Budget 2018 saw the federal government propose legislative changes to the section of the Income Tax Act governing Employee Life and Health Trusts (ELHTs).
For reference, upon the introduction of ELHTs in 2010, they co-existed with Health and Welfare Trusts (HWTs), whereby:
- ELHTs were governed by section 144.1 of the Income Tax Act (ITA); and
- HWTs were governed by administrative positions taken by Canada Revenue Agency (CRA), most recently in Income Tax Folio S2-F1-C1 (HWT Administrative Rules).
The intention of the proposed legislative changes was to:
- Address and refine various technical aspects of ELHTs
- Add further clarity around the requirements for HWTs to transition to ELHTs
In May 2019, the Department of Finance Canada released draft legislative proposals supporting the conversion of HWTs to ELHTs and sought feedback from stakeholders.
On November 27, 2020, the Department of Finance Canada released revised draft legislative proposals. The revised draft introduces several changes.
Importantly, the deadline to convert has been extended to December 31, 2021, essentially providing HWTs with one additional year to complete the conversion to ELHTs. For collectively bargained HWTs, the deadline is December 31, 2022. Further, trusts that offer plans that are collectively bargained and comply with most of the ELHT rules may be deemed ELHTs until the plans are re-negotiated, at which point it is expected that the trusts will fully comply. Beyond the deadline date, HWTs will no longer be recognized by CRA via an administrative position and will essentially cease to exist.
Other changes included in the revised draft legislative proposals, include (but are not limited to):
- Clarifications that align more closely to market norms to simplify transition, such as:
- Defining counselling services for mental and physical health (e.g., an Employee Assistance Program) as a category of Designated Employee Benefit for ELHTs; and
- Updating reference to eligible beneficiaries to include those of former participating employers (e.g., retirees).
- Clarifications in transitioning from an HWT to an ELHT, such as:
- Adding trust-to-trust transfer guidance;
- Specifying deductibility of transferred property; and
- Adding filing requirements.
- Adjustments to various determinations applicable to ELHTs, such as:
- Relaxing restrictions around participation of key employees; and
- Adding a new section outlining a tax on prohibited investments.
As there are several changes outlined in the revised draft legislative proposals above and beyond those we have highlighted, we encourage HWTs and ELHTs in the market to review all changes to consider how they may impact their specific programs.
In addition, it is worth noting that in both section 207.9 (i.e., tax on prohibited investments) and subsection 144.1(3)(a) (i.e., breach of terms ), there has been wording added using the benchmark that trustees “knew or ought to have known” when assessing certain requirements for ELHTs. Although this has always been generally understood for trustees as the fiduciaries of the plan, the fact that the ITA has added specific reference to this further emphasizes the expectation of trustees: they must actively seek information to support decision-making and governance.
Although no date has been communicated for the government to introduce the final legislation, a Department of Finance Canada news release indicates that this will be carried out “at an early opportunity”.
Overall, we are pleased to see these updates being made to the revised draft legislative proposals. ELHTs can be effective vehicles for providing benefits for active and retired members. If the proposed legislation is adopted, the resulting rules for ELHTs and treatment of transitioning HWTs should meet the needs of plan sponsors.