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March 8, 2018

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Health and Welfare Trust

A health and welfare trust (HWT) is not defined in the Income Tax Act (the Act). In general terms, a health and welfare trust is described as a trust arrangement established by an employer for the purpose of providing health and welfare benefits to its employees. Under this type of trust arrangement, trustees receive contributions from the employer and in some cases from employees, to provide certain health and welfare benefits agreed to between the employer and the employees. Multiple employers can participate in the same health and welfare trust.

In the past, the Canada Revenue Agency (CRA) has published administrative positions regarding the requirements for HWTs along with detailed guidance on computing taxable income of such trusts. Employer’s contributions to a HWT are tax deductible in the year made if they are reasonable. In preparing trust income tax returns, a HWT may deduct taxable benefits it pays out.

Employee Life and Health Trust

In 2010, the Act was amended to introduce the employee life and health trust (ELHT) rules which are virtually identical to the CRA’s administrative guidance on HWTs. An ELHT, like a HWT, is an arrangement that allows an employer to make contributions to a trust that will provide benefits under a group sickness or accident insurance plan, a private health services plan or group term life insurance. Employer’s contributions to an ELHT are tax deductible. An ELHT may deduct all expenditures related to providing eligible benefits, including insurance premiums, claims and administrative expenses plus any benefits it pays out.

An EHLT has restrictions on what employees can participate. The ELHT’s objects are limited to paying “designated employee benefits” for employees, former employees or members of their families who belong to at least one “class of beneficiaries” of one or more participating employers. At least one class of beneficiaries of an ELHT must contain more than 25% of all employees and at least 75% of the members of that class cannot be key employees. A key employee is defined as an employee who owns 10% or more of the employer’s shares or a “high-income” employee. This rule discourages plans that benefit business owners and key employees only.

Key differences between HWTs and ELHTs

  • While HWTs rely on administrative positions contained in CRA’s Income Tax Folio S2-F1-C1, ELHTs are defined in section 144.1 of the Act.
  • An ELHT must be resident in Canada while a HWT may be established in a foreign country.
  • An ELHT cannot be created primarily for the benefit of key employees. There are no restrictions for a HWT on the participation of key employees.
  • An ELHT can be more tax efficient than a HWT as an ELHT is able to deduct all expenditures related to providing eligible benefits, including insurance premiums, claims and administrative expenses plus any benefits it pays out. A HWT is taxable on its net investment income and is only able to deduct taxable benefits paid.

2018 Federal Budget proposals

The 2018 Federal Budget proposes to discontinue the application of the CRA’s administrative positions with respect to existing HWTs after the end of 2020 in order to encourage conversion of such trusts to ELHTs. Starting in 2021, only ELHTs will be subject to the tax rules for trusts according to the Act. In addition, the CRA will no longer adhere to its administrative positions for HWTs established after February 27, 2018.

The Department of Finance has requested comments on the transitional rules by June 29, 2018. The issues for consideration in the consultation include:

  • Whether a HWT can continue as an ELHT without creating a new arrangement;
  • Whether and under what conditions a rollover of assets of a HWT to an ELHT will be permissible; and
  • The tax implications for a HWT that does not satisfy the conditions to become an ELHT or where the trustees choose not to convert.

The Department of Finance will release draft legislative proposals and guidance to facilitate the conversion of existing HWTs to ELHTs following the consultation.

Please send your comments by June 29, 2018 to the Department of Finance at: 

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