28 March 2001 External T.I. 2001-0071655 - HWT-CONTRIB. FOR FUTURE YEAR BENEFITS

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: Whether the fact that the Taxpayer's annual contribution to a health and welfare trust would exceed what is required to fund current year benefits, i.e., contributions may be in respect of future benefits also, would disqualify the trust as a health and welfare trust and thus jeopardize the tax exempt status of the benefits paid to employees.

Position: It is our position that employer contributions to a health and welfare trust which exceed the amount necessary to provide current year coverage will be denied pursuant to subsection 18(9) of the Income Tax Act. However, it is our view that the fact that excessive contributions have been made will generally not, in and of itself, result in the disqualification of a trust as a health and welfare trust, if the contributions are based on an actuarial determination of the amounts necessary to fund future health and welfare benefits.

Reasons: Administrative position.

XXXXXXXXXX 		J. Gibbons, CGA
			2001-007165
March 28, 2001

Dear XXXXXXXXXX:

We are replying to your letter of February 21, 2001, in which you requested our views about the establishment of a health and welfare trust in the situation described below.

Since your situation appears to relate to actual proposed transactions, we refer you to our policy in this regard, which is set out in Information Circular 70-6R4. This circular explains that it is our policy not to provide written confirmation of the tax implications inherent in particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in that circular. However, we have provided general comments for your benefit.

Facts

1. Your client (the "Taxpayer") would like to provide health and dental benefits (the "benefits") to its current and future retirees.

2. The Taxpayer wishes to ensure that coverage for the benefits can be provided during the lifetime of the retirees, even should the Taxpayer cease to exist.

3. The Taxpayer has determined that the best way of providing the benefits would be the establishment of a trust arrangement under which the trustees would receive contributions from the Taxpayer to fund the benefits.

4. Given the objective of ensuring long-term coverage, the annual contribution by the Taxpayer could be higher that what is required to fund current year benefits.

It is your understanding that the trust arrangement described above would normally qualify as a "health and welfare trust." However, you wish to know whether the fact that the Taxpayer's annual contribution would exceed what is required to fund current year benefits would disqualify the trust as a health and welfare trust and thus jeopardize the tax exempt status of the benefits paid to employees.

Our Comments

As you noted in your letter, it is our position that employer contributions to a health and welfare trust which exceed the amount necessary to provide current year coverage will be denied pursuant to subsection 18(9) of the Income Tax Act. However, in answer to your question, it is our view that the fact that excessive contributions have been made will generally not, in and of itself, result in the disqualification of a trust as a health and welfare trust, if the contributions are based on an actuarial determination of the amounts necessary to fund future health and welfare benefits. However, confirmation of the status of a health and welfare trust can only be made after reviewing a detailed submission, along with all of the related agreements. Thus, you may wish to request an advance income tax ruling in the manner set out in IC 70-6R4.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate