June 6, 2019
Last week, the Department of Finance released a set of draft legislative proposals clarifying the requirements for converting Health and Welfare Trusts (HWTs) to Employee Life and Health Trusts (ELHTs) and revising certain rules resecting ELHTs. The proposed changes are generally welcome and address many of the concerns raised by stakeholders.
The proposed process for converting an existing HWT to an ELHT is detailed in an accompanying Backgrounder. In brief, the ELHT rules will be extended to apply to trusts created prior to 2010, and existing HWTs will be permitted to elect to continue as ELHTs without suffering any adverse tax implications by notifying the CRA in the prescribed manner. For the 2019 taxation year, the HWT will simply need to notify CRA of its election to be deemed an ELHT, as well as any transfer of property, in a letter included with the trust’s T3 Trust Income Tax and Information Return.
We note that if contributions to the trust are collectively bargained, the trust may benefit from deeming rules extending the period to formally comply with the ELHT requirements (see below). However, if contributions are not collectively bargained, it is possible some amendments to the underlying trust documents may be necessary in order for the trust to meet all applicable ELHT requirements at the time of conversion.
Apart from the conversion process, the new legislation provides for the following key changes:
- There will be no tax consequences on conversion of an HWT to an ELHT and there is no need to establish a new trust.
- There will be a mechanism for collectively bargained trusts to be deemed an ELHT despite non-compliance with ELHT rules. This will essentially provide up to a two-year extension beyond the proposed HWT phase-out date of 2020 for collectively bargained trusts to make amendments in compliance with the ELHT rules. The “deemed ELHT” election may apply until the earlier of the end of 2022 or the effective date of the next collective bargaining agreement.
- HWTs and ELHTs will be permitted to merge without any adverse tax consequences. This proposal is a welcome clarification regarding the rules surrounding transfers and mergers of trusts providing employee benefits.
- The test for when an employer will be permitted to deduct all contributions required under a collective bargaining agreement will be significantly simplified. Collectively bargained trusts will no longer be required to meet a test based on number of employers and employee mobility in order to take advantage of these rules.
- An ELHT will not be offside where it provides designated employee benefits to individuals who are not eligible beneficiaries (i.e. independent contractors), but may lose its ability to deduct any expense from income if the trustees either knew – or ought to have known – that beneficiaries were not eligible.
- The rules have been amended to clarify that eligible beneficiaries of an ELHT also include employees and eligible spouses and dependents of employers who no longer participate in the plan or contribute to the ELHT.
- A trust will now be able to qualify as an ELHT where it is not a Canadian resident if it meets certain conditions. This is intended to deal with, for example, a U.S. resident voluntary employees’ beneficiary association (VEBA) trust that may have Canadian members.
- The rules have been changed to apply a less onerous penalty on ELHTs which hold prohibited investments. These changes are largely in line with the prior Comfort Letter on this issue released by the Department of Finance.
- The representation rules have been changed such that a majority of an ELHT’s trustees must deal at arm’s length with each participating employer. Previously the rule required that a majority of trustees must not be employer representatives.
- An amended definition of “Employee Benefit Plan” (EBP) provides that, as of 2021, a trust that provides designated employee benefits but does not meet the conditions to be an ELHT will be considered to be an EBP.
Despite these changes, there remain some outstanding issues and questions with respect to the ELHT rules. The Backgrounder notes that certain issues remain under consideration by the Department of Finance including whether the type of benefits that qualify as “designated employee benefits” to be provided through an ELHT should be expanded, whether the scope of Private Health Services Plan benefits should be expanded, how ELHTs may be used to provide benefits to “key employees”, and the rules relating to carry-back and carry-forward of non-capital losses for ELHTs.
The Department of Finance is soliciting comments from stakeholders on the proposed legislation by no later than July 31, 2019. We encourage any interested parties to make submissions by the deadline. In addition, we encourage you to contact us should you have any questions or concerns regarding the application of the proposed Draft Legislation to the circumstances of your organization.
Co-authored by Elie Waitzer, Articling Student
Pension and Benefits