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.
Health and Welfare Trusts
This is in reply to your round trip memorandum dated September 4, 1991 in which you asked us for our comments on the acceptability of a trust agreement (the Agreement) as a health and welfare trust pursuant to comments in paragraph 15 of Interpretation Bulletin IT-85R2. We note that the name of the party involved with the trust (the Trust) in question is the XXX
As stated in paragraph 6 of Interpretation Bulletin IT-85R2, to qualify for treatment as a health and welfare trust, (1) the funds of the trust cannot revert to the employer, (2) the trust funds cannot be used for any purpose other than providing health and welfare benefits (3) the employer's contributions to the fund must not exceed the amount required to provide the benefits, (4) the payments by the employer cannot be made on a voluntary or gratuitous basis and must be enforceable by the trustees should the employer decide not to make the payments, and (5) the trustee must act independently of the employer.
Our comments on the above requirements are set out below:
- 1. (a) To comply with the requirement that the funds of a health and welfare trust cannot revert to the employer(s) or be used for any other purpose other than providing health and welfare benefits for which the contributions are made, the Department has taken the position that none of the trust property may be used by the employer(s) or a person related to any of the employer. In this respect, the Agreement must contain a clause restricting the type of investments it can make.
XXX
With respect to the above comments, the Department has suggested that the following wording could be incorporated into a trust agreement although in your case it would have to be modified to refer to all employers who participate in the plan as well as XXX:
No property of the trust, whether such property is acquired from the capital or income of the trust, shall be invested in the shares, notes, bonds, debentures or similar indebtedness issued by:
- (a) the company (b) a person who does not deal at arm's length with the company, or (c) a person who is a member of a group of persons not dealing at arm's length with the company,
nor shall any such property of the trust be invested in property which is or will be used directly or indirectly, solely or otherwise, by the company or any person who does not deal at arm's length with the company or who is a member of a group of persons not dealing at arm's length with the company. For the purposes of this agreement, a group of persons is deemed not to be dealing at arm's length with the company if the persons in the group are related (within the meaning of the Income Tax Act) and collectively, they control the company.
- (b) XXX
(c) Article XXX of the Agreement is not in accord with the requirement that no funds revert to the employer. Pursuant to this article XXX participating dues or membership dues, which are to be paid to XXX may be deposited in the fund (the Fund) of the Trust along with contributions that are made in respect of health and welfare benefits. The participating dues and membership dues will subsequently be remitted to XXX. Assuming this occurs, it seems possible that funds of the Trust might inadvertently be paid to XXX. In addition, there might be some question in certain cases as to whether a payment belongs in the Fund or to XXX and this article is not relevant to the functioning of the Trust. Accordingly, article XXX should be deleted from the Agreement and the participating dues and the membership dues should be the subject of another document in which the Trust is not involved. Consistent with these comments, separate invoices must be sent to employers with the fees due to XXX being required to be paid to XXX and contributions required to be made in respect of health and welfare benefits being required to be paid to the Trust.
- 2. In order to qualify as a health and welfare trust, the benefit programs funded through the Trust must be restricted to a) a private health services plan b) a group term life insurance policy, or c) a group sickness or accident plan. Since our review was confined to the Agreement, we are unable to comment on whether or not this requirement has been satisfied.
- 3. Article XXX of the Agreement provides that a reserve may be accumulated as part of the Fund where such a reserve is considered to be in the best interest of the Fund. Assuming that such a reserve would be established in connection with a self insured benefit plan, the amount of an employer's contribution to a health and welfare trust in respect of such a plan must be based on sound actuarial principles (The establishment of an arbitrary reserve that is contingent is not acceptable.). This is normally done through the use of a professional actuary. As the potential risk is taken into account in determining the contributions that are to be made in respect of a self insured plan, article XXX must be deleted. For your further information, we note that if an employer's contributions exceed the amounts required to provide the benefits, it is the Department's position that the excess is not deductible pursuant to section 67 of the Act.
- 4. As the Agreement contains no terms relating to the enforceability of employer contributions, an article in this regard must be included.
XXX
- (a) In order to achieve independence from the employer, a health and welfare trust usually provides that the number of trustees representing the employees are to be equal to the number of trustees representing the employer(s). In connection with this comment, we also note that a shareholder or officer would not be considered an employee representative. Consistent with the comments in paragraph 6 of IT-85R2, the Agreement should also contain provisions that ensure that the trustees are able to act independently of the employers. XXX
- (b) The Trust functions carried out by XXX should be carried out by the trustees of the Trust and the powers conferred upon XXX should be conferred on trustees.
Other Considerations
XXX
The determination of whether contributions to a health and welfare trust are made by an employee or the employer involves a question of fact which cannot be altered by the fact that such a statement is included in a trust agreement establishing a health and welfare trust. Accordingly, it would appear that it should be deleted.
The above comments indicate that the Trust should not be regarded as a health and welfare trust described in IT-85R2. However, a review of the Trust's operations may indicate that it is possible to consider the Trust to be a health and welfare trust at all relevant times provided that procedures are undertaken to correct the above deficiencies.
If you require any further assistance, we would be pleased to provide our views.
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