XXXX
M. Evans (613) 957-2136
April 16/86
Dear Sirs:
This is in reply to your letter of December 19, 1985, concerning the tax consequences to the trust and its beneficiaries under the plan described below. We regret the unavoidable delay in replying.
The arrangement you describe is as follows:
- A Plan has been set up using a trust ("the Trust") to provide a vehicle for group insurance coverage to a large group of individuals. These individuals do not work for a company but are employed by various homogeneous professional associations in Ontario. The individuals are all in the same profession.
- The Plan collects contributions from its members for various kinds of insurance coverage. No underwriting risks are carried by the Plan as all risks are placed with various insurance carriers.
- The amounts collected from the members are the amounts the Plan estimates are required to cover the premiums paid by the Plan to the insurance companies plus the expenses of administering the Plan. In any one year, the amounts collected from the members may be more or less than the expenditures of the Plan.
The Plan may in any one year generate a surplus or a deficit depending on whether the expenses of administration and insurance premiums paid, fall short of, or exceed the amounts collected from the members.
Although the Plan may be named in the insurance policy as the master policyholder, the members are in fact the beneficial policyholders as a list of them is kept by the insurance company and all claim and other benefit payments under the insurance policies go directly from the insurance companies to the members.
- In some cases, employers of members make contributions to the Plan, however, these amounts are not material in relation to the total annual contributions received.
- The type of insurance risks placed by the Plan include, life, accident and sickness, auto, home and dental.
- The Plan does not have any motive of gain or profit. Its purpose is to act as an administrator in the providing of various types of group insurance benefits for its members at the lowest possible cost. The only benefit to the members is low cost insurance coverage and claims assistance.
We cannot confirm your view that the arrangement should be treated as a Health and Welfare Trust and that the tax consequences outlined in Interpretation Bulletin IT-85R should apply.
We would prefer to review the plan documents before making any comments when dealing with a factual situation. We advise that two of the risks covered, i.e., automobile and home insurance, do not fall into the category of health and welfare and note that employers of some members make contributions to the trust. It is therefore our opinion, based on the information provided, that the arrangement is an employee benefit plan (EBP) for which the tax consequences to the employer, employee and the trust are outlined in Interpretation Bulletin IT-502 . The Department's views with respect to an omnibus arrangement such as yours which includes several types of benefit plans, e.g., a group sickness or accident insurance plan, a group term life insurance policy and a private health services plan which are excluded from the definition of an EBP, are explained in paragraph 4 of the bulletin. Accordingly, unless the employers identify the portion of each contribution that relates to each separate plan and the trustee accounts separately for the income and disbursements of the component plans, the total arrangement is considered to be an EBP.
The tax consequences to beneficiaries under an EBP, as discussed in paragraphs 6 to 15 of the bulletin, will apply to all beneficiaries under the plan, whether or not their employers made contributions to the trust, when the trust pays premiums to the insurance companies on their behalf. At the time of the constructive receipt by beneficiaries of income from an office or employment under paragraph 6(1)(g) of the Income Tax Act (the "Act"), the employers are entitled to a deduction under section 32.1 of the Act which is limited to contributions in respect of their own employees or former employees. The tax result to employers is further explained in paragraphs 16 to 24 of the bulletin.
The tax result to the trust is covered in paragraphs 26 to 31 of the bulletin.
We trust this information will be of assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch