Principal Issues: 1- Degree of independence and criteria to be met in choosing the trustee or trustees for a health and welfare trust. 2- Does a trust account need to be opened for each employee or is one trust account with a financial institution sufficient?
Position: 1- Question of fact. 2- Generally, a trust bank account for each employee is not necessary.
Reasons: 1- Question of fact as to whether trustee or trustees are independent of the employer. 2- Generally, it would not be necessary to keep a separate trust bank account for each employee. Proper internal records for each employee should be maintained to ensure compliance with the Income Tax Act and its reporting requirements.
XXXXXXXXXX 2010-035552 C. Tzortzis June 21, 2010
Dear XXXXXXXXXX :
Re: Health and Welfare Trusts
This is in response to your email of January 25, 2010, inquiring about the degree of independence between the trustee or trustees of the health and welfare trust and the employer. You also inquired whether a trust account needs to be opened for each employee or whether one trust account with a financial institution is sufficient.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the internet at http://www.cra-arc.gc.ca. Since your inquiry concerns an actual situation involving questions of fact, it should be dealt with by your local tax services office. If you wish to have the CRA review your actual situation, you should submit all of the relevant information and documentation to the particular tax services office serving your area, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
As indicated in paragraph 6 of IT-85R2, Health and Welfare Trusts for Employees, to qualify as a health and welfare trust, the trust arrangement must be one where the trustee or trustees act independently of the employer as opposed to the type of arrangement initiated unilaterally by an employer who has control over the use of the funds. It is a question of fact as to whether the trustee or trustees act independently from the employer and whether the employer controls the trust. While directed primarily at corporations, the comments on control in fact in IT-64R4, Corporations: Association and Control [Consolidated], and IT-419R2, Meaning of Arm's Length, may be of assistance to you.
Any particular issues on the setup of a health and welfare trust should be addressed to your local tax services office. However, in our view, separate trust bank accounts for each employee would not usually be required if proper internal records for each employee are maintained to ensure compliance with the Income Tax Act and its reporting requirements. There may be instances where separate trust bank accounts may be warranted as in the situation outlined in paragraph 4 of IT-85R2 where contributions, income and disbursements of separate parts of a plan are required to be separately identified and accounted for by the plan.
Please note that our comments above have not taken into account the new tax proposals on employee life and health trusts which were announced by the Minister of Finance on February 26, 2010 and are proposed to apply to trusts established after 2009. Information on the new tax proposals is available on the Department of Finance website at www.fin.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
G. Moore
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch