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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Is the trust exempt from tax pursuant to paragraph 149(1)(k) of the Act as a "benevolent or fraternal benefit society or order"?

Position: No.

Reasons: The trust will be taxed as an inter vivos trust.

		October 31, 2003

	XXXXXXXXXX 	HEADQUARTERS
	XXXXXXXXXX 	A. Seidel, CMA
	Verification and Enforcement Division	(613) 957-2058
	XXXXXXXXXX  Tax Services Office

		2003-003799

Benevolent or Fraternal Benefit Society or Order

On June 27, 2003 we provided a memorandum that was in response to your referral of Mr. XXXXXXXXXX 's January 13 and February 28, 2003, letters concerning the XXXXXXXXXX (the "Trust"). On August 22, 2003, Mr. XXXXXXXXXX provided another submission and further documentation to support his argument that the Trust is a "benevolent or fraternal benefit society or order" and, therefore, not subject to tax by virtue of paragraph 149(1)(k) of the Income Tax Act (the "Act").

Background

1. The Trust was established on XXXXXXXXXX by the union representing the XXXXXXXXXX, in consultation with the XXXXXXXXXX, to provide a range of "health and welfare" benefits (the "Plan") to retired XXXXXXXXXX ("Retirees") of XXXXXXXXXX.

2. The particular benefits to be provided to Retirees are determined by the trustees of the Trust. The Plan provides that benefits may include any, or all of, health, welfare, life insurance and related auxiliary benefits. The benefits under the Plan, and any amendments thereto, must be approved by XXXXXXXXXX. The Plan has been restricted to providing health care benefits XXXXXXXXXX. The Plan is a "private health services plan" within the meaning thereof in subsection 248(1) of the Act.

3. Eligible beneficiaries under the Plan include Retirees who were formerly covered by the collective agreement between the XXXXXXXXXX and XXXXXXXXXX and are currently in receipt of a pension from the XXXXXXXXXX.

4. The Trust was settled by a single payment from XXXXXXXXXX in XXXXXXXXXX. The XXXXXXXXXX was entitled to a suspension of contributions to a pension plan for its employees. XXXXXXXXXX received a payment from the XXXXXXXXXX as a result of the suspension of contributions and pursuant to a collective agreement with the XXXXXXXXXX. XXXXXXXXXX choose to use a portion of this payment to create and settle the Trust. No individual XXXXXXXXXX member had any right to receive a specific portion of the payment made to XXXXXXXXXX by the XXXXXXXXXX.

6. Other than the benefits provided for under the Plan, no Retiree has any right, title or interest in or to the assets of the Trust.

Taxpayer's Views

Under the Income Tax Act (the "Act") a Trust is generally subject to tax on the portion of its income, as otherwise determined, which is not payable to a beneficiary in the year. For tax purposes, a trust is taxed as an individual.

Amounts paid to Retirees under the terms of the Plan are paid to them because of their entitlement to benefits under the Plan and not because they are entitled to a distribution of the income of the Trust. The Retirees are entitled to benefits because of a contractual arrangement between the Retirees and the XXXXXXXXXX. Therefore, any income earned in the Trust is subject to tax in the Trust.

The terms of the XXXXXXXXXX made as of the XXXXXXXXXX created an entity to operate the Plan. It is the taxpayer's view that this Trust is exempt from tax on its taxable income pursuant to paragraph 149(1)(k) of the Act. Paragraph 149(1)(k) of the Act provides that no tax is payable on the taxable income of a "benevolent or fraternal benefit society or order".

The CCRA has issued an Interpretation Bulletin dealing with health and welfare trusts for employees (IT-85R2, Health and Welfare Trusts for Employees) ("IT-85R2"). This bulletin provides for the taxation of any investment income earned by the trust. Such income is included in the income of a beneficiary (where the trust provides that benefits are first paid out of income) with any remaining investment income taxed in the trust. This position is consistent with the views expressed above with respect to the Plan, i.e. the income of the Trust is included in the taxable income of the trust and is only exempt from tax on such taxable income under paragraph 149(l)(k) of the Act. A health and welfare trust administered by an employer would not qualify for tax exemption as a "fraternal benefit society" whereas the Plan administered by Trustees for the benefit of current and future retirees would appear to qualify as a "benevolent or fraternal benefit society or order".

Issue

Is the Trust a "benevolent or fraternal benefit society or order" within the meaning thereof in paragraph 149(1)(k) such that the income earned by the Trust in a taxation year is exempt from tax?

Our Comments

We discussed the meaning of the expression "a benevolent or fraternal benefit society or order", as referred to in paragraph 149(1)(k) of the Act, in our previous memorandum. We continue to be of the view that the Trust does not fall within the definition of a "fraternal benefit" organization and that paragraph 149(1)(k) of the Act does not apply to the Trust.

IT-85R2 describes the tax treatment accorded to an employee health and welfare benefit program that is administered by an employer through a trust arrangement and that is restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy or any combination of the above. In this particular case, the Trust is administering health and welfare benefits that would generally qualify for the treatment described in IT-85R2. However, it is not the "employer" administering the Trust. The union representing retired employees created and, with XXXXXXXXXX, is administering the Plan. Accordingly, it is our view that the Trust would not qualify as a health and welfare trust within the guidelines outlined in IT-85R2.

The definition of "retirement compensation arrangement" in subsection 248(1) of the Act includes, subject to certain exclusions, "a plan or arrangement under which contributions (other than payments made to acquire an interest in a life insurance policy) are made by an employer or former employer of a taxpayer, ... to another person or partnership (in this definition and in Part XI.3 referred to as the "custodian") in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of, the retirement of the taxpayer". The arrangement between XXXXXXXXXX, XXXXXXXXXX and the Retirees is the type of arrangement that fits within this definition. However, since the contribution to the Trust was not made by the employer or former employer (it was made by the union) the Trust would not fall within the definition of "retirement compensation arrangement".

It is our view that, for income tax purposes, the Trust is simply an inter vivos trust, as defined in subsection 108(1) of the Act. The Trust was settled with the payment from XXXXXXXXXX and earns investment income thereon. The Trust has no other income. As such, the provisions of Subdivision k of Division B of Part I of the Act will apply to the investment income earned by the Trust.

Although the Trust documents make provision for amendments to the benefits to be provided to Retirees, and provide for changes in the funding of the Trust, to date, the Trust has been restricted to administering medical and dental benefits under a private health services plan. Pursuant to the trust agreement governing the Trust, Retirees are not entitled to any of the assets of the Trust such that the Retirees are not capital beneficiaries of the Trust. The Retirees are also not employees of XXXXXXXXXX, such that the contribution to the Trust did not give rise to any taxable benefit to the Retirees under section 6 of the Act. The Retirees are simply entitled to a reimbursement of actual medical and dental expenses that qualify for reimbursement under the Plan. As such, and notwithstanding the fact that the Trust is considered to be an inter vivos trust, the Trust is currently providing medical and dental health benefits to Retirees. Provided that the amount(s) received by a Retiree is/are restricted to reimbursement of actual medical and/or dental expenses, such amount(s) would not be required to be included in computing income, for income tax purposes, of the Retiree.

We hope our comments are of assistance. If you wish to discuss any of the above further, or if we can be of any further assistance, do not hesitate to contact us at the above number.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to

Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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