2021-0915921E5 ELHT – Class of beneficiaries

Principal Issues: Whether a group comprised of employees from multiple participating employers who are entitled to different benefit entitlements may constitute a class of beneficiaries for purposes of subparagraph 144.1(2)(e)(i) of the Act.

Position: Question of fact.

Reasons: A class of beneficiaries may be comprised of employees of several participating employers where all members of the class have identical rights under the trust and reasonably similar benefit entitlements.

Author: Zabolotney, Brad
Section: 144.1(2)(e) and (f)

XXXXXXXXXX                                                           2021-091592
                                                                                   B. Zabolotney

December 5, 2022

Dear XXXXXXXXXX:

Re: Employee Life and Health Trusts – Class of beneficiaries

We are writing in reply to your correspondence of November 3, 2021, wherein you asked for our comments regarding the beneficiary class rules in paragraph 144.1(2)(e) of the Income Tax Act (the ”Act”).

In the scenario you describe, a privately held corporation (“Corporation”), co-operatively owned by over one thousand independent member stores (“Member Stores”) operates a Canadian retail chain. This collective group, including the Corporation, settled a health and welfare trust (the “Trust”) to provide health benefits to two groups of non-collectively bargained employees. The first group is made up of employees of the Corporation and represents 22% of all employees under the Trust. The second group is comprised of employees of the Member stores and affiliates and represents 78% of all employees under the Trust. We understand that most Member Stores employ fewer than 20 employees.

Each participating employer of the Trust (i.e., the Corporation, a Member Store, or an affiliate) contracts separately with the Trustees for health benefits to be provided to their respective employees. Collectively, the employees of all participating employers are the beneficiaries of the Trust. We understand that the terms, conditions, and benefits provided by a participating employer are set out in a plan booklet that is specific to that employer. Accordingly, the benefits offered to employees may vary by participating employer. We also understand that there may be different classes of benefits and coverage levels offered to the employees of some participating employers.

Given this plan design, you are concerned that there is no group of employees that comprises 25% of all employees covered by the Trust whose benefit entitlements under the Trust are subject to identical terms and conditions, such that the condition outlined in paragraph 144.1(2)(e) of the Act could be met. In this regard, you note that the single largest group of employees covered by a single plan booklet is the approximately 22% of employees employed by the Corporation.

You have also expressed concern that even where paragraph 144.1(2)(e) of the Act is satisfied, the condition outlined in paragraph 144.1(2)(f) may not be met where the rights of key employees who are beneficiaries of the trust are more advantageous than those of the class of beneficiaries described in paragraph 144.1(2)(e) of the Act.

Our Comments

This technical interpretation provides general comments about the provisions of the 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.

Generally, in order to meet the requirement in paragraph 144.1(2)(e) of the Act, either subparagraph 144.1(2)(e)(i) or 144.1(2)(e)(ii) of the Act must be met. The test in clause 144.1(2)(e)(i)(A) of the Act requires that the members of one “class of beneficiaries” must represent at least 25% of all beneficiaries of the trust who are employees of the participating employers.

Alternatively, subparagraph 144.1(2)(e)(ii) of the Act provides (among other things) that if an employee life and health trust (“ELHT”) restricts the annual cost of private health services plan benefits payable to each key employee and to each family member to no more than $2,500, there are no limits on the number of key employees (including non-arm’s length employees) that may participate under the ELHT.

The term “class of beneficiaries” is defined in subsection 144.1(1) of the Act (for purposes of section 144.1 of the Act) as a group of beneficiaries with identical rights or interests under the trust. We are of the view that a “right”, as it pertains to an ELHT, includes an entitlement to designated employee benefits (“DEBs”). Thus, where the employees of several participating employers have the same rights under the trust (but not necessarily the same benefit entitlements or coverage), it is our view that such employees may collectively form a class of beneficiaries for purposes of clause 144.1(2)(e)(i)(A) of the Act as long as the benefit entitlements for each employee in the class are reasonably similar. This could be the case, for example, if a particular designated benefit plan offers various levels of benefit coverage that are different but similar to those offered by another participating employer whose employees are included in the class.

Where such a class of beneficiaries constitutes 25% or more of all beneficiaries of the trust, the condition in clause 144.1(2)(e)(i)(A) of the Act would be satisfied. Whether the condition in clause 144.1(2)(e)(i)(B) of the Act is also be met is a question of fact which would need to be made on a case by case basis, taking into account all relevant facts.

When the requirement in paragraph 144.1(2)(e) of the Act is met (by satisfying the conditions in either subparagraph 144.1(2)(e)(i) or (ii) of the Act), paragraph 144.1(2)(f) of the Act further requires that the rights of key employees, who are beneficiaries of the trust, must not be more advantageous than those of the class of beneficiaries described in paragraph 144.1(2)(e) of the Act. It is a question of fact whether the benefit entitlements of, or the existence of additional rights for, such key employees would be considered more advantageous such that the condition in paragraph 144.1(2)(f) of the Act would not be met.

However, as mentioned in the technical legislative proposals released by Finance Canada on August 9, 2022, the condition in paragraph 144.1(2)(f) of the Act should only apply where a trust meets the condition in subparagraph 144.1(2)(e)(i) of the Act, and does not apply to a trust that meets the condition in subparagraph 144.1(2)(e)(ii) of the Act.

We trust that these comments will be of assistance to you.

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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