the expenses described in paragraph 12 a) of IT-85R2 incurred in earning the investment income of the trust exceed the gross income of the trust. However, a non-capital loss cannot arise as a result of the expenses described in paragraph 12 b) and c) of IT-85R2. The expenses in paragraph 12 b) are not incurred for the purpose of earning income from business or property, and the expenses described in paragraph 12 c) are limited by subsection 104(6) of the Act.

As it appears that the Trust has sufficient operating expenses to reduce its income to nil for all the years under audit, with the possible exception of 1989, the taxable income of the Trust as reported by the Trust for the years 1990, 1992 and 1993 seems to be correctly stated as nil. However, a loss determination would be in order as the information presented suggests that the Trust has not incurred a non-capital loss for any of the years listed in their schedule of non-capital losses. As we have not reviewed the financial statements or the calculation of taxable income for 1989, we cannot comment on whether the income reported for 1989 of $XXXXXXXXXX is correct.

The above noted comments are based on the fact that the Trust qualifies as a health and welfare trust. However, as stated in paragraph 3 of IT-85R2, a health and welfare trust will only qualify for the treatment set out in that bulletin if the benefits are restricted to those described in paragraph 1. When a trust provides non-qualifying benefits as well as benefits described in paragraph 1 of IT-85R2, paragraph 4 of the bulletin states that the whole trust will be treated as an employee benefit plan unless the trustee administratively segregates the non-qualifying part and treats it as either an employee benefit plan or employee trust. As this trust was created before 1979, the trust (or that portion which does not qualify for the treatment set out in the bulletin) would be treated as an employee benefit plan.

XXXXXXXXXX

However, a trust may have the legal authority to provide benefits which do not qualify for inclusion in a health and welfare trust but that does not, in itself, affect its status for income tax purposes. Provided that the actual benefits provided under the Trust are restricted to those described in paragraph 1 of IT-85R2, the Trust will be accorded the treatment set out in the bulletin. If the trust does provide additional benefits which do not qualify for inclusion in a health and welfare trust but segregates the contributions, income and disbursements relating to the benefits which do qualify in the manner indicated in paragraph 4 of IT-85R2, the tax treatment outlined in the bulletin will apply to that part of the plan.

We hope these comments are helpful.

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch