7 June 1991 Income Tax Severed Letter - Acceptability of a Trust as a Health & Welfare 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.

Subject: Draft Health & Welfare Trust

This is in reply to your memorandum dated March 27, 1991 wherein you requested our comments as to the acceptability of the trust agreement as a Health & Welfare Trust.

The following are our general comments and areas of concerns with respect to the draft Health & Welfare Trust agreement.

HEALTH & WELFARE TRUSTS

As stated in paragraph 6 of Interpretation Bulletin IT-85R2, to qualify for treatment as a health & welfare trust, (1) the funds of the trust cannot revert to the employer, (2) the employer's contributions to the fund must not exceed the amount required to provide the benefits, (3) the payments by the employer cannot be made on a voluntary or gratuitous basis, and (4) the trustee must act independently of the employer and the payments must be enforceable by the trustee should the employer decide not to make the payments required.

In our view, the trustee may not be acting in an independent capacity from the employer since, according to the trust agreement, the employer must approve all major decisions taken by the trustee. In order to achieve some independence, the trustees are usually comprised of equal representation from the employer and employees. XXX

Since the employer's contribution to the trust fund must not exceed the amount required to provide the benefits and therefore must be actuarially determined, we are unable to see how the premium for the "class A" life insurance can be determined in this manner since the benefit upon death is arbitrarily determined as being all funds in the trust. We also fail to see the element of insurance in the "class A" policy as there seems to be no element of risk. As stated in paragraph 1 of IT-85R2, in order to qualify as a Health & Welfare Trust, the benefit programs funded through the trust must be restricted to one or more of the following plans:

• a) a private health services plan, b) a group term life insurance policy, or c) a group sickness or accident insurance plan.

Private Health Services Plan

As we do not have sufficient information on the Dental Insurance Plan and the Extended Health Care Plan we are unable to comment as to whether either of these plans qualify as a private health services plan as this term is defined in subsection 248(1) of the Income Tax Act (the "Act") and discussed in IT-339R2.

Group Term Life Insurance Policy

The phrase "group term life insurance policy" is defined in subsection 248(1) of the Act as a group life insurance policy under which no amount is payable as a result of the contributions made to or under the policy by the employer except in the event or death or disability of the employee. An employee's group life insurance policy is a policy whereby the lives of employees are insured severally under a single contract between the insurer and an employer contracting with the insurer.

XXX. As mentioned in paragraph 4 of IT-85R2, the entire trust would be given employee benefit plan treatment in respect of the timing and amounts of both the employer's expense deductions and the employees' receipt of benefits under the plan unless separate records are kept of contributions and disbursement for taxable benefits.

Group Sickness or Accident Insurance Plan

The comments raised under the heading "Group Term Life Insurance" would also apply to the Group Sickness/Accident Insurance Plan (i.e. the plan covering the "class A" employee is not a group plan).

OTHER CONSIDERATIONS

In the case of a "one man company", the Department generally considers that coverage under insurance plans, such as a private health services plan, a group term life insurance plan and a group sickness and accident insurance plan, would be received by virtue of the individual's shareholdings rather than by virtue of employment. Consequently, the benefit in question could be taxed in the shareholder's hands pursuant to subsection 15(1) of the Act and the exceptions under subparagraph 6(1)(a)(i) of the Act would not apply. Where subsection 15(1) of the Act applies to tax the shareholder because the benefit was received by him in his capacity as a shareholder and not as an employee, the payment of the premiums in question by the corporation would not be deductible in computing the corporation's income since the payment is not incurred by the corporation for the purpose of gaining or producing income from a business or property as required under the exception in paragraph 18(1)(a) of the Act.

Other than what is mentioned in article 5.02 of Appendix A of the trust agreement, there is no indication of any restrictions on the type of investment the trust can make. For example, the Department will find offensive trust funds that are invested in a vacation property which may be used for personal purposes. The following wording could be incorporated in the plan document.

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.