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G. Kauppinen (613) 995-0051
August 25, 1986
Dear Sirs:
This is in reply to your letter dated May 29, 1986 regarding certain trusts created November 29, 1985.
Since these trusts are already in place, queries with respect to the income tax ramifications therein should be directed to the Halifax District Taxation Office.
We are, however, prepared to offer the following general comments for your consideration assuming the following situation:
1. An employer contributes capital assets and/or cash to a trust from which one or more payments will be made to former employees.
2. The right to payments from the trust does not vest in the former employees at the time the payments are made to the trust by the employer.
3. No annual allocations (as distinguished from actual payments) are made by the trustee to the former employees.
4. The trustee has not elected in the return of income filed within 90 days from the end of the first taxation year of the trust to be an employee trust.
5. The amount and timing of employer's contributions to the trust are not established by the trust agreement.
6. The trust was established before 1986.
Assuming the above-noted situation, in our opinion the following income tax consequences result:
A. The trust would not be governed by a registered supplementary unemployment benefit plan as defined by section 145 of the Income Tax Act ("Act") since the employer's contributions to the trust will not be used for the payment of periodic amounts to employees or former employees who are laid off and since the payments could be viewed as separation benefits. Furthermore, the plan does not establish the amount and timing of employer's contributions.
B. The trust is not an employee trust as defined by subsection 248(1) of the Act because of the facts assumed in 2., 3., and 4. above.
C. In our opinion, provided the relevant provisions of the Act are otherwise satisfied, this arrangement would constitute an employee benefit plan as defined in subsection 248(1) of the Act. Consequently, all amounts received by the former employees would be taxable to them as employment income pursuant to paragraph 6(l)(g) of the Act. The deductibility of amounts paid to the trust by the employer would be governed by the provisions of section 32.1 of the Act. It is possible that the trust itself could be taxable under Part I of the Act on income not paid out to former employees.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on this Department.
We trust the foregoing is of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch