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New Draft Health & Welfare Trust Conversion Rules

New Draft Health & Welfare Trust Conversion Rules

Currently, have been no legislative rules in the Act to specifically apply to these trusts

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Finance released draft legislative proposals to facilitate the conversion of health and welfare trusts to employee life and health trusts on May 27, 2019. These proposals, which were originally announced in the 2018 federal budget, are intended to ensure that only the employee life and health trust tax rules apply to these arrangements after 2020. The new draft proposals facilitate the conversion of health and welfare trusts to employee life and health trusts, and amend the existing tax rules so that current health and welfare trust arrangements can continue to operate as usual, among other things.

Finance will accept comments on the draft proposals by July 31, 2019.

Background
A Health and Welfare Trust is a trust established by an employer for the purpose of providing health and welfare benefits to its employees. Currently, the tax treatment of Health and Welfare Trusts is based on administrative positions published by the CRA, since there are no legislative rules in the Act that specifically apply to these trusts. However, the "Employee Life and Health Trust tax rules" are very similar to the CRA's administrative positions for Health and Welfare Trusts. As a result, Finance proposed in the 2018 federal budget to have only one set of rules apply to these types of arrangements and, as a result, the budget announced that the CRA would no longer apply its administrative positions to existing Health and Welfare Trusts after 2020, or to Health and Welfare Trusts established after February 27, 2018. Finance advised in the budget that trusts that do not convert (or wind up) to an Employee Life and Health Trust will be subject to the normal trust income tax rules. (See TaxNewsFlash-Canada 2018-06 "2018 Federal Budget Highlights").

Details

Conversion of Trusts

Finance states that it proposes to facilitate the conversion of existing Health and Welfare Trusts by:

  • Extending the Employee Life and Health Trust rules to apply to trusts created before 2010 (the current rules only apply only to trusts created after 2009)
  • Permitting existing Health and Welfare Trusts to elect to continue as Employee Life and Health Trusts without any adverse tax implications and without having to create a new trust. Existing Health and Welfare Trusts that elect to continue as Employee Life and Health Trusts will be required to notify the CRA in prescribed form and manner
  • Introducing transitional rules that permit Health and Welfare Trusts to be deemed to be Employee Life and Health Trusts until December 31, 2022, if certain conditions are met, since many Health and Welfare Trusts will need time to amend the terms of their current trust, and
  • Introducing transitional rules that provide for a tax-free rollover of assets where a new trust is created, or where two or more existing trusts merge, such that the assets accumulated in existing Health and Welfare Trusts will continue to be available to provide benefits to employees.

For the 2019 taxation year, the requirement to file in prescribed form and manner means that the CRA should be notified of any transfer of property and the election to be a deemed Employee Life and Health Trust in a letter included with the T3 Trust Income Tax and Information Return.

Other changes

The legislative proposals also include other amendments to the rules that apply to Employee Life and Health Trusts, that Finance states are needed to address concerns expressed by stakeholders.

For more information, contact your KPMG adviser.

Information is current to May 28, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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