31 March 1998 External T.I. 9729065 - HEALTH AND WELFARE TRUST - GENERAL COMMENTS

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 ‚mis, peut ne pas repr‚senter la position actuelle du ministŠre.

J. Gibbons
XXXXXXXXXX 5-972906

Attention: XXXXXXXXXX

March 31, 1998

Dear XXXXXXXXXX:

We are replying to your letter of October 29,1997, requesting confirmation of the tax implications with respect to a hypothetical health and welfare trust. The health and welfare trust will provide short-term disability benefits to active employees, private health services plan benefits to retirees, and group term life insurance benefits to retirees. We apologize for the delay in replying.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, while we have reviewed the sample documentation submitted with your letter, we cannot provide assurance of any of the issues raised in your letter. The following comments are, therefore, of a general nature only.

The term, health and welfare trust, is not defined in the Income Tax Act but is used in Interpretation Bulletin IT-85R2 to describe a trust which is used to administer certain employer-provided benefits described in paragraph 1 of the bulletin. In this regard, the types of benefits which would be offered by your hypothetical trust, i.e., the short-term disability benefits, the private health services plan benefits, and the group term life insurance benefits, are of the type described in the bulletin. However, as indicated in Interpretation Bulletin, IT-339R2, a private health services plan must be a plan of insurance and should generally cover expenses which qualify as medical expenses in subsection 118.2(2) of the Act and section 5700 of the Income Tax Regulations.

According to the requirements described in IT-85R2, the funds of a health and welfare trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. In addition, the employer's contributions to the fund must not exceed the amounts required to provide these benefits. Furthermore, the payments cannot be made on a voluntary or gratuitous basis. The payments must be enforceable by the trustees should the employer decide not to make the payments required. The type of trust arrangement envisaged is one where the trustee or trustees act independently of the employer as opposed to the type of arrangement initiated unilaterally by an employer who has control over the use of the funds whether or not there are any employer contributions.

In regard to the requirements described in IT-85R2, your letter indicates that the employer will appoint a Canadian trust company to administer the trust and hold and invest its assets. In the event that a trust company is unwilling to perform the duties assigned to the trustee under the agreement, the employer will appoint individual trustees from retirees and current employees, both unionized and non-unionized. Your letter also indicates that a clause will be included in the trust agreement which will ensure that trust funds cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. The employer will appoint a Fellow of the Canadian Institute of Actuaries to value the assets and liabilities of the health and welfare trust and recommend appropriate contribution levels. Any funding surpluses, determined actuarially, will be reduced as soon as possible by future employer contribution holidays, until such surpluses are eliminated. The letter also indicates that, should the trust be terminated by the employer, funds remaining in the Trust cannot be returned to the employer, but will be used to provided benefits of a type acceptable to Revenue Canada as health and welfare benefits

While we cannot confirm that the hypothetical trust described in your letter will qualify as a health and welfare trust, it is our view that it generally meets the requirements of a health and welfare trust. However, in order for employer contributions to a health and welfare trust to be deductible in a particular taxation year, pursuant to paragraph 18(9)(a) of the Act, the contributions must be reasonable in relation to the benefits that are expected to be paid out of the trust in that particular year.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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