14 October 1999 External T.I. 9921165 - H&W TRUST - PRE-FUNDING LIFE INS.

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 taxpayer can deduct a lump-sum payment to a health and welfare trust which is made on behalf of a retiree upon his or her retirement to cover all future life insurance premiums.

Position: Depends on the situation.

Reasons: Where a company makes a lump-sum contribution to a health and welfare trust to provide for coverage beyond the current year, it is our view that subsection 18(9) of the Income Tax Act applies to deny the employer a deduction for any portion of the contributions which relate to benefits in respect of a period after the year, unless the exception in subparagraph 18(9)(a)(iii) of the Act applies. In general terms, this exception applies where an employer has incurred an expense or made an outlay as consideration for group term life insurance in respect of a period that ends more than 13 months after the consideration is made. Where an employer has paid an employee's life insurance premiums, the employee will be considered to have received a benefit, as determined under Part XXVII of the Income

Tax Regulations, which must be included in income by virtue of subsection 6(4) of the Act.

xxxxxxxxxx J. Gibbons
5-992116

Attention: XXXXXXXXXX

October 14, 1999

Dear XXXXXXXXXX:

This is in response to your letter of July 19, 1999, in which you requested confirmation of the tax consequences of an arrangement whereby life insurance and death benefits for retired employees will be provided through an existing health and welfare trust.

Written confirmation of the tax implications inherent in particular transactions is 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. The following comments are, therefore, of a general nature only.

You have outlined the following hypothetical situation:

1. ABC Corp currently provides life insurance benefits for retirees.

2. The life insurance benefits for retirees are delivered through a group term life insurance policy, and each year ABC pays that year's premium to provide coverage for the year. There is no pre-funding of future costs.

3. There is an existing health and welfare trust in place for employee benefits. ABC is considering the possible use of the same health and welfare trust to fund and deliver the retiree's life insurance.

4. ABC Corp wishes to change its present arrangements so that:

a) a death benefit is paid, in recognition of the employee's service, equal to the present insurance benefit but not to exceed $10,000;

b) the amount of group term life insurance would be equal to the present amount minus the amount of the death benefit; and

c) the group term life insurance benefit would be funded through the existing employee health & welfare trust.

5. The death benefit would be paid directly by ABC Corp.

6. The trust arrangement would require ABC Corp to contribute to the health and welfare trust each year an amount equal to the present value of the premiums required to provide the life insurance coverage for the employees who retire during that year for the balance of their lifetimes, as actuarially determined. ABC Corp would also be required to contribute an additional amount, as actuarially determined, to provide for the funding of premiums required on behalf of employees who retired before the new arrangement becomes effective. This additional amount would be payable over 20 years. The trustees may also require additional contributions from time to time to ensure the solvency of the trust.

Our views

It is our general view that employers may deduct their contributions to a health and welfare in the year in which the legal obligation to make the contribution arose provided the amounts are reasonable and laid out to earn income from a business or property. However, where a company makes a lump-sum contribution to a health and welfare trust to provide for coverage beyond the current year, it is also our view that subsection 18(9) of the Income Tax Act applies to deny the employer a deduction for any portion of the contributions which relate to benefits in respect of a period after the year, unless the exception in subparagraph 18(9)(a)(iii) of the Act applies. In general terms, this exception applies where an employer has incurred an expense or made an outlay as consideration for group term life insurance in respect of a period that ends more than 13 months after the consideration is made. Where an employer has paid an employee's life insurance premiums, the employee will be considered to have received a benefit, as determined under Part XXVII of the Income Tax Regulations, which must be included in income by virtue of subsection 6(4) of the Act.

In regard to the other issues which you have asked us to comment on, there are a number of interpretation bulletins and other publications that set out the Department's general positions. For example, general information on the taxable benefit for employer-paid group term life insurance can be found in paragraph 20 of Interpretation Bulletin IT-529, "Flexible Employee Benefit Programs and in the "Employer's Guide to Payroll Deductions Taxable Benefits." Interpretation Bulletin IT-508R, "Death Benefits," discusses the tax treatment of death benefits. If, after reviewing these publications, you require confirmation of the tax consequences of a proposed arrangement, we suggest that you request an advance ruling in the manner described in IC 70-6R3.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate