On February 27, 2018, the Minister of Finance introduced Canada’s 2018 Federal Budget: Equality and Growth for a Strong Middle Class (2018 Budget), as well as an annexed Tax Measures: Supplementary Information (Supplementary Tax Measures), which include a proposal to discontinue the Health and Welfare Trust regime and provide for the transition of existing Health and Welfare Trusts into Employee Life and Health Trusts.

A Health and Welfare Trust is a trust established by an employer for the purpose of providing health and welfare benefits to its employees. The Income Tax Act (Canada) (ITA) does not expressly set out the tax treatment of such a trust; however, the Canada Revenue Agency (CRA) has long-standing administrative positions regarding the requirements for qualifying as a Health and Welfare Trust along with rules relating to contributions to, and the computation of taxable income of, such a trust. In general, under these administrative positions, benefits provided to employees through a Health and Welfare Trust will be taxed in the same manner as if they were provided directly to the employees by the employer.

In 2010, the Employee Life and Health Trust rules were added to the ITA. These trusts also provide health and welfare benefits for employees, such as group sickness or accident insurance plans, private health services plans and group term life insurance. The ITA rules governing Employee Life and Health Trusts are very similar to the CRA’s administrative positions on Health and Welfare Trusts, but also address certain issues (e.g., the treatment of surplus income and pre-funding of benefits) that are not clearly dealt with in the CRA’s administrative positions on Health and Welfare Trusts.

The 2018 Budget proposes that only the ITA Employee Life and Health Trust rules apply to trusts providing health and welfare benefits to employees. As such, after the end of 2020, the CRA will no longer apply its administrative positions with respect to existing Health and Welfare Trusts. Further, trusts established after February 27, 2018 will not benefit from the CRA administrative positions on Health and Welfare Trusts. To facilitate the conversion of existing Health and Welfare Trusts to Employee Life and Health Trusts, transitional rules will be added to the ITA. In addition, the CRA will provide administrative guidance relating to winding up existing Health and Welfare Trusts.

Health and Welfare Trusts that do not convert to an Employee Life and Health Trust (or wind up) will be subject to the normal income tax rules for trusts, which will likely mean that most benefits provided through such trusts, including otherwise non-taxable health benefits, will be taxable to the participating employees.

Stakeholders are invited to submit comments on transitional issues, both administrative and legislative, to facilitate the discontinuation of the Health and Welfare Trust regime. Following the consultation, the federal government intends to release draft legislative proposals and transitional administrative guidance. Issues currently being considered include:

• Whether a Health and Welfare Trust can continue as an Employee Life and Health Trust without the creation of a new trust
• Whether, and under what conditions, a rollover of assets to a new trust will be permitted
• The tax implications for a Health and Welfare Trust that does not satisfy the conditions to become an Employee Life and Health Trust, or where the trustees of a Health and Welfare Trust choose not to convert.

The federal government is accepting comments on the 2018 Budget and Supplementary Tax Measures until June 29, 2018.