Employee Benefit Trust Fund
This is in reply to your memorandum of February 20, 1991 concerning the above noted trust fund.
24(1)
You have queried whether the trust qualifies as a health and welfare trust.
24(1)
i) Paragraph 6 of Interpretation Bulletin IT-85R2 states that employer contributions to the fund must not exceed the amounts required to provide these benefits.
ii) Paragraph 6 of Interpretation Bulletin IT-85R2 also states that the funds of the trust cannot be used for any purpose other than providing health and welfare benefits for which the contributions are made.
24(1)
You have further queried whether OHIP premiums can be deducted against trust income and, if so, whether they can create non- capital losses which may be carried forward.
24(1)
Paragraph 4 of Interpretation Bulletin IT-85R2 states that where part of a single plan can be regarded as a health and welfare plan and another part as an employee benefit plan or an employee trust, the combined plan is given employee benefit plan or employee trust treatment in respect of the timing and amounts of both the employer's expense deductions and the employee's receipt of benefits under the plan. However, If contributions, income and disbursements of the part of the plan that is described in paragraphs 1(a) to (d) of Interpretation Bulletin IT-85R2 are separately identified and accounted for, the tax treatment outlined in IT-85R2 applies to that part of the plan.
24(1)
We have taken the position, since 1986, that a provincial hospital insurance plan is not a group sickness or accident insurance plan, private health services plan or an accident insurance plan. This position is reflected in the amendments made to Interpretation Bulletin IT-85R, most notably the deletions made to old paragraph 4. Thus, pursuant to the comments cited above, the payment of premiums to OHIP can render the entire fund ineligible for health and welfare trust status.
24(1)
We will not rule favourably with respect to a health and welfare trust unless there is a statement to the effect that the funds of the trust shall not be, inter alia, loaned to or invested in the securities, notes, bonds, debentures or similar obligations of any Trustee, Administrator, or professional advisor of the Plan. It is believed that a statement of this nature assists in ensuring that there is no reversion of funds to the employer or a person controlled by the employer, that the trustees act independently of the employer or employers, that the employer does not have control over the use of the funds of the trust and that the funds are available to provide the health and wealth benefits for which they are intended.
Paragraph 104(6)(a.1) of the Act provides that in the case of a trust governed by an employee benefit plan, an amount may be deducted that would be its income for the year as was paid in the year to a beneficiary. In other words, it would appear irrelevant whether the OHIP premiums are paid from the employers' contributions or from trust income; where an amount is included in the hands of the employees under paragraph 6(1)(a) or subsection 104(13) of the Act, a deduction from trust income is permitted. The premiums are regarded as having been paid first out of trust income and then out of the employer's contributions. Paragraph 104(6)(a.1) limits any deduction in the trust to an amount that would be its income for the year, hence, while it reduces the trust income subject to tax, cannot create a loss that would be deductible by the trust.
Commencing in the 1980 taxation year, an employer's deduction to an employee benefit plan is conditional upon contributions to the plan being included in the income of employees. Section 32.1 provides specific rules to achieve this result. See Interpretation Bulletin IT-502 in this regard. We are of the view that
24(1)
We trust that the above comments are of assistance to you.
B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch