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 plan to fund short term sick leave with employee contributions needs to be administered by a trust and whether such a plan is an employee benefit plan or a health and welfare trust
Position: In order to implement a plan under which the employer administers the plan funded with employee contributions, such funds would be “held in trust”. If the employer merely sets aside its own funds to continue to pay benefits during a period of absence, no employee funded plan exists. On the issue of whether trust indenture documents are required in order to establish a trust, they are recommended but not required if the facts otherwise establish that a trust exists.
Provided a trust does exist as appears to be required by the collective agreement, such trust would not be a health and welfare trust as described in it-85R2, an employee benefit plan or an employee trust because it is funded solely by employee contributions.
Reasons: comments provided on the 3 certainties of a trust, which would ordinarily be established if a written indenture was created. If the employer administers the Plan as it described in the collective agreement, a trust would be created, but if the employer does not set the employees’ funds in a trust (with the employer or some other person as trustee), then amounts paid by the employer to the employees would be taxed under 5 or 6(1)(f ) when received, even though such payments would not be made in accordance with the collective agreement (unlikely to be the case, in our view) as the employees would receive less salary with no deductions for contributions to the plan and any payments for periods of leave would either be payments out of an employer-funded wage loss replacement plan or would be continuing salary.
April 29, 1998
Vancouver Tax Services Office HEADQUARTERS
A. Humenuk
Attention: C. Harrington
972394
Sick Leave Plans
This is in response to your request received September 5, 1997, concerning the short-term sick leave plan of the XXXXXXXXXX Our response was delayed because we had been expecting further documentation from XXXXXXXXXX As we have not received such information, we are providing a response based solely on the information originally submitted.
XXXXXXXXXX
You ask whether the Plan is an employee benefit plan or a health and welfare trust as described in Interpretation Bulletin IT-85R2. In our view, the Plan is neither an employee benefit plan or a health and welfare trust if the facts substantiate that it is funded solely by contributions of the employees. The Income Tax Act (the "Act") does not set out any specific requirements with respect to plans that are funded solely by employee contributions. However, the employees are taxed on the full amount of their contributions as noted in the chart following paragraph 11 of Interpretation Bulletin IT- 502, Employee Benefit Plans and Employee Trusts. It should be noted that a trust set up to administer a plan funded solely by employee contributions is not an "employee trust" as defined in subsection 248(1) of the Act and that it is a question of fact as to whether a trust exists in respect of the Plan. If a trust exists, income earned by the trust is calculated and taxed according to the rules in section 104 of the Act.
The XXXXXXXXXX has asked whether a trust is required in order to administer the Plan. If there is no trust relationship between the employer and employees with respect to the funds of the Plan (which seems unlikely given our understanding of the collective agreement), there would be no authority to tax employees on the amount of employment income not received (i.e. the amount required as a contribution to the Plan) unless the Plan could be considered to be a salary deferral arrangement or an employee saving or thrift plan. Any amount paid by the employer to an employee under a group sickness and accident insurance plan that does not involve holding the employees’ funds in trust would, whether or not on account of a period of absence from work, be taxed as employment income under subsection 5(1) or paragraph 6(1)(f) of the Act. If a trust does exist to administer the Plan, the employees are taxed on the full amount of their salary contributed to the Plan as noted above and any benefits or return of contributions paid out of the Plan are not included in the employee’s income when received by the employee.
While a written trust indenture or deed is strongly recommended for the establishment of a trust, it not absolutely necessary, provided that the three certainties particular to the creation of a trust are evident.
A. Certainty of Intention
A person must transfer property or an interest in property with an intention to create a trust relationship. It must be clear that a trust is intended as opposed to an outright gift of property, creation of an agency relationship, or some other type of relationship other than a trust. Where there is a written trust indenture, this is normally not an issue.
B. Certainty of Property
The property or interest therein which is to be held in trust must be identifiable with certainty. Again, where there is a written indenture which sets forth the settlement property, little difficulty arises. However, where there is no written trust indenture, or a written trust indenture which does not adequately describe the property, questions can arise as to whether or not, as a matter of law, a trust has been validly constituted. For example, a trust does not exist if the employer merely sets funds aside in a separate account of the employer which funds can be seized by the employer’s creditors.
C. Certainty of Objects
In order for a trust to be validly created, not only must there be an intention to create a trust and identifiable property which is to be held in trust, but in addition, beneficiaries must be identified and ascertained.
In summary, it is our view that the Plan will involve the establishment of a trust if it is to be funded with contributions by the employees and administered by the employer as stated in the collective agreement. As stated above, although it is strongly recommended that such a trust be evidenced by a written trust indenture or deed, the employer may well be considered the trustee of the Plan based on the collective agreement which sets out the details of the Plan.
P. Spice
Business, Property and Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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