The End of Health and Welfare Trusts: Proposed Amendments to the Income Tax Act (Canada)


The End of Health and Welfare Trusts: Proposed Amendments to the Income Tax Act (Canada)

Date: June 5, 2019

On May 27, 2019, the federal Department of Finance announced proposed amendments to the Income Tax Act (Canada) (ITA), to facilitate the conversion of existing Health and Welfare Trusts (HWTs) into Employee Life and Health Trusts (ELHTs), and to improve the existing ELHT rules. Comments on the proposed ITA amendments are invited by July 31, 2019.

In this FTR Now, we highlight key aspects of the proposals that will be of interest to administrators of HWTs and ELHTs, and to employers that sponsor or participate in these arrangements.


HWTs have long existed as vehicles for providing health and welfare benefits to employees on a tax-effective basis. However, HWTs have no express legislative framework or authority under the ITA. Instead, their rules, including rules respecting contributions and the computation of taxable income, have been set by the Canada Revenue Agency as a matter of administrative policy. 

In 2010, the ITA was amended to establish a framework for ELHTs, which provide benefits for employees in the nature of group sickness or accident insurance, private health services and group term life insurance. The ELHT rules are similar to the administrative rules that have been applied to HWTs, but there are some notable differences (e.g. respecting requirements for beneficiary classes, the treatment of surplus, and the application of certain tax rules, particularly for non-capital losses). This ELHT framework applies to trusts established after 2009.

On February 27, 2018 the federal government tabled its 2018 Budget, Equality & Growth: A Strong Middle Class (2018 Budget), which announced the government’s intention to end the tax treatment afforded to HWTs for years after 2020, and the introduction of transitional rules to facilitate the discontinuation of HWTs, including the conversion of HWTs into ELHTs. The federal government invited stakeholder input on these proposed transitional rules, setting a deadline of June 29, 2018, for submissions. The current ITA amendment proposals have been developed with the assistance of submissions made through this consultation process.

Conversion of HWTs to ELHTs

To facilitate the conversion of existing HWTs, the proposed ITA amendments would, if adopted, allow for HWT property to be transferred to an ELHT at any time prior to January 1, 2021, without triggering taxation, provided that the Minister has been given notice of such transfer (in a form to be prescribed). 

As an exception, however, the proposed ITA amendments would allow HWTs established before February 28, 2018, under which contributions are determined by a collective bargaining agreement, to be deemed as ELHTs on a transitional basis. This deeming rule would apply to a HWT that makes a qualifying election (in a form to be prescribed), and would be continued until the earliest of:

  • the effective date of the next collective bargaining agreement, relating to benefits under the trust
  • the end of 2022; and
  • the date that the trust satisfies the conditions governing ELHTs.

Thus, to the extent applicable, a HWT which has contributions that are determined by collective bargaining agreement would have up to an additional two years to convert to an ELHT. The intent is to allow such HWTs to be continued as ELHTs, without transfers of property, provided that they satisfy (or are amended to satisfy) the ELHT rules prior to the end of the deeming period. 

HWTs that are not converted to ELHTs or wound up by the end of 2020 will generally be considered “employee benefit plans”, and while designated benefits provided by such plans would taxed in the same way as if provided through a HWT or ELHT, this employee benefit plan treatment would potentially impact the timing of employer deductions for contributions made in respect of these plans. 

Since the deeming rule (and conversion option) is not extended to HWTs under which contributions are determined other than by collective bargaining agreement, it would seem that the only way to avoid employee benefit plan tax treatment for these particular HWT arrangements would be to transfer property to qualifying ELHTs prior to 2021.

Improvements to Existing ELHT Rules

To address stakeholder concerns that have been raised respecting the existing ELHT rules, the proposed amendments to the ITA would, if approved, also:

  • require that a majority of the ELHT trustees deal at arm’s length with each participating employer (replacing the existing requirement that employer representatives not constitute a majority of the trustees, or otherwise control the trust);
  • reduce the risk that an ELHT will be denied tax deductions where benefits are provided to individuals other than eligible beneficiaries, as long as it is reasonable to conclude that the trustees of the ELHT neither knew nor ought to have known that benefits have been provided to, or contributions have been made in respect of, non-eligible beneficiaries;
  • reduce the ELHT tax impact where the trust acquires prohibited property, by imposing tax only on the portion of the trust investments (or loans) that are prohibited;
  • remove the existing multi-employer test respecting the deductibility of employers’ contributions to an ELHT where the contributions are required by collective bargaining agreement; and
  • allow a non-resident trust to qualify as an ELHT if certain conditions are met.

Finally, in the Backgrounder respecting the draft ITA amendments, the Department of Finance signalled that it will continue to look at certain other issues relating to ELHTs, including:

  • whether any changes should be made to the types of benefits that can be provided under ELHTs
  • the use of ELHTs to provide benefits to “key employees,” including the use of self-insured arrangements; and
  • the rules related to carry back and carry forward of non-capital losses.

We will monitor and provide updates on future developments related to these and any other proposals respecting HWTs and ELHTs. 

Should you have any questions respecting the proposed ITA amendments or wish to make submissions, please contact a member of the Pension, Benefits & Executive Compensation practice group.

The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Hicks Morley Hamilton Stewart Storie LLP and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Hicks Morley Hamilton Stewart Storie LLP. ©