2011 Ruling 2010-0389651R3 - Employee Life and Health 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.

Principal Issues:
1. Does Section 80 apply to the assumption by the Trust of Employerco's obligation to make certain post-retirement benefits?
2. Does the Trust qualify as an ELHT under subsection 144.1(2) of the Act?
3. Does the Actuarial Report satisfy the criteria set forth in subsection 144.1(5) of the Act?
4. Will the Actuarial Disbursements for a particular taxation year set forth in the Actuarial Report be deductible in that particular year pursuant to subsections 144.1(4) and (5) of the Act.

Position:
1. No
2. Yes
3. Yes
4. Yes

XXXXXXXXXX
									2010-038965
									XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear Sir:

Re:  	Advance Income Tax Ruling
	XXXXXXXXXX  ("Employerco")
Proposed Retiree Health Care Trust		

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above-named taxpayer. We also acknowledge your XXXXXXXXXX as well as various additional submissions received during the month of XXXXXXXXXX .

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request herein are:

(i) dealt with in an earlier return of Employerco or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of Employerco or a related person;

(iii) under objection or appeal by Employerco or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate to Employerco or a related person; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise noted, (i) all references herein to sections or components thereof are references to the Income Tax Act (the "Act"), as amended, or the Income Tax Regulations (the "Regulations"), as appropriate, and (ii) all references to monetary amounts are in Canadian dollars.

Definitions:

(a) "Actuarial Disbursements" has the meaning set out in 23 below;

(b) "Actuarial Report" has the meaning set out in 23 below;

(c) "Actuary" means XXXXXXXXXX , the independent consulting actuary retained by Employerco for purposes of preparing the Actuarial Report in respect of the Trust;

(d) "Beneficiaries" means beneficiaries of the Trust and refers to all members of each particular Participating Employer's Covered Group;

(e) "Benefits" means certain post-retirement medical, hospital and dental benefits for Beneficiaries of the Trust who are permitted beneficiaries of an ELHT under subparagraphs 144.1(2)(d)(i) and (ii), that qualify as a 'designated employee benefit' under subsection 144.1(1);

(f) "Covered Group" of a particular Participating Employer means all individuals entitled to receive benefits under a Plan and who are permitted beneficiaries of an ELHT under subparagraphs 144.1(2)(d)(i) and (ii);

(g) "DOT" means the Declaration of Trust related to the Trust;

(h) "ELHT" means an employee life and health trust within the meaning of subsection 144.1(2);

(i) "Eligible Child" means unmarried children, provided they meet the criteria set forth in (a), (b) and (c) of this definition, until the end of the calendar year in which they attain 25 years of age, or at any age if they are totally and permanently disabled by a medically determinable physical or mental condition which prevents the child from engaging in substantial gainful activity and which can be expected to be of long-continued or indefinite duration or to result in death.

a) XXXXXXXXXX ;
b) XXXXXXXXXX ;
c) They are permitted beneficiaries of the Retiree within the meaning of paragraph 144.1(2)(d).

(j) "Employerco" means XXXXXXXXXX as described more fully in 1 to 4 below;

(k) "Employee" means XXXXXXXXXX ;

(l) "Employerco Covered Group" means Employerco's Retirees and Retiree Dependents who are permitted beneficiaries of an ELHT under subparagraphs 144.1(2)(d)(i) and (ii);

(m) "Employerco Payments" means, collectively, the payments described in 24(a) and the Note Payments described in 25, below;

(n) "Employerco Plan" means the XXXXXXXXXX and which provides for post-retirement health benefits to members of the Employerco Covered Group;

(o) "Funding Date" means XXXXXXXXXX ;

(p) "Independent Trustees" means trustees of the Trust who are not Member Trustees and XXXXXXXXXX ;

(q) "Key Employee" means a key employee within the meaning of subsection 144.1(1);

(r) "Member Trustees" means trustees of the Trust who are appointed by XXXXXXXXXX ;

(s) "Notes" means the XXXXXXXXXX ;

