In February, Federal Finance Minister Jim Flaherty proposed to amend the Income Tax Act to permit a new vehicle for health and welfare benefits called an employee life and health trust (ELHT). It will be the first Canadian tax-recognized arrangement expressly permitting the pre-funding of employee health and welfare benefits.

The proposal fulfills the government’s 2009 auto sector restructuring commitment requiring GM and Chrysler Canada to eliminate post-retirement benefits liabilities. It will contain the following key provisions.

  • It can be established for both active and retired employees, their spouses, dependents and beneficiaries;
  • It can provide only “designated employee benefits” (any combination of group benefits, private health benefits or group life insurance);
  • It preserves the tax status of the benefits received by employees and retirees:
  • Employees are not entitled to a deduction, but the tax treatment of their contributions is preserved if the trust identifies the specific benefits for which the contribution is made;
  • The ELHT must be a Canadian resident trust;
  • Employers will not have any rights to distribution from the trust; and
  • Employer representatives cannot constitute a majority of the trustees.

Key distinctions

Currently, these benefits are delivered through a health and welfare trust (HWT)—a vehicle governed by rules outlined in the Canada Revenue Agency’s (CRA) Interpretation Bulletin IT-85R2. The ELHT provisions are almost identical to the existing HWT rules, with some key distinctions.

Most significant is the ELHT’s ability to deduct from its taxable income all qualifying benefits paid to participants. For HWTs, only those benefits taxable for the employee are deductible.

ELHTs are taxable entities, but the trust deduction rules should eliminate or minimize the tax payable to the extent that earnings do not exceed expenses and benefits payable in any given year.

The other main feature of the ELHT amendments is a mechanism to provide tax deductions to employers for lump sum contributions and to meet funding obligations using debt instruments.

The ELHT amendments continue to tie the employer’s tax deduction to the benefits payable. The employer may only deduct its contributions “…to the extent that the amount may reasonably be regarded as having been contributed to fund designated employee benefits payable in the year [the deduction is claimed], or for the benefit of its employees.” The amendments do not include a mechanism for determining the benefits expected to be payable in the year, but it is anticipated that permissible deductions will need to be based on actuarial estimates.

Key criticism

The main criticism of the proposal is that it continues to reflect a fundamental misunderstanding of the nature of health and welfare plans and insurance generally by tying the deduction to the benefits actually paid out in a given year. The benefit for employees and retirees is not just receiving medical expense reimbursement, for example, but also the insurance coverage against the risk of incurring such expenses.

The proposed ELHT deduction rules are particularly problematic for multi-employer plans where required employer contributions are typically a fixed dollar amount per hour worked and where an employee may work for many different employers in the same year. Under the proposed amendments, these employers will presumably be denied a deduction for the amount of their contractually mandated contribution if it exceeds actuarial estimates of the benefits that may be paid to, or for the benefit of, their employees in the year.

If passed as is, the ELHT provisions will apply only to trusts established after 2009, and it’s unclear how existing HWTs will be affected. In the meantime, the CRA has indicated that it is considering revoking IT-85R2 and terminating its administrative recognition of HWTs. BC

Roberto Tomassini is an associate pension and benefits lawyer and a member of the Healthcare Trust Group with Koskie Minsky LLP. rtomassini@kmlaw.ca

Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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