Draft Legislative Proposals for Employee Life and Health Trusts
November 27, 2020
A Health and Welfare Trust is a trust established by an employer for the purpose of providing health and welfare benefits to its employees.
Aside from the tax treatment of benefits provided to employees, the tax treatment of these trusts is not explicitly set out in the Income Tax Act (the Act). The Canada Revenue Agency (CRA) has, however, published administrative guidance since 1966 setting out the requirements for qualifying as a Health and Welfare Trust.
An Employee Life and Health Trust is a trust that is similarly established by an employer to provide health and welfare benefits for its employees. Although the tax treatment of these trusts is substantially similar to that for Health and Welfare Trusts, the Act explicitly sets out the tax treatment of certain aspects of these trusts (e.g., the treatment of surplus income and pre-funding of benefits). These rules were enacted in 2010 and they do not apply to Health and Welfare Trusts.
To provide greater certainty and consistency to taxpayers, Budget 2018 proposed that only one set of tax rules apply to trust arrangements that provide "designated employee benefits". The Budget invited stakeholders to submit comments on how best to transition Health and Welfare Trusts to Employee Life and Health Trusts. On May 27, 2019, the Department of Finance Canada released draft legislative proposals and invited Canadians to submit comments on those proposals.
With those comments carefully considered, today, the department released revised draft legislative proposals for the Act’s rules that apply to Employee Life and Health Trusts.
The department is proposing changes to the Act that fall into three categories:
- amendments to facilitate the conversion of existing Health and Welfare Trusts into Employee Life and Health Trusts;
- amendments to improve the operation of the Employee Life and Health Trust rules; and
- amendments to relax the current restrictions under which “key employees” may participate in an Employee Life and Health Trust.
1. Conversion of Trusts
Budget 2018 originally announced that the CRA would no longer apply its administrative rules with respect to Health and Welfare Trusts after the end of 2020. Today, the Department of Finance Canada and the CRA are also announcing a one-year extension to those administrative rules. Accordingly, the CRA will apply its administrative tax rules for Health and Welfare Trusts until the end of 2021. In order to facilitate the conversion of existing Health and Welfare Trusts into Employee Life and Health Trusts, the department proposes that:
- the Employee Life and Health Trust rules be extended to apply to trusts created prior to 2010. The current rules apply only to trusts created after 2009;
- existing Health and Welfare Trusts be permitted to convert to Employee Life and Health Trusts without any adverse tax implications and without having to create a new trust;
- transitional rules permit Health and Welfare Trusts to elect to be deemed Employee Life and Health Trusts until December 31, 2022, if certain conditions are met, since many Health and Welfare Trusts will need time to amend their current trust terms;
- transitional rules provide for a tax-free rollover of assets where a new trust is created, or where existing trusts effectively merge (i.e., by way of a transfer of property), such that the assets accumulated in existing Health and Welfare Trusts will continue to be available to provide benefits to employees; and
- each Health and Welfare Trust that converts to, or is merged into, an Employee Life and Health Trust be required to notify the CRA in a prescribed form that it has become an Employee Life and Health Trust. The notification would be required at the time of an election or transfer of property (as described above) or otherwise not later than the trust’s first filing-due date after 2021.
If a Health and Welfare Trust does not convert to an Employee Life and Health Trust, or does not wind up, by the end of 2021, the CRA will apply the existing tax rules that apply to inter vivos trusts (and will not apply the rules for employee benefit plans to the Health and Welfare Trust).
2. Amendments to Improve the Existing Employee Life and Health Trust Rules
To address concerns expressed by stakeholders, the department also proposes the following additional changes to the Act to improve the operation of the rules applicable to Employee Life and Health Trusts:
- expanding the list of “designated employee benefits” to include certain counselling services and death benefits of up to $10,000;
- permitting employers to offer certain other types of benefits (e.g., bereavement leave and leave for jury duty) provided that all or substantially all (generally, 90 % or more) of the total cost of benefits is for designated employee benefits and that the employer contributions in respect of those other benefits would otherwise be deductible in computing the employer’s income under the Act had the employer directly paid for the benefits;
- expanding the rule permitting automatic deductibility (i.e., without reference to actuarial recommendations) of negotiated fixed-rate contributions. The automatic deductibility would apply to contributions made under a collective bargaining agreement (as is currently permitted), or under a participation agreement that is substantially similar to a collective bargaining agreement, or to legally binding employer contributions to an Employee Life and Health Trust with at least 50 beneficiaries all of whom operate at arm’s length with the participating employers;
- adding a new tax (under new Part XI.5 of the Act) applicable to prohibited property held by the trust. As such, the acquisition of a prohibited property would not cause the entire trust to fall offside of the conditions required to be an Employee Life and Health Trust, but would instead impose a tax on the portion of the investments (or loans) that are prohibited investments;
- allowing certain non-resident trusts, that otherwise meet the relevant conditions, to qualify as an Employee Life and Health Trust if certain conditions are met. The current rules require an Employee Life and Health Trust to be resident in Canada; and
- extending the carry-forward period for non-capital losses (e.g., the payment of designated employee benefits) from 3 years to 7 years, which would permit most Employee Life and Health Trusts to effectively match contributions and revenues with benefit payment obligations.
3. Participation of Key Employees
To address concerns expressed by stakeholders, the department also proposes to relax the current restrictions that apply with respect to the participation of “key employees” (i.e., specified shareholders and highly-compensated employees).
It is proposed that the current restrictions on the participation of key employees (e.g., key employees may not exceed 25% of employee-beneficiaries) in an Employee Life and Trust not apply if either of the following conditions are met:
- the benefits provided to key employees who deal at arms length with their employers are negotiated under a collective bargaining agreement; or
- the total cost of private health services plan benefits paid to each key employee (and to each family member of a key employee) does not exceed $2,500 each year, prorated if the key employee did not render service on a full-time basis throughout the year.
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