Add a bookmark to get started

3 December 20204 minute read

Out with the old & in with the “new” - draft legislative proposals & employee life and health ‎trusts

After hearing from stakeholders, the Minister of Finance released on November 27, 2020 proposed ‎amendments to the Income Tax Act (Canada) (the “Proposed Amendments”) that cover three areas: 1. ‎conversion of “health and welfare trusts” (“HWT”) to “employee life and health trusts” (“ELHT”); 2. ‎improvements to current rules of ELHTs; and 3. easing of rules related to key employees.‎

The purpose of the Proposed Amendments is to provide one set of tax ‎rules to apply to trusts that ‎provide employee benefits‎ - ELHTs. Existing HWTs that do not convert to ELHTs by the end of 2021, ‎will become subject to the existing rules that apply to inter vivos trusts and those income tax ‎consequences.‎

The Proposed Amendments will affect a trust that provides employee benefits to employees and to ‎retired employees (including those trusts in existence prior to 2010). Typically, that is a trust established ‎by a collective agreement or by an association. An employer that offers employee benefits through an ‎insurance company or one that is offered by an insurer to the public will not be affected by the ‎Proposed Amendments.‎

Highlighted below are some key aspects of the Proposed Amendments (which are not exhaustive):

  1. ‎Riding the new wave

    To facilitate the conversion of HWTs to ELHTs, the Proposed Amendments include provisions that allow ‎existing HWTs to “elect” or “deem” to convert to an ELHT without any adverse tax implications and ‎without having to create a new trust. If a new trust is created, then tax-free transfers of property will be ‎permitted provided the former trust was an employee benefits trust (HWT). ‎

    Whether a HWT “elects” or “deems” to convert to an ELHT, notice is required to be provided to Canada ‎Revenue Agency. The notice is required at the time of the election of the transfer of the property or not ‎later than the trust’s first filing-due date after 2021. Otherwise, if an HWT is deemed to convert, subject to ‎conditions, by December 31, 2022.‎

  2. Improvements to the ELHT rules already in place 

    The proposed Amendments address changes to improve the rules of ELHTs which include allowing ‎ELHTs to offer additional benefits. For example, “designated employee benefits” were expanded to ‎include additional categories (such as counselling services). Further, the ELHT will be able to offer other ‎benefits as long as “all or substantially all” of the total costs of the benefits provided are designated ‎employee benefits.‎ ‎

  3. No Longer the “Key Employee” test

    The current 25% and 75% test is to be altered to provide that if one employer’s key employees exceed ‎‎25% of that employer’s ‎employees, but the total number of key employees of all participating ‎employer’s in the ‎ELHT does not exceed 25% of all employees, then this will be permissible.‎

Takeaways

HWTs that will be affected by the Proposed Amendments have until December 31, 2021 to make the ‎necessary changes to their trust agreements or consider alternative vehicles by which they may continue ‎to offer employees benefits. It is worthwhile to take advantage of the time, and start planning now.‎

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.

Print