15 December 1999 External T.I. 9929185 - PRE-FUNDING OF CONTRIB. TO 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: Whether a lump-sum contribution to a health and welfare trust to provide for the life-insurance coverage of a retired employee is deductible by the employer, where the trust purchases one-year term insurance during the remaining life of the employee.

Position: The employer's contributions to the health and welfare trust that relate to term-insurance premiums that will be paid by the Trust in future years will not be deductible by the employer by virtue of subsection 18(9) of the Act.

Reasons: In this situation, the exception in clause 18(9)(a)(iii)(B) does not apply since the employer's pre-funding of its required contributions to the Trust cannot be deemed consideration for life insurance in respect of a period that ends more than 13 months after the consideration is paid.

XXXXXXXXXX 	J. Gibbons
		5-992918
Attention: XXXXXXXXXX 

December 15, 1999

Dear XXXXXXXXXX:

We are replying to your letter of October 27, 1999, in which you requested additional clarification of our comments in a letter to you dated October 14, 1999, concerning the income tax consequences of providing life insurance and death benefits through a health and welfare trust (the "Trust").

As requested, we have considered your situation and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless 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, our comments are of a general nature only.

In our letter of October 14, we stated that 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 subsection 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.

Your views

You have clarified that the employer is not directly responsible for paying the employee's life insurance premium but that the Trust is responsible. The Trust purchases one-year term insurance during the remaining life of the employee. Thus, it is your view that:

1. The employer would be entitled to the deduction by reason of the exception in clause 18(9)(a)(iii (B).

2. The retired employees would not receive a taxable benefit as a result of ABC Corp's contribution to the Trust pursuant to paragraph 9(d) of IT-85R2.

3. The employer's contribution to the Trust would be deductible in the year it is deposited.

4. The premium paid by the Trust to the insurer for group term life insurance would result in a taxable benefit to the retired employees as a "term insurance benefit" pursuant to Regulation 2702 which taxable benefit would arise each year as the Trust purchases the term life insurance coverage.

Our views

In our view, the employer's contributions to the Trust that relate to term-insurance premiums that will be paid by the Trust in future years will not be deductible by the employer by virtue of subsection 18(9) of the Act. In this situation, the exception in clause 18(9)(a)(iii)(B) does not apply since the employer's pre-funding of its required contributions to the Trust cannot reasonably be regarded as consideration for life insurance in respect of a period that ends more than 13 months after the consideration is paid.

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

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