In Whom We Trust

Draft legislation introduces life and health trust rules

by Glenn Stephens & Kevin Wark, May 2010

The Income Tax Act contains a number of rules dealing with benefits provided by employers to employees. Most readers will be aware that employers may deduct contributions made on behalf of employees to a group sickness or accident insurance plan, a private health services plan (PHSP) or a group term life insurance plan. In the case of group life insurance, premiums paid by the employer are treated as a taxable benefit to the employee. However, employer contributions to a group sickness plan or PHSP are not generally taxable to employees.

Primarily for administrative reasons, many employers choose to manage one or more of the above programs through arrangements that have come to be known as health and welfare trusts. The income tax rules governing these arrangements have been largely reliant on CRA administrative practice, as reflected in Interpretation Bulletin IT-85R2, which was published in 1986. As recently as 2005, the CRA attempted to amend IT-85R2, but the proposed changes met with significant resistance from the insurance and tax communities, and no changes were implemented.

Draft legislation released by the Department of Finance in February 2010, which introduces employee life and health trusts (ELHTs), appears to be an attempt to codify certain health and welfare trust rules. But is also introduces some new elements that could raise questions for employers.

The following is a brief summary of some key Department of Finance proposals.


Like health and welfare trusts, an ELHT must meet the following conditions:

  • The trust must reside in Canada and exist only to provide employee benefits;
  • All beneficiaries must be employees or former employees of an employer, or dependants of those employees; and
  • The employer can have no rights to trust distributions and its representatives cannot constitute a majority of the trustees.


Employer contributions to an ELHT will be deductible, but only to the extent that they relate to benefits payable in the same year as the contribution. Contributions not deducted in the current would be deductible in future years if and when benefits are paid.

This appears to be a departure from current practice for health and welfare trusts, where arguably the employer can deduct of contributions made to fund current claims, even though such claims are not payable in the particular year. The suggested changes seem unduly restrictive, especially where an employer contributes to a trust based upon sound actuarial principles and pursuant to a legal obligation, and considering that an ELHT would be subject to tax on its invested surplus.


The proposed rules are similar to those that apply regarding health and welfare trusts. Contributions to an ELHT made in respect of a group sickness plan or PHSP would not result in taxable employee benefits, but contributions in respect of group life insurance would be taxable. Benefits payable on a periodic basis under a sickness or accident insurance plan, such as disability income, would be taxed as received.


Significantly, the ELHT rules introduce the new concept of "key employee". An individual is considered a key employee if:

  1. the individual is an employee who owns at least 10% of the shares of any class of the employer corporation or a related corporation; or
  2. he or she earns at least five times the year's maximum pensionable earnings, which is $47,200 in 2010 ($236,000).

The rules contemplate the possible establishment of different employee classes within an ELHT. Key employees could be put into a separate class, but their rights could not be greater than those provided to any other class representing at least 25 per cent of all employees, of whom 75 per cent or more are non-key employees.

As an example, assume an employer has ten employees, of whom four would meet the definition of a key employee. In this case, it would appear that the key employees could be included in the ELHT by putting them in a totally separate class from the non-key employees and providing exactly the same rights to both classes. This would satisfy the 25 per cent test (the-non key employee class would represent 60 per cent of all employees) and the 75 per cent test (the class would be 100 per cent non-key employees)

As long as the key employee group did not have greater rights than the other group, the ELHT would be within the rules. For example, if both classes had group term insurance coverage equal to five times salary, this would be no more advantageous to the key employees even though the absolute amount of insurance coverage was higher for key employees.

It is proposed that these rules will apply to trusts established after 2009. At the date of writing, the CRA has made no comments as to how these amendments would affect its administrative policies under IT-85R2. It seems fair to assume that if the ELHT rules are passed in some form, the bulletin would be withdrawn. This would introduce the troublesome question of how existing health and welfare trusts would be treated, and whether some sort of "grandfathering" relief would be provided.



This article was published in the May 2010 issue of FORUM magazine. Posted with permission from the Financial Advisors Association of Canada (Advocis).

These resources are provided for reference only and do not necessarily represent the opinions of Guilfoyle Financial Inc. Please consult your own tax and legal advisors.