Employee Life & Health Trusts — Finance releases revised rules
Employee Life & Health Trusts — Finance revises rules
The CRA will also extend its administrative tax rules for Health and Welfare Trusts
Finance has provided new relief in its revised legislative proposals for Employee Life and Health Trusts, which include rules to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts before 2022. These proposals are intended to improve the operation of the Employee Life and Health Trust rules and ensure that only one set of tax rules apply to these types of arrangements after 2021. Concurrent with this release, the CRA also announced that it will continue to apply its administrative tax rules for Health and Welfare Trusts until the end of 2021 (instead of until the end of 2020, as originally announced in the 2018 federal budget). The revised draft proposals, which were released November 27, 2020, broaden the benefits that Employee Life and Health Trusts may provide, ease the restrictions that apply to the participation of certain "key employees" in Employee Life and Health Trusts and extend the carry-forward period for non-capital losses, among other changes. The changes in the revised draft legislation are based on public comments received after Finance issued its initial draft proposals for comment in May 2019.
Finance advises that the government intends to introduce the final legislation soon.
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 introduce rules to facilitate the conversion of Health and Welfare Trusts into Employee Life and Health Trusts and have only one set of rules apply to these types of arrangements. As a result, the 2018 budget also 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 2018 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.
Finance released draft legislation to implement these changes on May 27, 2019 for public comment. Among other proposals, these rules facilitate the conversion of existing Health and Welfare Trusts to Employee Life and Health Trusts, including changes to:
- Extend the Employee Life and Health Trust rules to apply to trusts created prior to 2010 (the current rules apply only to trusts created after 2009)
- Allow existing Health and Welfare Trusts to convert to Employee Life and Health Trusts without any adverse tax implications and without having to create a new trust
- Enact transitional rules to allow Health and Welfare Trusts to elect to be deemed Employee Life and Health Trusts until December 31, 2022, if certain conditions are met
- Enact transitional rules that provide for a tax-free rollover of assets where a new trust is created, or where existing trusts effectively merge (i.e., by way of a transfer of property), such that any accumulated assets will continue to be available to provide benefits to employees.
The legislation also proposed to amend the definition of "employee benefit plan" so that certain Health and Welfare Trusts that were not deemed to be Employee Life and Health Trusts or who hadn't converted to an Employee Life and Health Trust by 2021 could be considered an employee benefit plan.
Conversion of Health and Welfare Trusts
It appears that the new draft legislation generally reflects the same rules originally proposed that would apply to the conversion of existing Health and Welfare Trusts before 2022. However, the revised draft legislation now requires certain additional trusts that become an Employee Life and Health Trust after February 26, 2018 to notify the CRA of the conversion in prescribed form on or before its filing due-date after 2021. Further, Finance advises that if a Health and Welfare Trust does not convert to an Employee Life and Health Trust, or does not wind up, by the end of 2021, the CRA will apply the existing tax rules that apply to inter vivos trusts (and will not apply the rules for employee benefit plans, as initially proposed in the earlier draft legislation). The CRA says it will continue to apply its administrative tax rules to Health and Welfare Trusts until the end of 2021 (instead of until the end of 2020).
Changes to the existing Employee Life and Health Trust Rules
Finance's revised legislation provides several new welcome changes to the rules for Employee Life and Health Trusts. Specifically, these changes:
- Expand the list of "designated employee benefits" to include certain counselling services (i.e., for mental or physical health) and death benefits of up to $10,000
- Allow employers to offer certain other types of benefits that are not designated benefits (e.g., bereavement leave and leave for jury duty) provided all or substantially all (i.e., generally 90% or more) of the total cost of benefits is for designated employee benefits and certain other criteria are met
- Expand the rule allowing automatic deductibility of negotiated fixed-rate contributions
- Extend the carry-forward period for non-capital losses (e.g., the payment of designated employee benefits) to 7 years (from 3 years), so that most Employee Life and Health Trusts can effectively match contributions and revenues with benefit payment obligations.
The revised legislation also includes the changes proposed in the May 2019 draft legislation to:
- Add a new tax that applies to prohibited property held by the trust (under new Part XI.5 of the Act), such that the acquisition of a prohibited property would not cause the entire trust to fall offside the required conditions of an Employee Life and Health Trust (would apply retroactively for 2014 and subsequent taxation years)
- Allow certain non-resident trusts to qualify as an Employee Life and Health Trust if certain conditions are met (under current rules Employee Life and Health Trusts must be resident in Canada, unlike Health and Welfare Trusts)
- Amend the trustee requirement so that trustees who do not deal at arm's length with one or more participating employers (instead of participating employer representatives) must not make up the majority of trustees.
Participation of key employees
Finance's revised legislation relaxes the current restrictions that apply to the participation of "key employees" (i.e., specified shareholders and highly compensated employees). The revised rules provide that key employees can now make up 25% or less of a class of employee-beneficiaries across all employers in an Employee Life and Health Trust. Further, under these new changes, the restrictions for key employees will not apply if either of the following conditions are met:
- The benefits provided to key employees who deal at arm's length with their employers are negotiated under a collective bargaining agreement, or
- The total cost of private health services plan benefits paid to each key employee (and to each family member of a key employee) does not exceed $2,500 each year (prorated if the key employee did not render service on a full-time basis throughout the year).
For more information, contact your KPMG advisor.
Information is current to December 8, 2020. 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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