(t) "Participant" means a member of a Covered Group who has fulfilled all requirements for participation as determined pursuant to Article XXXXXXXXXX of the DOT and who pays all contributions as and when required as a condition of coverage, and who receives coverage pursuant to the terms of a Plan;

(u) "Participating Employer" has the meaning set out in paragraph 9 below;

(v) "Plan" means the Employerco Plan and the comparable plan(s) of any Participating Employer who enters into a participation agreement with the Trust, as described in 9, below;

(w) "Retiree Dependents" means a surviving Spouse of a deceased Retiree who is eligible to receive Benefits; a Spouse; an Eligible Child; and a Sponsored Dependent;

(x) "Retiree Payments" has the meaning set out in 30 below;

(y) "Retiree" means a former Employee of Employerco who retired on or before the Funding Date and who is eligible to receive Benefits;

(z) "Settlement Agreement" has the meaning set out in 6 below;

(aa) "Sponsored Dependent" means an individual who is a permitted beneficiary of a Retiree within the meaning of paragraph 144.1(2)(d), who is a member of the Retiree's household, and who qualifies as a dependent of the Retiree within the meaning of the Act or was reported as a dependent on the Retiree's most recent tax return;

(bb) "Spouse" means the person to whom the Retiree is legally married, or, if the Retiree so elects, means a person who has been residing with and cohabitating with the Retiree for a continuous period of at least one year, and has been publicly represented by the Retiree as the Retiree's wife, husband or spouse;

(cc) XXXXXXXXXX ;

(dd) XXXXXXXXXX ;

(ee) XXXXXXXXXX ;

(ff) XXXXXXXXXX ;

(gg) "Transitional Payments" means the payment of Benefits made by Employerco in respect of claims for Benefits arising after XXXXXXXXXX ;

(hh) "Trust" means the intervivos XXXXXXXXXX Trust established as described in 7 and 8, below;

(ii) "Trustees" means the trustees of the Trust; and

(jj) "Union" means the XXXXXXXXXX .

FACTS AND PROPOSED TRANSACTIONS

1. Employerco is a taxable Canadian corporation within the meaning of subsection 89(1).

2. Employerco's executive offices are situated at XXXXXXXXXX . The Taxation Centre and Tax Services Office of Employerco are the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office, respectively. The Business Number of Employerco is XXXXXXXXXX .

3. Employerco's business includes XXXXXXXXXX .

4. Historically, Employerco was obliged to make certain payments in respect of medical, hospital and dental benefits for its Employees, Retirees and Retiree Dependents. These costs are an ongoing cost of doing business for Employerco. Such benefits have not been separately funded and were paid for by Employerco out of its operating income, as such expenses were incurred by the relevant Employees, Retirees and Retiree Dependents.

5. Pursuant to a collective bargaining agreement negotiated between Employerco and the Union, certain post-retirement medical, hospital and dental benefits to which Employees may become entitled should they retire subsequent to the Funding Date, will be funded and paid exclusively by the Trust and not by Employerco.

6. Pursuant to the terms of the Settlement Agreement XXXXXXXXXX , Employerco and the Retirees and the Retiree Dependents (subject to certain exceptions for persons who may opt-out) have XXXXXXXXXX . Subject to the satisfaction of certain conditions precedent, the parties agreed to undertake the steps described in 7 to 32 below.

7. Prior to the Funding Date, the Union will establish the Trust pursuant to a Declaration of Trust (the "DOT") executed by the Trustees and containing (inter alia) all of the terms described herein. Employerco will then deliver $XXXXXXXXXX to the Trustees (or their appointed legal representatives) to settle the Trust. The Trust will be effective as at XXXXXXXXXX and the terms of the DOT will remain unchanged throughout its XXXXXXXXXX taxation year.

8. Pursuant to Article XXXXXXXXXX of the DOT, the only purpose of the Trust will be to provide Benefits to, or for the benefit of, current and future Participants of the Trust.

