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: Various questions regarding the administration of a health and welfare trust.
Position: General comments provided
Reasons: See response.
XXXXXXXXXX
2010-037632
Renee Sigouin
(613) 957-2128
March 15, 2011
Dear XXXXXXXXXX :
Re: Health and Welfare Trust ("HWT")
This is in response to your letter of July 19, 2010 wherein you asked for our comments on various matters concerning the administration of a HWT. We apologize for our delay in responding to your request.
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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
As you are aware, the CRA's position on the taxable status of HWT's is discussed in Interpretation Bulletin, IT-85R2 "Health and Welfare Trusts for Employees" ("IT-85R2"). In general terms, a health and welfare benefit program that is administered by an employer through a trust arrangement may be considered a HWT where it meets the conditions outlined in the bulletin and is used exclusively to administer:
- a group sickness or accident insurance plan;
- a private health insurance plan ("PHSP");
- a group term life insurance plan; or
- any combination of the above plans.
As noted in paragraph 6 of IT-85R2, "to qualify for treatment as a HWT the funds of the 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".
Notwithstanding the above, a HWT will not necessarily be disqualified as a HWT where an employer has made excess contributions in a year or the HWT has a surplus at the end of a fiscal period(s). However, there could be tax implications for the employer in terms of the deductibility of contributions. Furthermore, as described in paragraph 12 of IT-85R2, a trust which invests some or all of the contributions received and earns investment income, will be subject to tax under section 104 of the Act on the amount of the trust's income remaining after deductions. As a HWT is an inter-vivos trust for tax purposes, such income is taxable at the highest marginal tax rate.
You have asked whether a HWT can make certain specific distributions in order to reduce its surplus at the end of a fiscal year, without compromising its status as a HWT. The CRA's general position with respect to the use of funds in a HWT is outlined in paragraph 6 of IT-85R2, a portion of which is excerpted above. It is our view that where the funds of a trust that is purported to be a HWT are distributed otherwise than in the form of an eligible benefit from one of the three abovementioned plans, the particular trust would not qualify as a HWT, since the benefits provided by the trust would not be restricted to benefits from such plans. Notwithstanding this, we have previously indicated that we would not be particularly concerned with a situation in which excess employer contributions to a HWT in a taxation year were distributed from a HWT to employees in the same taxation year in which the employer deducts the contributions, as long as the amount paid to employees is included in their employment income in the year of receipt.
You have asked various questions in relation to the distribution of funds or the payment of benefits from a HWT to former employees and their dependents, where the former employee contributed and had unutilized funds in the HWT. We note that this query presupposes that the funds in a HWT, representing contributions made by the employer and employees, are maintained in individual accounts reflecting contributions and benefit payments for each participant in the plans.
Generally, funds in a HWT are pooled according to the plan to which the contributions relate or are aggregated to provide benefits from all of the plans within the HWT. Accordingly, there is no portion of the funds within a HWT that can be specifically attributed to any particular individual. An exception might occur if a HWT contains a health care spending account ("HCSA") that qualifies as a PHSP. Further information regarding HCSAs is available in IT-529, "Flexible Employee Benefit Programs". It is therefore possible for an employee to have a credit in their HCSA which is an amount specific to that particular employee (such credit should not be confused with a flex credit which is discussed in detail in IT-529). However, as with other plans of insurance, an employee does not have an inherent right to the balance of credits in a HCSA. As stated in paragraphs 16 and 17 of IT-529:
"One of the criteria for a private health services plan is that the plan must be a plan of insurance. In order for a health care spending account to qualify as a plan of insurance, there must be a reasonable element of risk. For example, if the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a private health services plan.
[...]
If an employee is able to withdraw or transfer an amount from a health care spending account (other than as a premium payable in respect of another private health services plan), the health care spending account will not be a private health services plan and all amounts received out of the account, including reimbursements of eligible medical expenses, will be included in the employee's income ..."
Accordingly, a HWT cannot make a distribution to employees or former employees or to their dependents or survivors, from its surplus or from an amount standing to the credit of a particular individual's HCSA, except to the extent permitted under the terms of a bona fide plan described in paragraph 1 of IT-85R2 as a benefit payment. Where such plans permit participation by retirees and/or their dependents, the HWT can provide benefits to such individuals without effecting its status as a HWT.
We trust that these comments have been of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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