20 December 1999 Internal T.I. 9928917 - H&W TRUST "ADMIN. SERVI" FEES

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 administrative only fees (ASO fees) paid by a health and welfare trust may be deducted from the trust's investment income.

Position: Likely yes.

Reasons: Pursuant to our policy in paragraph 12(b) of IT-85R2.

		December 20, 1999

	Winnipeg Tax Services Office	HEADQUARTERS
	Large File Audit	J. Gibbons
(613) 957-8953
	Attention: Gary Yip
		7-992891

XXXXXXXXXX (the "Trust") and XXXXXXXXXX (the "taxpayer")

We are replying to your facsimile of October 20, 1999, in which you requested our comments regarding the deductibility of administrative services only ("ASO") fees paid by the Trust. We also acknowledge receipt of the trust agreement for the Trust.

Facts:

• The Trust is a health and welfare trust set up by XXXXXXXXXX companies (the "Association") to provide disability, medical, and dental benefits for its employees.
• The Trust was set up on XXXXXXXXXX, and is a self-insured arrangement without the use of an insurance contract with an insurance carrier.
• The XXXXXXXXXX companies make contributions to the Trust based on an actuarial determination of the funding requirements of the plan.
• The Trust pays ASO fees to XXXXXXXXXX to administer the employees' claims.
• The employers deduct their contributions to the Trust, including their portion of the ASO fees.
• The Trust has set up separate accounts for each of the XXXXXXXXXX companies ("claims fluctuation accounts") which tracks their contributions and the respective claims made by employees. The accounts also contain an allocation of ASO fees based on the proportion of the particular company's employees' claims over the total claims.
• Each employer is entitled to a refund of its excess contributions (total contributions less the total of the claims made by its employees and its allocated ASO fees) as showing in the claims fluctuation account. This refund may be received on the termination of the plan or earlier if the employer so requests. In XXXXXXXXXX, the taxpayer received such a refund, which it reported as income.
• At XXXXXXXXXX, the total in the claims fluctuation account, i.e., the total of all employer's excess contributions plus investment income, amounted to $XXXXXXXXXX. This account has accumulated since the inception of the Trust in XXXXXXXXXX.
• In XXXXXXXXXX, investment income earned on this account amounted to $XXXXXXXXXX.
• In computing its income in XXXXXXXXXX, the Trust deducted ASO fees of $XXXXXXXXXX and trust accounting fees of $XXXXXXXXXX from the investment income to arrive at a non-capital loss for the year of $XXXXXXXXX.

In your correspondence with us, you raised a number of concerns. In particular, you questioned the appropriateness of the Trust's deduction for ASO fees paid to XXXXXXXXXX. It is our view that the ASO fees are likely deductible by the Trust pursuant to paragraph 12(b) of IT-85R2. However, a non-capital loss cannot arise as a result of expenses described in paragraph 12(b) since they are not incurred for the purpose of earning income from a business or property. Further, whether it is appropriate to allow the Trust to claim a full deduction for the ASO fees, with no offset in the Trust against the employer contributions to the Trust, will be reviewed in more depth, and we will write to you later on this aspect.

In order to qualify for treatment as a health and welfare trust, it is essential that the conditions set out in IT-85R2 are met. In the circumstances, it would appear that the requirement in paragraph 6 is not being met. This paragraph states that the funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. In addition, this paragraph provides that the employer's contributions to the fund must not exceed the amounts required to provide these benefits. The claims fluctuation account that records ongoing employers' surpluses which can be returned to them at their own discretion clearly violates this principle. Nonetheless, if the clear intention of the parties was to establish the Trust as a health and welfare trust, as would appear to be the case, we suggest that you seek assurance that this will not be done in the future (with an appropriate follow-up). Otherwise, there is support for treating the Trust as an "employee benefit plan" (see paragraphs 3 and 4 of IT-85R2).

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton
Manager
Business, Property & Employment Income Section
Income Tax Rulings and
Interpretations Directorate

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