N.R. Mitchell (613) 957-2139
May 7, 1986
Dear Sirs:
This is in reply to your letter of February 21, 1986 concerning the proposed establishment of a Stabilization Agreement for the XXXX. We regret the unavoidable delay in responding.
It is our understanding that the Canadian Branch of the XXXX is considering the establishment in Canada of a stabilization program patterned after a program already implemented by its counterpart in the United States. This program is a response to the employment patterns to which many XXXX workers in the construction industry are subject. These workers are highly mobile and tend to work for many different employers, but there can be dramatic variations from one year to the next in a worker's total periods of employment and there are consistently long periods of unemployment. Consequently, the Canadian Union is considering following the U.S. example by establishing a benefit program for its own members to supplement members' incomes, particularly for those workers who involuntarily work a low level of hours in the industry. Under this program, an employer contribution (negotiated in a collective agreement) would be paid into the XXXX. The parties to the collective agreement, labour and management, would appoint individuals to serve as trustees on the board which would be responsible for the operations of the XXXX.
The fundamental benefit and initially perhaps the only benefit to be offered under the Canadian XXXX would be for "basic underemployment". This benefit would enable qualified workers to receive a supplementary benefit (up to a specified maximum) equal to their average hourly wage rate multiplied by the number of hours fewer that they worked in comparison with the predetermined standard for their union local.
The U.S. XXXX already implemented also includes a number of other benefits some or all of which might (eventually) be incorporated into the Canadian program. These benefits are as follows:
(1) advance underemployment benefits;
(2) advance payments to assist workers with mortgage or similar payments;
(3) premium assistance benefits to help maintain coverage under the union health and welfare plans;
(4) special travel benefits to enable a worker to journey to areas where there is a demand for XXXX workers;
(5) benefits (a return of a percentage of contributions made to XXXX on one's behalf) for workers who make a low level of claims for underemployment benefits;
(6) education benefits while receiving training through an approved program; and
(7) cost of living adjustment (COLA) benefits to compensate for the effects of inflation during a period in which a worker was entitled to other XXXX benefits.
The Union has not yet developed a plan for Canada; it wishes first to determine the tax consequences. However, if a Canadian XXXX plan is implemented, it could include all of the benefits available under the U.S. plan or it could be limited, at least initially, to the basic under-employment benefit.
In light of the foregoing, you have requested our views with respect to four questions.
(1) Would the employer's contributions to a XXXX fund be tax deductible as a business expense?
(2) Would the employer's contributions be non-taxable income to the employees?
(3) Would the benefits received by the employees from the XXXX be taxable income when received?
(4) Would a XXXX Fund, as contemplated, be exempt from taxation on investment income?
We must advise you at the outset that we cannot give definitive responses to these questions because the nature of the proposed Fund has not yet been finalized. The tax consequences of such a Plan will vary depending on how it is structured and what benefits it offers. However, we can make the following general observations.
First, on the assumption that the plan would be limited to the provision of supplementary unemployment benefits, as described in paragraph 145(1)(b) of the Income Tax Act (the "Act"), the tax implications would depend on whether or not the Plan qualified for registration with this Department as a registered supplementary unemployment benefit plan (see the enclosed Information Circular 72-5R) and was in fact so registered. The answers to your specific questions in the case of a registered supplementary unemployment benefit plan would be as follows:
(1) employer contributions to such a plan would be deductible as an expense by the employer under subsection 145(5) and paragraph 20(1)(x) of the Act;
(2) an employer's contribution to such a plan would come within the exception in subparagraph 6(1)(a)(i) of the Act and would not give rise to a taxable benefit to the employee;
(3) the income of a trust governing such a plan would not be subject to tax (subsection 145(2) and paragraph 149(1)(q) of the Act); and
(4) an employee would be subject to tax on the benefits he receives out of such a plan (subsection 145(3) and paragraph 56(1)(g) of the Act).
If, on the other hand, the plan was a supplementary unemployment benefit plan (s.u.b. plan) as defined by paragraph 145(1)(b) of the Act and was not registered or capable of being registered, the tax consequences may be summarized as follows:
(1) the employer could not deduct his contribution to an unregistered s.u.b. plan (paragraph 18(1)(i) of the Act);
(2) the employer contribution to an unregistered s.u.b. plan would come within the exception under subparagraph 6(1)(a)(i) of the Act and would not give rise to a taxable benefit to the employee;
(3) the income of a trust governing an unregistered s.u.b. plan would not be exempt from tax; and
(4) the employee would be subject to tax on the benefits be receives out of an unregistered s.u.b. plan (subsection 145(3) and paragraph 56(1)(g) of the Act).
Alternatively, should the plan be structured so as not to satisfy the definition in paragraph 145(1)(b) of the Act - for example, by offering a broader range of benefits - then the comments in paragraph 4 of the enclosed Interpretation Bulletin IT-502 would appear to be applicable and the total arrangement may be regarded as an "employee benefit plan". In such a case, the following tax consequences would ensue:
(1) the employer may only claim a deduction to the extent permitted by section 32.1 of the Act, the operation of which is discussed in paragraphs 16 to 24 of IT-502 ;
(2) the employer contributions to the employee benefit plan would come within the exception in subparagraph 6(1)(a)(ii) and would not give rise to a taxable benefit to the employee;
(3) the income of the plan would not be exempt from tax - see paragraphs 26 to 31 of IT-502 ;
(4) an employee would be subject to tax on the benefits he receives from the plan pursuant to paragraph 6(1)(g) subject to the exceptions set out subparagraphs 6(1)(g)(i),(ii) and (iii) of the Act - see paragraphs 6 to 14 of IT-502 .
The comments in this letter represent our opinion of the law as it applies generally, but is not a ruling and, accordingly, it is not binding upon the Department. Nonetheless, we hope this letter will be of some assistance to you.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
P.D. FUOCO
For Director
Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
s. 6(1)(g) s. 145