S2-F1-C1, Health and Welfare Trusts

Introduction

The purpose of this Chapter History is to highlight any amendments to the information contained in an interpretation bulletin that is now replaced in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Update November 28, 2015

¶1.5 is updated to add a hyperlinked reference to a CRA webpage with updated information about what qualifies as a private health services plan (PHSP).

Update November 24, 2015

Minor changes have been made to improve the usability of the income tax folios:

• the Summary section has been moved to the top of each folio chapter to be more immediately visible and helpful to readers;
• the Application and Reference sections have been moved to the end of the Chapter which is more appropriate for administrative content of this nature. However, these sections now appear in the Table of contents for easy access;
• the statement that folios are only available in electronic format has been moved to the end of the Application section; and
• the words “as promulgated under the Act” in connection with the Income Tax Regulations have been removed from the Application section, in the interest of using plain language.

Update July 27, 2015

General

Income Tax Folio S2-F1-C1, Health and Welfare Trusts, replaces and cancels Interpretation Bulletin IT–85R2, Health and Welfare Trusts for Employees.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below. Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended and as promulgated under the Act.

Legislative and other changes

¶1.1 (formerly included in ¶5 of IT-85R2) is updated to clarify that multiple employers may participate in the same health and welfare trust.

¶1.3 is added to clarify that benefits administered by a health and welfare trust are not always limited to those provided under a third-party insurance contract.

¶1.4 - 1.7 (formerly included in ¶2 and 7 of IT-85R2) are updated to provide a general description and overview of each of the health and welfare benefits that can be administered in a health and welfare trust.

¶1.8 and 1.9 are added to provide a brief overview of employee life and health trusts clarify that a trust may qualify as both a health and welfare trust and an employee life and health trust in certain circumstances, and to refer the reader to the requirements and conditions that must be met to qualify under each respective trust regime.

¶1.14 is added to clarify that the benefit plans administered by a health and welfare trust cannot provide coverage for non-employees, regardless of whether such individuals pay for coverage themselves.

Content in ¶7 of IT-85R2 has not been included in the Chapter. A trust established by a partnership to provide health and welfare benefits to its partners is not a health and welfare trust described in this Chapter.

¶1.15 (formerly included in ¶6 of IT-85R2) is updated to clarify that the funds of a health and welfare trust cannot be invested in or used by the employer or a person or group that is determined not to deal at arm’s length with the employer. This paragraph also refers the reader to Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length.

¶1.16 is added to clarify that the distribution of surplus funds to employees is not an acceptable use of trust funds in most cases and may disqualify the trust as a health and welfare trust. This paragraph also highlights the circumstances under which such a distribution may be acceptable.

¶1.17 is added to clarify the acceptable uses of trust funds on the wind-up of a health and welfare trust.

¶1.19 is added to clarify some of the factors considered when determining trustee independence. This paragraph also refers the reader to Interpretation Bulletin IT-64R4 (Consolidated), Corporations: Association and Control, and Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length.

¶1.20 (formerly included in ¶6 of IT-85R2) is updated to clarify that an employer must make contributions to fund employee health and welfare benefits or the trust will not qualify as a health and welfare trust.

¶1.21 (formerly included in ¶6 of IT-85R2) is expanded to clarify that a temporary or permanent surplus in a particular year will not automatically disqualify the trust as a health and welfare trust, even though its existence may suggest that employer contributions exceeded the amount required to provide health and welfare benefits to employees.

¶1.22 and 1.23 are added to highlight the circumstances under which a surplus may arise in a health and welfare trust, distinguish between surpluses of a temporary and permanent nature, and clarify the measures that may be taken to eliminate a permanent surplus in a health and welfare trust.

¶1.25 is added to provide general guidance concerning the establishment of a health and welfare trust.

¶1.26 (formerly ¶8 of IT-85R2) is updated to include reference to both insured plans and self-insured plans. This paragraph also refers the reader to jurisprudence concerning the deductibility of contributions made to a health and welfare trust.

¶1.27 and 1.28 are added to provide information concerning the deductibility of contributions and reasonable administrative costs by an employer when health and welfare benefits are provided through an insured or a self-insured plan.

¶1.29 is added to clarify that contributions that are not deducted in a year may be deducted in a subsequent year when the contributions are used by the trust to provide health and welfare benefits to employees.

¶1.30 is added to provide information concerning the deductibility of employer contributions when a trust loses its status as a health and welfare trust, and refers the reader to Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts.

¶1.32 (formerly included in ¶9 of IT-85R2) is expanded to include general comments concerning the tax treatment and recognition of health and welfare benefits received by an employee and the tax treatment of contributions made by a health and welfare trust to particular benefit plans.

¶1.33 is added to reflect paragraph 6(1)(e.1), which was added to the Act by S.C. 2012, c.31, s.2 and effective for the 2013 and subsequent tax years, and clarifies the tax implications of employer contributions to a group sickness or accident insurance plan that provides lump sum payments or pays benefits where there has been no loss of employment income. Paragraph 6(1)(e.1) applies to contributions made on or after March 29, 2012.

¶1.34 (formerly ¶9(a) of IT-85R2) is updated to include reference to periodic payments received as compensation for the loss of employment income. This paragraph also refers the reader to Interpretation Bulletin IT-428, Wage Loss Replacement Plans.

¶1.35 (formerly ¶9(c) of IT-85R2) is revised to remove the specific reference to premiums, as a self-insured plan may also qualify as a private health services plan. This paragraph also clarifies that private health services plan premiums, contributions or other consideration paid for by the employer cannot be claimed as eligible medical expenses by an employee under paragraph 118.2(2)(q).

¶1.36 (formerly ¶9(d) of IT-85R2) is updated to reflect a legislative amendment to subsection 6(4), made by S.C. 1995, c.3, s.1, and applies to insurance provided in respect of periods that are after June 1994. This paragraph also clarifies that the benefit included in subsection 6(4) is determined under Part XXVII of the Regulations.

Content in ¶9(e) - (h) of IT-85R2 has not been included in this Chapter. These paragraphs discussed the tax implications of lump sum and periodic payments provided to beneficiaries/recipients under a group term life insurance policy and did not specifically concern tax implications to employees or contain information that is specific or unique to a health and welfare trust.

Content in ¶10 of IT-85R2 which concerns the determination of the non-taxable portion of benefits has not been included in this Chapter. Benefits received by an employee under a private health services plan or a group sickness or accident insurance plans to which paragraph 6(1)(e.1) applies are not taxable, regardless of whether the employee makes contributions. ¶1.38 in this Chapter specifically addresses the treatment of employee contributions to a group sickness or accident insurance plan that provides benefits which are included in income under paragraph 6(1)(f). The formula in subsection 2702(1) of the Regulations determines an employee’s annual subsection 6(4) benefit in respect of a group term life insurance policy and takes employee contributions into account.

¶1.38 is added to provide the circumstances under which benefits included in income under paragraph 6(1)(f) may be reduced, to include reference to employee-pay-all plans, and to clarify that such plans may be either insured or self-insured plans. This paragraph also refers the reader to Interpretation Bulletin IT-428, Wage Loss Replacement Plans and the CRA website, which provide additional information concerning the tax treatment of benefits received under employee-pay-all plans.

¶1.39 is added to clarify that employee contributions to a group term life insurance policy would reduce the annual benefit included in income under 6(4), and refers the reader to Guide T4130, Employers’ Guide – Taxable Benefits and Allowances, which provides information concerning the calculation of the benefit.

¶1.40 - 1.43 are added to discuss the concept of benefits conferred on an individual who is both an employee and a shareholder of a corporation, to highlight the importance of establishing whether such benefits are conferred to an individual in the capacity of an employee or shareholder, and to outline the possible tax treatment of health and welfare benefits received by employee-shareholders. The reader is also directed to Interpretation Bulletin IT-432, Benefits Conferred on Shareholders, for additional information on this subject.

¶1.44 (formerly included in ¶11 and 12 of IT-85R2) is revised to provide general comments concerning the taxation of inter vivos trusts, and to clarify that a health and welfare trust is subject to alternative minimum tax determined under subsection 127.5, which was introduced in the 1985 Federal budget and took effect on January 1, 1986. This paragraph is also updated to clarify that a health and welfare trust is not subject to the 21-year deemed realization rule in subsection 104(4).

¶1.45 (formerly included in ¶11 of IT-85R2) is revised to clarify the meaning of gross trust income and to provide an example of incidental income earned by a health and welfare trust.

¶1.46 (formerly included in ¶12 of IT-85R2) is revised to include reference to trust income subject to tax and to clarify that a health and welfare trust may deduct net capital losses when computing trust income subject to tax.

¶1.49 is added to clarify that provincial sales taxes and premium taxes are not deductible by a health and welfare trust.

¶1.51 and 1.52 are added to reflect the introduction of the alternative minimum tax in section 127.51, as added by S.C. 1988, c. 55.

¶1.53 is added to highlight the 21-year deemed realization rule generally applicable to trusts and clarify that a health and welfare trust is not subject to the application of subsection 104(4) by reason of paragraph (a.1) of the definition of trust in subsection 108(1), which was added to the Act by S.C. 2001, c.17, s.83, and applicable to the 1999 and subsequent tax years. Paragraph (a.1) of the subsection 108(1) definition of trust was amended by S.C. 2013, c.34, s.236, to clarify that its intended application should be limited to health and welfare trusts. This amendment applies to trust tax years that begin after 2006.

¶1.54 (formerly included in ¶11 of IT-85R2) is revised to refer to the reader to the T3 Trust Income Tax and Information Return and Guide T4013, T3 Trust Guide.

¶1.55 (formerly ¶13 of IT-85R2) is updated to change unemployment insurance to employment insurance, and refer the reader to Form T4, Form T4A, Guide T4001, Employers’ Guide – Payroll Deductions and Remittances, Guide T4130, Employers’ Guide - Taxable Benefits and Allowances, and the CRA webpage Canada Pension Plan and Employment Insurance Explained. This paragraph also clarifies that taxable benefits provided through a health and welfare trust may be subject to Canada Pension Plan contributions and Employment Insurance premiums in certain circumstances.