IT85R2 Health and Welfare trusts for employees
INCOME TAX ACT Health and Welfare Trusts for Employees IT-85R2
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 below),
(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 plan.
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
there under 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 order: (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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