2018-0782541E5 Employee Life and Health Trusts

Principal Issues: 1) Whether a trust that arranges for the provision of designated employee benefits but is not funded directly by employer contributions may qualify as an employee life and health trust? 2) Whether such employer contributions are deductible irrespective of whether the trust is an employee life and health trust?

Position: 1) Yes, provided that the trust satisfies all of the requirements outlined in paragraph 144.1(2) of the Income Tax Act. 2) Yes.

Reasons: 1) The administration of arrangements for benefit payments is an activity performed in furtherance of the object of providing designated employee benefits. Further the ELHT rules do not explicitly require that an employer make contributions to the trust to fund designated employee benefits. 2) Depending on the circumstances, contributions made by an employer to fund designated employee benefits are deductible pursuant to paragraph 18(1)(a) or under subsection 144.1(4) of the Act.

Author: Baltkois, Thomas
Section: 6(1)(a)(i); 6(1)(e.1); 6(1)(f); 6(4); 18(1)(a); 56(2); 144.1

XXXXXXXXXX                                                               2018-078254
                                                                                       T. Baltkois

June 29, 2020

Dear XXXXXXXXXX:

Re: Employee life and health trusts

We are writing in response to your correspondence of October 10, 2018 wherein you asked whether a trust which otherwise satisfies the requirements outlined in paragraph 144.1(2) of the Act will qualify as an employee life and health trust (ELHT), notwithstanding that employer contributions or premiums may not be paid directly (or at all) to the trust. We apologize for the delay in responding.

Based on the information provided in your letter, it is our understanding that:

* the trust is established by multiple employers to arrange for the provision of designated employee benefits (DEB’s) to, or for the benefit of their employees and certain related persons;

* each participating employer determines its own benefit plan design based on individual employee needs and economic considerations, or by requirements mandated by a collective bargaining agreement;

* the trust negotiates the premiums payable (in respect of insured plans) or contributions required (in the case of self-insured plans) with an insurance carrier (or carriers) to fund the benefit plans established for each participating employer;

* under the terms of the trust agreement:

o participating employers are legally obligated to make contributions to fund DEB’s, and

o trustees have discretion regarding how these contributions and premium payments are remitted;

* at the direction of trustees, participating employers are required to remit premiums or contributions directly to an insurance carrier to acquire insurance coverage rather than to 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

An ELHT is a trust established after 2009 for employees of one or more employers. In order to qualify as an ELHT, a trust must satisfy all of the conditions described in subsection 144.1(2) of the Act.

One of these conditions (outlined in paragraph 144.1(2)(a) of the Act) requires that the only purpose of the trust must be to provide benefits to, or for the benefit of, persons described in subparagraphs 144.1(2)(d)(i) or (ii) of the Act (i.e., employees and certain related persons) and that all or substantially all of the total cost of benefits must be in respect of DEBs. DEB’s are defined in subsection 144.1(1) of the Act to mean a benefit that is:

* from a private health services plan;

* a group sickness or accident insurance plan;

* a group term life insurance policy;

* in respect of a counselling service described in subparagraph 6(1)(a)(iv) of the Act or

* not a death benefit (but that would be a death benefit if the amounts determined for paragraphs (a) and (b) of the definition “death benefit” in subsection 248(1) of the Act were nil).

An ELHT may also provide benefits that are not DEB’s, provided that all or substantially all of the total cost of benefits are in respect of DEBs, as required under paragraph 144.1(2)(a) of the Act. It is worth nothing that new paragraph 144.1(3)(b) of the Act precludes an ELHT from deducting any amount pursuant to subsection 104(6) of the Act if that trust provides benefits, the contributions for which would not be deductible in computing the income of an employer if the benefit would have been provided directly to the employee and not out of the trust.

Furthermore, in our view, the condition in subparagraph 144.1(2)(a) of the Act may be satisfied irrespective of whether the trust provides DEB’s and other permissible benefits to employees and related persons directly (i.e., using the funds of the trust) or indirectly (i.e., through an insurance contract or self-insured plan administered by an insurer), as the provision of DEB’s includes related activities such as administering payments.

In addition, the fact that premiums and contributions paid by an employer are not made directly to a trust will also not, in and of itself, impair that trusts’ ability to qualify as an ELHT, as there is no requirement in section 144.1 of the Act which explicitly requires that an employer make contributions directly to an ELHT (or to any extent whatsoever). That is, a trust established to provide DEB’s to employees and certain related persons may qualify as an ELHT absent employer contributions. For example, a trust established by a union may qualify an ELHT where the union or participating employees have the legal obligation to fund the entire cost of DEB’s (i.e., an employee-pay-all plan).

In the situation described in your letter, it is our understanding that participating employers have the legal obligation to pay premiums and make contributions to fund DEB’s, but are required (at the direction of trustees) to make these premium payments and contributions directly to a third party insurer instead of the trust.

If the trust does not qualify as an ELHT, or the payments you describe do not constitute employer contributions to an ELHT (a mixed question of fact and law), it is our view that the premiums paid and contributions made would not generally be deductible by participating employers pursuant to subsection 144.1(4) of the Act but could be deductible as an expense incurred for the purpose of gaining or producing income from a business.

By contrast, where it is established that a trust is an ELHT, the participating employer may be entitled to claim a deduction under subsection 144.1(4) of the Act in respect of its premiums and contributions to that ELHT to the extent that the amount is related to one of three amounts described in that subsection.

We trust these comments will be helpful.

Yours truly,

Tom Baltkois, CPA, CGA
Acting Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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