1999 Ruling 9904343 - EXCESS CONTRIBUTIONS 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: The Union has a multi-employer health and welfare fund whereby numerous employers contribute for members covered under collective agreements with the Union. The Employers contribute to the Fund based on an hourly rate. The Trustees set the rate in conjunction with advice from the Fund Consultants, XXXXXXXXXX. The rate is set so as to approximate the average cost per hour of funding the benefits for the average member during the term of the Collective Agreement. A number of the members covered by the Fund have substantial accounts that are not likely to be used up during periods of unemployment. These members tend to have steady employment and often work extensive overtime hours. The Trustees of the Fund propose to amend the Plan and the Trust to provide a return of contributions made for an active member during a taxation year where the balance of a particular member's account at the end of the particular taxation year exceeds the amount which may reasonably be considered necessary to fund his or her benefits. The return of contributions made by the employer to the members will be paid or payable once a year and the member would receive a T4A for such amounts. The return of contributions will be taxable as income in the hands of the member in the year in which the funds are paid or payable to him or her.

Position: It is our view that the proposed transactions would not affect the status of a health an welfare trust.

Reasons: Since the amount of employer contributions are based on an hourly rate, which is negotiated between the union and management, there must be some mechanism to reduce excessive contributions on a timely basis. If excessive amounts are paid to the employees for over contributions made by the employers during a taxation year, we are of the view that these amounts can be considered not to have belonged to the trust, but rather belonged to the employees all along. Thus, paragraph 6 of IT-85R2 would not apply.

XXXXXXXXXX					3-990434

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear XXXXXXXXXX:

RE: XXXXXXXXXX (the "Fund")
XXXXXXXXXX (the "Plan" or the "Plan of Benefits") Advance Income Tax Ruling

We are writing in response your letter dated XXXXXXXXXX, in which you resubmitted an advance income tax ruling request on behalf of the Fund. This request replaced an earlier request dated XXXXXXXXXX. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, and the information provided during our meeting and telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

i. in an earlier return of the taxpayers or a related person;

ii. currently being considered by a tax services office or a tax centre in connection with a filed tax return of the taxpayers or a related person;

iii. under objection by the taxpayers or a related person;

iv. before the courts; or

v. the subject of a ruling previously issued by the Directorate.

Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:

Facts

1. The Fund was established pursuant to an Agreement and Declaration of Trust made as of XXXXXXXXXX, and amended from to time (the "Trust Agreement").

2. Pursuant to the Trust Agreement, various individuals act as Trustees of the Fund (the Trustees)

3. The Fund was established as a health and welfare trust to provide benefits contemplated by Interpretation Bulletin IT85R2, "Health and Welfare Trusts for Employees," dated July 31, 1986.

4. The Trustees have adopted the Plan of Benefits, which consists of weekly indemnity benefits that are self-insured by the Trust and various insurance contracts with insurance carriers to cover major medical and dental benefits, life insurance, accident and long-term disability benefits.

5. Weekly indemnity payments are self-insured since they are relatively short-term.

6. Information and rules of the Plan are provided to the members in the form of a booklet (the "Booklet") that covers all of their benefits.

7. The Fund was created pursuant to two collective bargaining agreements.

8. The Fund provides the benefits under the Plan to members of XXXXXXXXXX (the "Union"), who work under collective agreements in the XXXXXXXXXX.

9. XXXXXXXXXX.

1O. The Fund is a multi-employer Fund where numerous employers contribute for members covered under collective agreements with the Union.

11. The employers are represented in collective bargaining by an employer association known as the XXXXXXXXXX.

12. The employers are bound by the XXXXXXXXXX collective agreements with the Union XXXXXXXXXX.

13. Under the Collective Agreements, the Union and XXXXXXXXXX negotiate a total wage package. The wage package includes hourly wages, vacation pay, and pensions, health and welfare, training and industry fund contributions. The Union determines the portion of the package that is to go for each of the benefit funds, including the Fund, as well as the basic wages. Under the current Collective Agreements, Article XXXXXXXXXX sets out the wage rates, wage package and the various components.

14. Article XXXXXXXXXX of the Collective Agreements sets out the specific contributions attributable to the Fund and the pension trust fund, all of which form part of the wage package.

15. The hourly rate currently in place for the Fund under the most recent amendments to the Collective Agreements is $XXXXXXXXXX per hour. The Trustees set the rate in conjunction with advice from the Fund Consultants, XXXXXXXXXX (the Plan consultants) The rate is set so as to approximate the average cost per hour of funding the benefits for the average member during the term of the Collective Agreement. The benefits covered under the Plan and described in the Booklet are among those contemplated by IT-85R2. They include:

• Major medical, including prescription drugs, medical practitioners (including dentists), medical services, medical supplies, vision care and accommodations
• Life insurance
• Disability benefits
• Accidental death and disability and weekly indemnity benefits.

16. Benefits are funded so that there is adequate funding for the "average member" to get the necessary benefit coverage under the Plan.

17. Each member has an "account" towards which contributions made by the employers are credited. Each month there is a "withdrawal" from the account for the amount necessary to purchase the members' benefit coverage with the Fund's insurance carriers, and to contribute to the Fund's reserve for weekly indemnity benefits. As set out in the portion of the Booklet dealing with "Eligibility and Duration of Coverage," the full coverage benefit premium deduction for a member under age 65 who is employed, is currently $XXXXXXXXXX per month.

18. Prior to the proposed transactions, members accumulated dollars in their plan account without limitation. As most members work in the XXXXXXXXXX, the account system ensures that there are sufficient funds available during slow periods or periods of temporary unemployment to ensure continued coverage for the members.

19. A number of the members covered by the Fund have substantial accounts that are not likely to be used up during periods of unemployment. These members tend to have steady employment and often work extensive overtime hours.

20. As of XXXXXXXXXX, there were approximately XXXXXXXXXX out of XXXXXXXXXX Plan members whose accounts are considered to have more than is necessary to cover periods of unemployment.

21. Pursuant to the provisions of the Trust Agreement contributions cannot be refunded to employers.

Proposed Transactions

22. The Trustees of the Fund propose to amend the Plan and the Trust effective XXXXXXXXXX, to provide a return of contributions made for an active member during a taxation year where the balance of a particular member's account at the end of the particular taxation year exceeds the amount which may reasonably be considered necessary to fund his or her benefits.

23. The return of contributions made by the employer to the members will be paid or payable once a year and the member would receive a T4A for such amounts.

24. The return of contributions will be taxable as income in the hands of the member in the year in which the funds are paid or payable to him or her.

25. The Trust Agreement will be amended to permit such payments to members in the form of an amending resolution.

Purpose of the Proposed Transactions

26. The purpose of the proposed transactions is to ensure that the Plan is not over-funded in the case of those members who happen to have substantial accounts due to uninterrupted employment and substantial overtime. It also ensures that there is equity among the members so that the value of contributions earned by those who have additional hours is attributed to them.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our rulings are as follows:

A. The amendment to the Plan and the Trust Agreement as of XXXXXXXXXX, providing the return of employers' contributions and payment to active members who have an accumulated excess balance for a particular taxation year, as described in the proposed transactions, will not affect the status of the Plan as a Health and Welfare Trust for income tax purposes.

B. The payments made once a year to members in respect of excess employer contributions for a particular taxation year, will not affect the status of the Plan as a Health and Welfare Trust for income tax purposes,

C. We confirm that the members of the Plan will be taxable on amounts returned to them, as set out in the proposed transactions.

The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX, and are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Yours truly,

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