Employee Life and Health Trusts

In February 2010, the Federal Government introduced legislation to formalize the rules for Employee Life and Health Trusts (ELHTs). ELHTs can be organized for one employer or for many, and generally are established to provide designated employee benefits to employees (and/or former employees) and their families. Designated employee benefits (DEBs) include group sickness or accident insurance plans, group term life insurance policies, and private health services plans.

To qualify as an ELHT, a trust must satisfy these conditions:

1. The only object of the trust is to provide DEBs to employees or to provide pro-rata benefits to beneficiaries on the wind up of the trust;
2. The ELHT is resident in Canada;
3. Each beneficiary is an employee, a former employee, an individual related to those individuals, or another ELHT;
4. The ELHT is not maintained primarily for "key employees";
5. Key employee rights are not more advantageous than those of a "reference class";
6. No non-designated employee benefits are provided to employers or those not operating at arm's-length with employers;
7. The ELHT is administered according to its terms and objects;
8. The ELHT has a legal right to enforce payment of contributions from employers; and
9. Employer representatives do not constitute a majority of trustees.

"Key employees" include specified shareholders, persons not dealing at arm's-length with the employer, and employees who in any two of the previous five years earned more than five times the maximum pensionable earnings for the year.

The reference class of employees must represent at least 25% of the beneficiaries of the trust for a particular employer. Fewer than 25% of the members of that class may be key employees, and the rights of each member of that class must be identical.

An employer's contributions to an ELHT are deductible to the employer to the extent they are reasonably regarded as having been contributed to fund designated employee benefits payable in the year to, or for the benefit of, its employees. Contributions to the ELHT in excess of what is required for the current year will not be deductible in the year contributed, but may be deducted in future years. In addition, contributions made to fund anything other than DEBs will not be deductible.

Each year, the ELHT will be required to file a trust return to report income earned. The trust will be entitled to deduct as expenses amounts that became payable in the year as designated employee benefits. If expenses exceed income, the ELHT may carry the loss back or forward three years.

The tax treatment in the hands of employees of the DEBs provided by the ELHT will not change because of the existence of the ELHT. The Income Tax Act provides that some benefits are tax-exempt (i.e. private health services plans), others are not taxable until received (i.e. disability benefits, wage loss replacement), and others are taxable during the year of coverage but not taxable upon receipt (i.e. group term life insurance).

A trust that fails to qualify as an ELHT will be treated as an employee benefit plan, and any payments from it will be taxable as employment income unless they are for the payment of DEBs.

This new legislation codifies the rules for health and welfare trusts with some additional provisions. The new provisions should be reviewed carefully by employers who have established employee benefit plans or are considering doing so now that the rules provide a clearer picture of the tax implications to employers and employees.

Contact your Collins Barrow advisor for more information on ELHTs and this new legislation.

Julia Dean, CA, is a Tax Specialist in the Peterborough office of Collins Barrow.