Principal Issues: Taxation of benefits from a Health and Welfare Trust.
Position: General Discussion.
March 8, 2010
XXXXXXXXXX
Dear XXXXXXXXXX :
I am writing in response to your correspondence sent to my predecessor, the Honourable Jean-Pierre Blackburn, in which you express concerns regarding the XXXXXXXXXX of the disability benefits you receive from your former employer. I apologize for the delay in replying.
I am advised that you have spoken with an official of the Income Tax Rulings Directorate of the Canada Revenue Agency (CRA) who explained the income tax aspects of your larger concern. The purpose of this letter is to summarize the points you discussed.
I understand that you are disabled and that you receive disability benefits from what you describe as your former employer's self-insured wage loss replacement plan provided through a health and welfare trust (HWT). XXXXXXXXXX
The Income Tax Act generally taxes the value of any benefits taxpayers receive or enjoy in the year by virtue of their employment. There are exceptions to the general rule, which include certain benefits that relate to the health and welfare of employees that are provided directly by employers through contracts of insurance. For example, employers can establish a private health services plan (PHSP) for prescription drug and/or dental coverage for their employees that will not attract tax either upon the employers paying insurance premiums for such coverage or upon delivery of the benefits themselves. In some cases, such as when employers provide a wage loss replacement plan, any insurance premiums the employers pay on an employee's behalf for such coverage are non-taxable, although employees are taxed when they receive disability benefits.
Employers may not want to provide all or any of their employee health and welfare benefits through contracts of insurance and may use an HWT. In general terms, an HWT is a trust arrangement used to administer an employee health and welfare benefit program.
An HWT can provide health and welfare benefits under third party insurance contracts, directly from the funds of the HWT, or through a combination of both.
Unlike certain health and welfare benefits provided by an employer to its employees directly through a contract of insurance, like the ones described above, there are no specific provisions in the Act to exclude from an employee's income the benefit arising on the provision of health and welfare benefits through a trust arrangement. To extend the tax-free status of such benefits to employees even when an employer chooses to use an HWT, the CRA outlined in Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees, the circumstances in which it will administratively allow employees to benefit from the same, non-taxable, treatment.
Interpretation Bulletin IT-85R2 states that when certain conditions and requirements are met, employer contributions to an HWT will not give rise to an employment benefit for tax purposes. As outlined in paragraph 1 of the interpretation bulletin, this tax treatment applies to an employee health and welfare benefit program that employers provide through a trust arrangement restricted to a group sickness or accident insurance plan, a PHSP, a group term life insurance policy, or any combination of such plans. If employers use a trust to provide employees with benefits other than those specifically stated above or if the trust fails to meet the other conditions outlined in the interpretation bulletin, the trust will generally be treated as an employee benefit plan. You can find more details about employee benefit plans in Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, which is available on the CRA Web site at www.cra.gc.ca/E/pub/tp/it502.
Employers can normally deduct reasonable expenses related to employee benefits as business expenses. However, payments to a trust are generally considered non-deductible contributions of capital. Interpretation Bulletin IT-85R2 also outlines the circumstances in which the CRA will administratively allow an employer to deduct its contributions to an HWT. Generally, an employer can only deduct contributions to an HWT if they are reasonable and laid out to earn income from business or property. The contributions must also be deducted in the same tax year that the legal obligation to make contributions arose. Furthermore, as described in paragraph 12 of Interpretation Bulletin IT-85R2, because an HWT is an inter vivos trust for tax purposes, it is taxable at the highest marginal tax rate on any income remaining after expenses.
I understand that your situation is difficult and stressful. However, the Act does not give the CRA the authority to require employers to provide their employees with any particular benefit. Even when employers establish an employee benefit program, the Act does not give the CRA the authority to impose any minimum threshold of benefit, to require that the benefit continue for any particular period, or to impose standards of disclosure or communication in respect of those benefits. The CRA's authority is limited to administering the Act and determining the tax implications arising as a result of a particular benefit program.
I trust that the information I have provided is helpful.
Yours sincerely,
Keith Ashfield
Renee Sigouin
(613) 957-2128
2010-035504