Canada: Employee Life And Health Trusts

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits/Tax, March 2010


On February 26, 2010, the Department of Finance released proposed amendments to the Income Tax Act (Canada) (the ITA). The proposed amendments provide for a new type of employee benefit trust, to be known as an "employee life and health trust" (ELHT). Along with the press release (, the Department of Finance released the text of the draft legislative amendments, ( a more detailed backgrounder ( and explanatory notes ( The proposed amendments apply to trusts established after 2009.

In many respects, the proposed amendments codify current administrative practices of the Canada Revenue Agency (CRA) with respect to health and welfare trusts for employees. However, health and welfare trusts are not specifically addressed in the ITA and the proposed amendments do make some changes to the existing health and welfare trust administrative practices. The potential impact of these changes should be considered by employers and other entities that have established (or are considering establishing) a health and welfare trust.

1. Conditions for treatment as an ELHT

The proposed amendments define an ELHT as a Canadian resident trust established for employees of one or more employers which meets certain conditions.

The trust's objects must be limited to the provision of "designated employee benefits". "Designated employee benefits" include benefits from a group sickness or accident insurance plan, a group life insurance policy or a private health services plan.

In addition, each beneficiary must be an employee, a person related to an employee or another ELHT. For this purpose, employees include current and former employees, thereby covering the provision of benefits to retirees and employees of a business that has been discontinued or sold. Employees for this purpose also include individuals for whom the employer has assumed the responsibility of providing "designated employee benefits" as a result of a business acquisition.

The trust must also be maintained primarily for the benefit of beneficiaries who are not "key employees". This means that most of the beneficiaries must be employees who are not (and are not related to) significant shareholders of the employer and who are also not "high-income" employees. If key employees are beneficiaries, they must be treated the same way as a group, at least 75% of which are not key employees, representing at least 25% of all of the beneficiaries of the trust.

In addition, the trust must operate independently from the employer.

2. Employer deductions and pre-funding of an ELHT by an employer

The proposed amendments include rules specifying the timing of deductions available to an employer in respect of the funding of an ELHT.

An employer may deduct contributions made to an ELHT in a year to the extent the contributions relate to "designated employee benefits" payable in that year. To the extent the employer pre-funds benefits, the corresponding deduction is delayed until the year the related benefits are payable to beneficiaries. In this respect, the draft legislation is similar to CRA's current position relating to employer contributions to health and welfare trusts.

If an employer's obligation to an ELHT is satisfied with a promissory note (or other evidence of indebtedness), the issuance of the note is not regarded as a contribution. Instead, payments on the note (whether consisting of interest or principal) are treated as contributions to the trust and are deductible to the same extent as other employer contributions to the ELHT.

The total amount that an employer may deduct is capped at the total amount of contributions, not the total amount of benefits paid.

3. Employee contributions

Employee contributions to an ELHT are permitted, though not required. Such contributions generally are not eligible for a deduction or credit unless they can be traced to an expense that qualifies for a deduction or credit, such as the medical expense tax credit.

4. Tax treatment for employee benefits under an ELHT

Employer contributions to ELHTs generally will not be treated as taxable employee benefits. Further, when benefits are actually paid out of an ELHT, the status of those benefits as taxable or non-taxable will be the same as it would have been had those benefits been provided directly, rather than through an ELHT. This is generally the same result as under CRA's current health and welfare trust policies.

Amounts received by current or former employees from an ELHT that do not qualify as tax free "designated employee benefits" will generally be taxable.

5. Allowance for trust to deduct all amounts paid from an ELHT to employees or retirees in respect of "designated employee benefits", and rules governing the carryback and carryforward of non-capital losses

ELHTs will generally be taxable on their net income. However, amounts payable in a year as "designated employee benefits" are deductible in computing the trust's income for the year. Any excess of deductions over revenue may be carried back three years or carried forward three years to shelter net trust income.

6. Treatment as two or more separate trusts

The proposed rules would allow an ELHT that administers employee benefits on behalf of employees of more than one employer to elect to be treated for income tax purposes as two or more separate trusts, provided certain conditions are met.


The new ELHT rules codify some aspects of the existing tax treatment of health and welfare trusts. They also introduce some new provisions that should be carefully reviewed by employers and other entities that have established (or are considering establishing) such arrangements. The Department of Finance is inviting comments on the ELHT proposals until April 30, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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