2017-0702861E5 Health and Welfare Trust Distributions

Principal Issues: Whether it is permissible for a health and welfare trust to distribute funds to Her Majesty in right of Canada or a province on the windup of the trust.

Position: Yes, provided that Her Majesty is not the employer, or a person who does not deal at arm’s length with the employer.

Reasons: See response.

Author: Baltkois, Thomas
Section: 6(1)(a); 144.1; 149.1(1)(h) “qualified donee”; 248(1) “qualified donee”, “registered charity”

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                                                                                                                                T. Baltkois
February 28, 2018

Dear XXXXXXXXXX:

Re: Distributions on the wind-up of a health and welfare trust

We are writing in response to your correspondence of February 14, 2017, in which you asked whether a health and welfare trust (HWT) is permitted to distribute trust property to Her Majesty in right of Canada or a province (Her Majesty) on the wind-up of the trust.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 1.17 of Income Tax Folio S2-F1-C1, Health and Welfare Trusts, states that “[W]here a health and welfare trust is wound up, any funds remaining in the trust may be used to provide additional benefits under the plans described in ¶1.2 to the beneficiaries of the trust (that is, employees), or may be distributed to the employees or to a registered charity.”

However, as you have noted, technical interpretation (TI) 9412855 stated that, “any funds left in the trust upon windup which are not distributed to a “qualified donee” (as that term is defined in paragraph 149.1(l)(h) of the Act) must be used solely to provide the type of benefits as required by the plan to the employees entitled to receive those benefits at the time the plan is wound up.” This suggests that it would be permissible for a HWT to distribute trust property to a “qualified donee” in the course of winding up the trust.

The phrase “qualified donee” is currently defined in subsection 248(1) of the Act to have the meaning assigned by subsection 149.1(1) of the Act, and was formerly defined in paragraph 149.1(1)(h) of the Act (when TI 9412855 was published). Under both the current and former definitions, a qualified donee includes Her Majesty.

A folio chapter presents the Canada Revenue Agency’s (CRA) interpretation of the law as it applies to the most material aspects of the subject. Folio content will be updated when an interpretation changes or other major developments occur. Folios cannot explain how every provision of the law will apply to all situations.

Therefore, notwithstanding that paragraph 1.17 of Income Tax Folio S2-F1-C1 does not state that HWT property may be distributed to Her Majesty on the wind-up of the HWT, it is our view that such a distribution would be allowed provided that Her Majesty was not the employer and was dealing at arm’s length with the employer. In this regard, paragraph 1.15 of Income Tax Folio S2-F1-C1 specifically provides that the funds of the HWT and any income earned in the HWT cannot revert to the employer (on wind-up or otherwise) or be used by, the employer, a person who does not deal at arm’s length with the employer, or a person who is a member of a group of persons not dealing at arm’s length with the employer.

We trust these comments will be helpful.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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