31 August 1993 External T.I. 9311685 F - Health and Welfare Trusts - Small Businesses

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Health and Welfare Trusts - Small Businesses

This is in reply to your letter of April 19 concerning the establishment of a health and welfare trust in respect of small businesses.  We apologize for the delay in our response.

The questions that you have asked appear to relate to specific taxpayers and involve proposed transactions. Confirmation of the tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling following a review of all the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 and the related Special Release dated September 30, 1993. As a request for an advance income tax ruling has not been made, our comments set out below must be construed as being broad and general in nature rather than having been made in respect of a specific situation.

Our Comments:

It is our understanding that you are concerned with a health and welfare trust as described in Interpretation Bulletin IT-85R2 which would include a private health services plan and a disability insurance plan. General comments on these two types of plans are respectively set out in Interpretation Bulletins IT-339R2 "Meaning of Private Health Services Plan" and IT-428 "Wage Loss Replacement Plans".

Our reply to the four questions in the order presented in your letter is set out below:

1.     Is it necessary for participating employers to be related through a common industry (e.g., carpenters or plumbers) or through an association (e.g., retail merchants) or is it permissible for several employers, each of whom carries on a business that is unrelated to the business of the other employers, to participate in the same health and welfare trust?

It is the Department's position that it is possible for employers who carry on unrelated businesses to be employer-participants in the same health and welfare trust.

2.     For the purposes of determining whether an employer can participate in a health and welfare trust, does it matter whether the business is carried on by a corporation, by a partnership or by a sole proprietor?

It is the Department's position that the fact that a business may be carried on by a corporation, by a partnership or by a sole proprietor is not relevant in determining whether the employer is eligible to be a participant of a health and welfare trust.

3.     (a) For each of the three types of entities in 2 above, is there a minimum number of employees in respect of which health and welfare benefits must be provided (i.e., at least two or more employees)?

(b)     Are partners of a partnership and sole proprietors eligible for benefits under a health and welfare trust?

In the case of (a) above, neither the type of business carried on nor the legal status (i.e. corporation, partnership or sole- proprietorship) of the employer is relevant in regard to the minimum number of employees in respect of which health and welfare benefits must be provided in order for an employer to be a participant in a health and welfare trust. However, in relation to this question, we have also set out comments with respect to the type of plans administered by a health and welfare trust.

There is no minimum number of employees that must be covered under a private health services plan as is indicated in paragraph 7 of Interpretation Bulletin IT-85R2. However, in the case of a wage loss replacement plan referred to in IT-428, two or more employees must be covered under the plan if it is to be the type of plan that qualifies as a "group sickness or accident insurance plan".

We also note that a wage loss replacement plan can encompass the situation where employees are insured under a single contract between an insurer and a health and welfare trust. In addition, a wage loss replacement plan can include the situation under which employees are covered under individual insurance contracts but pursuant to a common plan. However, the fact that each employee is required to provide evidence of insurability or that discounted premiums are involved is not indicative of whether or not two or more employees are covered under a particular plan.

For your further information, we are mentioning that a "group term life insurance policy" in respect of which general comments have been included in Interpretation Bulletin IT-227R, must include two or more employees.

In connection with the above comments, paragraph 4 of IT-85R2 indicates that if one of the plans administered by a trust was considered not to be (a) a private health services plan, (b) a group term life insurance policy or (c) a wage loss replacement that qualifies as a group sickness or accident insurance plan, the combined plan is given employee benefit plan or employee trust treatment in respect of the timing and amounts of both employer's expense deductions and the employees' receipt of benefits under the plan. However, if contributions, income and disbursements of that part of the plan that is described in (a) to (c) are separately identified and accounted for, the tax treatment outlined in IT-IT-85R2 will apply to that part of the plan.

With respect to (b) above, the Department's position as expressed in paragraph 7 of IT-85R2 in relation to a partnership also applies to a proprietor. Accordingly, if proprietors or partners wish to be covered under a health and welfare trust, a separate trust must be established in order to ensure that funds in the plan are identifiable and no cross-subsidization occurs. It is also the Department's position that in the case of such a trust, contributions made by a partnership or proprietor would not be deductible but that in the event any benefits became payable, they would not be taxable in the hands of the recipient.

We also wish to mention that the position in paragraph 7 of IT- 85R2 also extends to an individual who receives benefits in his or her capacity as a shareholder. In the case where an individual is both an employee and a shareholder, it is a question of fact whether a benefit has been conferred on the individual in the capacity of a shareholder or in the capacity of an employee. However, where a benefit is granted to such an individual, the benefit will be presumed to have been conferred upon him or her by reason of being a shareholder unless the benefit is available to all employees of that corporation or the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.

Where a benefit is conferred on an individual in his or her capacity as a shareholder, those benefits would be taxed in the individual's hands pursuant to subsection 15(1) of the Act and the exception under subparagraph 6(1)(a)(i) of the Act would not apply. In addition, the related expense would not be deductible in computing the corporation's income since the payment is not incurred by the for the purposes of gaining or producing income from a business or property as required under paragraph 18(1)(a) of the Act.

4.     Where the eligibility requirements for coverage under the plans are the same for all employees (e.g., six months of continuous employment) but that different levels of benefits are provided, does affect the answers to the foregoing questions?

It is the Department's view that the fact that different levels of benefits are provided to different groups of employees does not affect the above responses.

We hope that these comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch