IT85R2 Health and Welfare trusts for employees

Health and Welfare Trusts for Employees
IT-85R2                                July 31, 1986

Paragraph 6(1)(a) and section 104 (also subsections
6(4), 12.2(3), (4), and (7), paragraphs 6(1)(f), 56(1)(d), and (d.1),
60(a), 110(8)(a) and subparagraphs 148(9)(c)(vii) and (ix); also
section 19 of the Income Tax Application Rules, 1971 (ITAR)).

This bulletin replaces and cancels IT-85R, dated
January 20, 1975.  Proposals contained in the Notice of Ways and Means
Motion of June 11, 1986 are not considered in this release.

1.  The general thrust of paragraph 6(1)(a) is to
include in employment income the value of all benefits received or
enjoyed in respect of an employee's employment.  However, there are
a number of specific exceptions many of which can be described as
benefits relating to the health and welfare of the employee.  In some
cases, the scope of the excepted benefits and applicable tax treatment
are well established by other provisions of the Act, (e.g., registered
pension funds or plans, deferred profit sharing plans, supplementary
unemployment benefit plans, the standby charge for the use of an
employer's automobile, employee benefit plans and employee trusts).
The treatment to be accorded to the other exceptions can be less
clear, particularly when the benefits form part of an omnibus health
and welfare program administered by an employer.  The purpose of this
bulletin is to describe 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) a group sickness or accident insurance plan (see 2
  (b) a private health services plan,
  (c) a group term life insurance policy, or
  (d) any combination of (a) to (c).

2.  Paragraph 6(1)(f) sets out the treatment of periodic
receipts related to loss of income from employment under three types
of insurance plans to which the employer had made a contribution.
These types of plans are sickness or accident, disability and income
maintenance (also known as salary continuation).  In the absence of
any statutory definition, the Department generally accepts that an
employer's contribution to any of the three types of plans will be
a contribution to a "group sickness or accident insurance plan"
as described in subparagraph 6(1)(a)(i), provided that the particular
plan is a "group" plan and an insured plan.  This is based on the
assumption that a "disability" resulting in loss of employment
income would almost invariably arise from sickness or an accident
and that an "income maintenance" payment would likely arise from
loss of employment income due to sickness or an accident if not lay
off (the latter reason justifying an exception under subparagraph
6(1)(a)(i) as a supplementary unemployment benefit plan).  There may
be situations where these assumptions will prove invalid but, subject
to this caveat, 1(a) above may also be read as a "group disability
insurance plan" or "a group income maintenance insurance plan that
is not a supplementary unemployment benefit plan".

Employee Benefit Plans and Employee Trusts

3.  Employee benefit plans are broadly defined in subsection
248(1) and can encompass health and welfare arrangements.  However,
funds or plans described in 1(a) to (d) above are specifically excluded
in the definition and are thus accorded the tax treatment outlined
in this bulletin.  Health and welfare arrangements not described in
1(a) to (d) above (e.g., those not based on insurance) may be employee
benefit plans or, less likely, employee trusts subject to the tax
consequences outlined in IT-502.

4.  Where part of a single plan could be regarded as a plan
described in 1(a) to (d) above and another part as an employee benefit
plan or an employee trust, the combined plan will be given employee
benefit plan or employee trust treatment in respect of the timing
and amounts of both the employer's expense deductions and the employees'
receipt of benefits under the plan.  However, if contributions, income
and disbursements of the part of the plan that is described in 1(a)
to (d) above are separately identified and accounted for, the tax
treatment outlined in this bulletin will apply to that part of the

Meaning of Health and Welfare Trust

5.  Health and welfare benefits for employees are sometimes
provided through a trust arrangement under which the trustees (usually
with equal representation from the employer or employers' group and
the employees or their union) receive the contributions from the
employer(s), and in some cases from employees, to provide such health
and welfare benefits as have been agreed to between the employer
and the employees.  If the benefit programs adopted are limited to
those described in 1(a) to (d) above and the arrangement meets the
conditions set out in 6 and 7 below, the trust arrangement is referred
to in this bulletin as a health and welfare trust.

6.  To qualify for treatment as a health and welfare trust
the funds of the trust cannot revert to the employer or be used for
any purpose other than providing health and welfare benefits for
which the contributions are made.  In addition, the employer's contributions
to the fund must not exceed the amounts required to provide these
benefits.  Furthermore, the payments by the employer cannot be made
on a voluntary or gratuitous basis.  They must be enforceable by the
trustees should the employer decide not to make the payments required.
The type of trust arrangement envisaged is one where the trustee
or trustees act independently of the employer as opposed to the type
of arrangement initiated unilaterally by an employer who has control
over the use of the funds whether or not there are employee contributions.
Employer control over the use of funds of a trust (with or without
an external trustee) would occur where the beneficiaries of the trust
have no claim against the trustees or the fund except by or through
the employer.

7.  With the exception of a private health services plan,
two or more employees must be covered by the plan.  Where a partnership
seeks to provide health and welfare benefits for both the employees
and the partners by means of a trust, two distinctly separate health
and welfare trusts (one for the partners and one for the employees)
must be set up to ensure that the funds of each are at all times
identifiable and that cross-subsidization between the plans will
not occur.  The exception in subparagraph 6(1)(a)(i) will of course
not apply to such a trust established for the partners.

Tax Implications to Employer

8.  To the extent that they are reasonable and laid out
to earn income from business or property, contributions to a health
and welfare trust by an employer using the accrual method of computing
income are deductible in the taxation year in which the legal obligation
to make the contributions arose.

Tax Implications to Employee

9.  An employee does not receive or enjoy a benefit at
the time the employer makes a contribution to a health and welfare
trust.  However, subject to 10 below, the tax consequences to an employee
arising from benefits provided under such a trust are as follows:

  Group Sickness or Accident Insurance Plans

  (a) Where a group sickness or accident insurance plan provides that
  benefits are to be paid by the insurer directly to the employee,
  the premium paid by the trustees to the insurer for the employee's
  coverage will not result in a benefit to be included in the
  employee's income.
  (b) Where this type of group sickness or accident insurance plan
  existed before June 19, 1971 and the requirements of section 19 of
  the ITAR are met (see IT-54, "Wage Loss Replacement Plans"), the
  benefits paid to an employee by the trustees or the insurers under
  such a plan in consequence of an event happening before 1974 will
  not result in a taxable benefit to the employee.  Where these
  requirements are not met and in all cases of payments for events
  happening after 1973, the wage loss replacement benefits will be
  taxable under paragraph 6(1)(f) (see IT-428, "Wage Loss Replacement Plans").

  Private Health Services Plans (defined in paragraph 110(8)(a))

  (c) Payment by the trustees of all or part of the
  employee's premium to a private health services plan does not give
  rise to a taxable benefit to the employee.  Benefits provided to an
  employee under a private health services plan are also not subject
  to tax.

  Group Term Life Insurance

  (d) Payment by the trustees of a premium under a group term life
  insurance policy will not result in a taxable benefit to the
  employee unless the aggregate amount of the employee's coverage
  under one or more group term life insurance policies exceeds
  $25,000.  (See IT-227R, "Group Term Life Insurance Premiums").  The
  provisions of section 12.2 which tax accrued amounts under a life
  insurance policy do not apply since a group term life insurance
  policy will be an exempt policy for that purpose.

  (e) Where a group term life insurance policy provides for a lump
  sum payment to the employee's estate or a named beneficiary, the
  receipt of the payment directly from the insurer is not included in
  the recipient's income.

  (f) Certain group term life insurance policies provide
  beneficiaries thereunder with an option to take periodic payments
  in lieu of the lump sum payment and others provide only for
  periodic payments to beneficiaries.  Prior to the introduction of
  the accrual rules in section 12.2 for 1983 and subsequent taxation
  years, benefits thus paid by the insurer to a beneficiary, whether
  as a result of exercising the option or by the terms of the policy,
  were annuity payments that were income of the recipient (paragraph
  56(1)(d)) who deducted the capital element of the annuity payment
  (paragraph 60(a) of the Act and Part III of the Regulations).
  (g) For the 1983 and subsequent taxation years, paragraphs 56(1)(d)
  and 60(a) continue to apply to a beneficiary who is a holder and
  annuitant under an annuity contract if subsection 12.2(3) does not
  apply because of the exceptions in paragraphs 12.2(3)(c) to (e) or
  the application of subsection 12.2(7).  Generally speaking, this
  will occur where the annuity contract
     (i) is a prescribed annuity contract as defined in Regulation 304,
    (ii) was acquired before December 2, 1982 under which annuity
         payments commenced before December 2, 1982,
   (iii) is an annuity contract that was received as proceeds of a
         group term life insurance policy which was itself neither an
         annuity contract nor acquired after December 1, 1982, or
    (iv) was acquired before December 2, 1982, can never be
         surrendered and in respect of which the terms and conditions
         have not been changed
  and is not the subject of an election under subsection 12.2(4).
  (h) For annuity contracts other than ones described in (g) above,
  the annuitant is required by subsection 12.2(3) for the 1983 and
  subsequent taxation years to include in income accrued amounts on
  every "third anniversary" of the contract.  In addition, in any year
  that does not include a "third anniversary", paragraph 56(1)(d.1)
  requires the inclusion of amounts in respect of annuity payments
  received during the year under the contract.  As an alternative to
  the application of subsection 12.2(3) and paragraph 56(1)(d.1), the
  annuitant may elect under subsection 12.2(4) (before annuity
  payments commence) to include accrued amounts on an annual basis.
  In each instance, the issuer will provide the annuitant with a T-5
  information slip indicating the amount of income to be reported in
  respect of the annuity contract.

Shared Contributions

10.  In 9 above the trustees are assumed to be receiving
contributions only from the employer to pay for the cost of benefits
under the trust plan.  However, the trustees may also receive employee
contributions to pay a part of the cost of the benefits being provided
under the plan.  If the plan does not clearly establish that the trustee
must use the employee contributions to pay all or some part of the
cost of a specific benefit, then it will be assumed that each benefit
under the plan is being paid out of both the employer and the employee
contributions.  If the benefit in question is otherwise taxable to
the employee, then in these circumstances a part of it is non-taxable.
The non-taxable part is that proportion of the benefit received by
the employee for the year that the total of employee contributions
received by the trustees in the year is of the aggregate of the employer
and employee contributions received by the trustees in the year.
The above treatment will not apply if the benefit must be reported
as income according to paragraph 6(1)(f) (see 9(b) above).  However,
the employee's contributions to plans referred to in 9(b) may be
deductible for tax purposes from benefits received from the plan.
See IT-428 for details.

Taxation of Trust

11.  A trust which invests some of the contributions
received and earns investment income, or has incidental income (other
than contributions from employers and employees which are not included
in computing income of the trust), is subject to tax under section
104 on the amount of such "trust income" remaining after the deductions
discussed in 12 below.  Where gross income (i.e., the aggregate of
its income from all sources) exceeds $500 in the taxation year (and
in certain other circumstances indicated on the form), the trustee
is required to file form T3 (Trust Information Return and Income
Tax Return).

12.  In computing trust income subject to tax, the trust
is allowed to deduct, to the extent of the gross trust income, the
following expenses, premiums and benefits it paid, and in the following
  (a) expenses incurred in earning the investment or other
  income of the trust,
  (b) expenses related to the normal operation of the trust including
  those incurred in the collection of and accounting for
  contributions to the trust, in reviewing and acquiring insurance
  plans and other benefits and for fees paid to a management company
  to administer the trust, except to the extent that such expenses
  are expressly not allowed under the Act,
  (c) premiums and benefits payable out of trust income of the
  current year pursuant to paragraph 104(6)(b).  Benefits that are
  paid out of proceeds of an insurance policy do not qualify.  Other
  benefits paid are normally regarded as having been paid first out
  of trust income of the year.  However, premiums and benefits that
  would not otherwise be taxable in the hands of the employee by
  virtue of paragraph 6(1)(a) may be treated at the trustee's
  discretion as having been paid out of prior year's funds or current
  year's employer's contributions, to the extent that they are
  available, to avoid the application of subsection 104(13).
The remainder of the income of the trust is subject to income tax
under section 122 of the Act.  As an inter vivos trust, the taxation
year of the trust coincides with the calendar year.

13.  For administrative simplicity, payments of taxable benefits
by the trustee to or on behalf of employees are to be reported on
Form T4A by the trustee and not on the T3 Supplementary.  Information
on the completion of Form T4A is contained in the "Employer's and
Trustee's Guide".  Although the trustee is required to withhold income
tax from taxable benefits paid to employees, these amounts will not
be subject to either Canada Pension Plan contributions or unemployment
insurance premiums when paid by the trustee.

14.  Although actuarial studies of the trust may recommend
the establishment of "contingency reserves" to meet its future
obligations, transfers to such reserves are not deductible for tax
purposes by the trust.

Setting up a Plan

15.  There is no formal registration procedure for a
health and welfare trust and no requirement that the trust agreement
be submitted to the Department for approval prior to the implementation
of the plan.  However, the advice of the District Taxation Office
may be requested where there is any doubt as to the acceptability
of the trust agreement as a health and welfare trust.  Full particulars
of the arrangement including a copy of all pertinent documents should
accompany the request.

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