2022-0925831E5 Contributions to an Employee Life and Health Trust

Principal Issues: Whether a one time, lump sum contribution made for future hires pursuant to the terms of a participation agreement would meet the requirement of paragraph 144.1(6)(b) of the Act, such that the contribution would be deductible under subsection 144.1(6) of the Act.

Position: No.

Reasons: The law.

Author: Leung, Brenna
Section: 144.1(6)(b)

XXXXXXXXXX                                                              2022-092583
                                                                                       B. Leung

March 14, 2023

Dear XXXXXXXXXX:

Re: Contributions to an employee life and health trust

We are writing in response to your correspondence of February 2, 2022 wherein you asked whether a one time, lump sum contribution (Initial Contribution) made to a trust that qualifies as an employee life and health trust (ELHT) would meet the requirement of paragraph 144.1(6)(b) of the Act, such that the Initial Contribution would be deductible under subsection 144.1(6) of the Income Tax Act (Act). We apologize for the delay in responding.

In the situation you describe, an employer discontinued the provision of post-employment health and welfare benefits for employees hired after a certain date (New Hires) pursuant to the terms of a collective bargaining agreement. In consideration for this discontinuance, the employer agreed to make contributions to a trust to fund certain designated employee benefits (DEBs) for New Hires. It is submitted that the employer’s Initial Contribution to the trust is to be made in accordance with a participation agreement to fund DEBs for New Hires, and that the trust qualifies as an ELHT.

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 IC70-6R12, 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).

Where a trust meets all of the conditions of subsection 144.1(2) of the Act (and thereby qualifies as an ELHT), an employer can generally deduct the contributions made to the trust under paragraph 144.1(4) of the Act. Subsection 144.1(6) of the Act provides a special rule to accommodate the deductibility of employer contributions made under a collective bargaining agreement (or a participation agreement, provided that the benefits are substantially the same as under the related collective bargaining agreement).

In order for an employer to deduct contributions under subsection 144.1(6) of the Act, paragraph 144.1(6)(b) of the Act requires that such contributions be determined, in whole or in part, “by reference to the number of hours worked by individual employees of the employer or some other measure that is specific to each employee with respect to whom contributions are made”.

While paragraph 144.1(6)(b) of the Act appears intended to encompass a broad range of contributions made pursuant to collective bargaining and allows employer contributions to be determined using an hours worked method or other similar measure, the wording of this provision explicitly requires that such contributions be made in reference to the specific individual employees for whom the contributions are made, regardless of which method is adopted.

Accordingly, contributions made to an ELHT must be directly attributable to specific active employees. Where a contribution is made in respect of new or future hires comprised of unidentified individuals, most of whom are not yet employees of the employer, this requirement would not be met and the contribution would not be deductible under subsection 144.1(6) of the Act.

While we regret that we could not give you a more favourable response, we hope that the foregoing comments will be of assistance in clarifying our position.

The Department of Finance Canada is responsible for tax policy and legislative changes to the Act, while the CRA is responsible for administering the tax system and applying the legislation as enacted by Parliament. Changing the legislation pertaining to the deduction of contributions made under collective bargaining and related participation agreements would be the responsibility of the Department of Finance. Therefore, we suggest you write to the Tax Policy Branch of the Department of Finance at 90 Elgin Street, Ottawa, Ontario, K1A 0G5.

We trust these comments will be of assistance.

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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