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):
- 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.
- 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.
- 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.
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