9. The Trust will permit employers in addition to Employerco (collectively, "Participating Employers") to enter into a participation agreement with the Trust in order to provide Benefits to their respective retired employees. The Plan of each Participating Employer will define the eligibility conditions of the Participants in its particular Covered Group but all Participants must qualify as permitted beneficiaries of an ELHT under subparagraphs 144.1(2)(d)(i) and (ii).

10. The DOT provides that the assets of Employerco and a Participating Employer must be separately accounted for in the Trust and that under no circumstances may the assets credited to the account of Employerco or a Participating Employer be available to meet the liabilities of, or defray the expenses attributable to the other. The Trust shall allow for the pooled investment of assets credited to each separate account in order to provide economies of scale to the Trustees in purchasing services for the Plan or the plan of Participating Employers.

11. The Trust will be administered by up to XXXXXXXXXX individual Trustees. Pursuant to the terms of the DOT, the majority of the Trustees must be residents of Canada for purposes of the Act. Up to XXXXXXXXXX of these Trustees shall be Member Trustees and up to XXXXXXXXXX of the Trustees shall be Independent Trustees.

12. The initial trustees will be comprised of XXXXXXXXXX Member Trustees and XXXXXXXXXX Independent Trustees appointed pursuant to the DOT. The XXXXXXXXXX Member Trustees shall serve at the discretion of the President of the Union who may remove and replace such Trustees. Each of the XXXXXXXXXX Independent Trustees may be removed and replaced by a majority vote of the other Trustees.

13. No Participating Employer will be permitted to nominate a Trustee. No Trustee shall have any financial or institutional relationship with a Participating Employer or the Union if such relationship could reasonably be expected to impair such person's exercise of independent judgment. No Trustee shall be appointed by, or serve as a representative of, a Participating Employer.

14. Pursuant to Article XXXXXXXXXX of the DOT, the Trust is required to be administered such that throughout each taxation year it is resident in Canada for purposes of the Act determined without reference to section 94.

15. The Retirees, the Retiree Dependents and Employees who retire subsequent to the Funding Date who are members of the Employerco Covered Group, will be Beneficiaries of the Trust. Pursuant to Article XXXXXXXXXX of the DOT, under no circumstances may individuals other than members of a Covered Group be allowed to benefit from the Trust;

16. Pursuant to Article XXXXXXXXXX of the DOT, the Trust and a Plan may contain one or more classes of Beneficiaries provided (i) the members of one class of Beneficiaries represent at least 25% of all the Beneficiaries of the Trust who are employees of a Participating Employer and (ii) at least 75% of the members of that class are not Key Employees of a Participating Employer;

17. Pursuant to Article XXXXXXXXXX of the DOT, no more than 25% of the members of a class of Beneficiaries may be Key Employees and no Key Employee shall have rights under a Plan that are more advantageous than the rights of the other members of the relevant Covered Group.

18. Pursuant to Articles XXXXXXXXXX of the DOT, no payment shall be made by the Trustees to a Participating Employer that is not a prescribed payment for purposes of paragraph 144.1(2)(g) or otherwise permitted to be made by an ELHT.

19. No Participating Employer will have a right to the assets of the Trust, either during its existence or upon its termination. Employerco does have a right to receive a reimbursement of certain costs (as described in 31 below).

20. Pursuant to Article XXXXXXXXXX of the DOT, notwithstanding any other provision of the DOT, the Trustees shall not make a loan to, or an investment in a Participating Employer or a person or partnership with whom a Participating Employer does not deal at arm's length.

21. Pursuant to Article XXXXXXXXXX of the DOT, upon termination of the Trust and the DOT, the assets of the Trust shall be paid out at the direction of the Trustees in the following order of priority:

(a) the payment of reasonable and necessary administrative expenses (including taxes);

(b) the payment of Benefits to Participants entitled to payments for claims arising prior to such termination; and

(c) distribution of the remaining property of the Trust on a pro rata basis and as permitted by the Act for the benefit of members of a Covered Group remaining on termination, in such fashion as the Trustees determine.

