2 August 1995 External T.I. 9516845 - H&W TRUST FOR PENSIONERS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

taxation of a health and welfare trust for pensioners

Position TAKEN: see It-85R2

Reasons FOR POSITION TAKEN:

bulletin has the general info required by the enquirer

A. Humenuk
XXXXXXXXXX		951684

August 2, 1995

Dear Sir:

Re: Taxation of a Trust Fund

Your letter of June 14, 1995 addressed to Brian Miller of the Belleville Tax Service office has been referred to us for reply.

You are seeking information on how to set up a trust fund to pay the medical and dental expenses of retired union employees so that the trust fund is considered a non-profit organization. It appears from your letter that the trust will be funded by employer contributions and that the funds will be used to provide retired employees with medical and dental benefits.

As stated in paragraph 21 of the Information Circular 70-6R2 "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto, the Department does not comment on or confirm the tax consequences relating to an actual proposed transaction except in the form of an advance income tax ruling. Where such a ruling is requested, copies of all relevant documents and a complete statement of the facts and issues should be submitted along with a deposit of $481.50. We offer the following general comments concerning the taxation of trusts set up to provide employees or retired employees with medical and dental benefits.

Interpretation Bulletin IT-496 "Non-profit organizations" sets out the Department's position with respect to non-profit organizations which qualify for tax-exempt status under paragraph 149(1)(l) of the Act. As explained in paragraph 11 of that bulletin, an organization which provides benefits to its members does not qualify as an exempt organization under paragraph 149(1)(l) of the Act. A trust which is funded by employer contributions to provide benefits to its employees or former employees would ordinarily be taxed as an employee benefit plan or an employee trust as described in Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts" and special release thereto.

However an employer-funded trust which is created to provide medical and dental benefits for employees or retired employees may be considered to be a health and welfare trust as described in Interpretation Bulletin IT-85R2 "Health and Welfare Trusts". For further information as to whether a medical and dental plan qualifies as a private health services plan, refer to Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"".

A health and welfare trust is taxed in accordance with section 104 of the Income Tax Act as explained in paragraph 11 of IT-85R2. Any interest or other investment earned by a health and welfare trust is taxed in the hands of the trust at the applicable rate for inter vivos trusts. As stated in paragraph 12 of IT-85R2, benefits paid to employees or former employees which would not otherwise be included in the employee's income by reason of paragraph 6(1)(a) of the Act may, at the trustee's discretion, be treated as paid out of prior year's funds or employer contributions to the extent available. As a result, the trust would not be entitled to a deduction for amounts payable to the employees as benefits out of the trust and the employees would not be required to include the amount received in income as a distribution of trust income.

While we trust that our comments will be of assistance to you, we would caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction. We have included a copy of the bulletins and circulars referred to in this letter.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosure

c.c. Brian Miller, Client Services

Belleville Tax Service office