Backgrounder: Summary of Draft Legislative Proposals
A Health and Welfare Trust is a trust established by an employer for the purpose of providing health and welfare benefits to its employees.
Apart 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. While the CRA's tax treatment of these trusts is substantially similar to Health and Welfare Trusts, the Act explicitly sets out the tax treatment of certain elements of these trusts (e.g., the treatment of surplus income and pre-funding of benefits). These rules were added to the Act in 2010 and 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" — and announced a public consultation where Canadians could submit comments on how best to transition Heath and Welfare Trusts to Employee Life and Health Trusts.
With these consultations concluded and comments carefully considered, the Government is proposing changes to the Act that fall into two categories:
- amendments to facilitate the conversion of existing Health and Welfare Trusts into Employee Life and Health Trusts; and
- amendments to improve the operation of the existing Employee Life and Health Trust rules.
1. Conversion of Trusts
In order to facilitate the conversion of existing Health and Welfare Trusts, the Government 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 elect to continue as Employee Life and Health Trusts without any adverse tax implications and without having to create a new trust. Existing Health and Welfare Trusts that elect to continue as Employee Life and Health Trusts will be required to notify the CRA in prescribed form and manner;
- transitional rules permit Health and Welfare Trusts to be deemed to be 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 the terms of their current trust; and
- transitional rules provide for a tax-free rollover of assets where a new trust is created, or where two or more existing trusts merge, such that the assets accumulated in existing Health and Welfare Trusts will continue to be available to provide benefits to employees.
2. Amendments to Improve the Existing Employee Life and Health Trust Rules
To address concerns expressed by stakeholders, the Government also proposes the following additional changes to the Act to improve the operation of the rules applicable to Employee Life and Health Trusts:
- Under current tax rules, where benefits are provided to individuals other than eligible beneficiaries, a trust is precluded from deducting certain amounts when determining the trust's taxable income in respect of the taxation year. A proposed amendment will provide that the prohibition on deductions does not apply if it is reasonable to conclude that the trustees neither knew nor ought to have known that designated employee benefits have been provided to, or contributions have been made in respect of, non-eligible beneficiaries.
- Under current tax rules, an Employee Life and Health Trust may not make a loan to, or any investment in, a participating employer or a person with whom a participating employer does not deal at arm's length. It is proposed to repeal that rule and to replace it with a new tax (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 become 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.
- The current rules require an Employee Life and Health Trust to be resident in Canada. A new rule will allow certain non-resident trusts, that otherwise meet the relevant conditions, to qualify as an Employee Life and Health Trust if certain conditions are met.
Meaning of "File in Prescribed Form and Manner"
For the 2019 taxation year, the requirement to "file in prescribed form" or "file in prescribed form and manner" means that the CRA should be notified of any transfer of property and the election to be a deemed Employee Life and Health Trust in a letter included with the T3 Trust Income Tax and Information Return.
Meaning of "Announcement Date"
Announcement Date means the date of this release.
Health and Welfare Trusts after 2020
Trusts that do not convert to an Employee Life and Health Trust (or wind up) by the end of 2020 will generally be an "employee benefit plan" as defined in subsection 248(1) of the Act. As a result, designated employee benefits provided to an employee will continue to be taxed in generally the same manner as if the benefits were provided through a Health and Welfare Trust or an Employee Life and Health Trust.
Other Issues Under Consideration
In addition to issues addressed in the draft legislative proposals released today, the submissions from stakeholders identified certain other issues relating to Employee Life and Health Trusts that continue to be considered by the Department of Finance:
- the types of benefits that currently qualify as "designated employee benefits" under an Employee Life and Health Trust and whether other benefits should be considered;
- expanding the scope of the Private Health Services Plan component of designated employee benefits;
- the use of Employee Life and Health Trust rules to provide benefits to "key employees" as defined in subsection 144.1(1) of the Act, including the use of self-insured arrangements; and
- the rules related to carry back and carry forward of non-capital losses under Employee Life and Health Trusts.
Canadians are invited to provide comments by July 31, 2019. Please send your comments to firstname.lastname@example.org. Written correspondence related to this consultation can also be mailed to:
Tax Policy Branch
Department of Finance
90 Elgin Street