22. Pursuant to Article XXXXXXXXXX of the DOT, any terms of the Trust or a Plan that would be inconsistent with the requirements of section 144.1(2) and the rules applicable to ELHTs shall be modified to the extent necessary to comply with such requirements. Furthermore, pursuant to Article XXXXXXXXXX of the DOT, the terms of the Trust shall be such as to qualify as an ELHT within the meaning of the Act and it shall be administered at all times so as to qualify as such.

23. Prior to the Funding Date, the Actuary will deliver an Actuarial Report which will set forth the projected annual disbursements ("Actuarial Disbursements") of the Trust on account of Benefits and administrative costs of the Trust for each year, commencing in XXXXXXXXXX . The Actuarial Report:

(a) will state that the data upon which the Actuarial Disbursements are based is sufficient and reliable and the methods employed are appropriate;

(b) will confirm that it was prepared for the purpose of subsection 144.1(5);

(c) will include an opinion of the Actuary that the report has been prepared, and opinions expressed therein have been given, in accordance with accepted actuarial principles and practices; and

(d) will confirm that it was prepared by a Fellow of the Canadian Institute of Actuaries.

24. On the Funding Date, Employerco will:

(a) make a cash payment of $XXXXXXXXXX (subject to reduction for Transitional Payments and other adjustments as set forth in the Settlement Agreement);

(b) issue and deliver to the Trust the XXXXXXXXXX promissory note having a principal amount of $XXXXXXXXXX and bearing interest at XXXXXXXXXX ;

(c) XXXXXXXXXX ;

(d) XXXXXXXXXX ; and

(e) XXXXXXXXXX .

25. On and after the Funding Date, Employerco will make certain payments ("Note Payments") to the Trust in respect of the Notes.

26. The Notes will reflect the following terms:

XXXXXXXXXX

27. Pursuant to the Settlement Agreement and as consideration for the Employerco Payments, the Trust will irrevocably assume Employerco's obligations to make all payments in respect of Benefits after the Funding Date for the Retirees, the Retiree Dependents and Employees who retire subsequent to the Funding Date.

28. Pursuant to the collective bargaining agreement (as described in 5 above) Employerco will be relieved from its obligation to make Benefits payments to Retirees and Retiree Dependents after the Funding Date.

29. Pursuant to the Settlement Agreement and subject to 31 below, Employerco will be released from its obligations to pay any Benefits to Retirees and Retiree Dependents after XXXXXXXXXX .

30. Retirees will make periodic payments to the Trust ("Retiree Payments") in respect of their current or future Benefits as required and in accordance with Article XXXXXXXXXX of the Employerco Plan.

31. XXXXXXXXXX

32. Employerco will recognize a gain (or loss) for financial statement purposes in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") in respect of the assumption by the Trust of the Benefits obligations and the elimination of the liability from the financial statements of Employerco. The amount of such gain (or loss) will be a function of the prevailing market interest rates at the time the Trust assumes the Benefits obligations.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the proposed transactions is to cap Employerco's obligations in respect of Benefits by having the Trust assume the obligations to make Benefits payments to the members of the Employerco Covered Group.

RULINGS GIVEN

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. Section 80 will not apply to the assumption by the Trust of Employerco's obligation to make payments in respect of Benefits as described in 27, 28 and 29 above.

B. The Trust will qualify as an "employee life and health trust" as defined in subsection 144.1(2) on the Funding Date, and throughout its taxation year ending XXXXXXXXXX .

C. The Actuarial Report will satisfy the criteria set forth in subsection 144.1(5).

D. Subject to the application of the cap set forth in subsection 144.1(7) as well as the specifications in subsection 144.1(8), the Actuarial Disbursements for a particular taxation year as set forth in the Actuarial Report shall, in the absence of evidence to the contrary, be considered to have been contributed to provide Benefits for that year and will be deductible by Employerco in that year pursuant to subsections 144.1(4) and (5).

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX .

COMMENTS

This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Further, nothing in this letter should be construed as implying that the CRA has confirmed, agreed to, reviewed or made any determination in respect of:

(a) the fair market value or adjusted cost base of any property referred to herein;

(b) the actuarial report submitted with the ruling; or

(c) any tax consequences relating to the facts and proposed transactions or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch