Proposed Amendments under the Income Tax Act for Employee Life and Health Trusts
The Minister of Finance recently announced proposed amendments to the Income Tax Act creating a new vehicle, called an employee life and health trust (EL&H trust), through which employers can provide certain group benefits to their employees and former employees in a tax effective manner.
While many of the rules in the proposed amendments regarding EL&H trusts are similar to existing law and policy for health and welfare trusts (H&W trusts), there are a number of interesting new provisions, including the following:
- Clearly setting out the timing for claiming a deduction for employer contributions to an EL&H trust in respect of employee benefits to be paid in a future tax year. Specifically, the portion of any pre-funding that relates to benefits payable in a future tax year may only be deducted in that future tax year.
- Permitting an EL&H trust to treat employee benefit payments as expenses and apply special rules to allow the carryback and carryforward of losses where the trust's expenses for a particular year exceed its revenue. (Under the current rules for H&W trusts, benefit payments in excess of the trust’s income for the year are treated as distributions of trust capital with no other income tax impact.)
- Specifically addressing employer contributions to an EL&H trust by way of a promissory note and prescribe the timing for claiming deductions for payments of principal and interest under the note.
I also note that the proposed amendments regarding EL&H trusts preserve the same tax treatment for benefits in the hands of employees as if they had been received directly from the employer (e.g., if they would have been tax-exempt (such as private health services plan benefits) when received directly from the employer, they would be tax-exempt when paid from the EL&H trust).
The proposed amendments would apply to trusts established after 2009. The Government is seeking comments on the proposed amendments by April 30, 2010.
