Lump Sum Payments in Lieu of Health/Dental Benefits Will Be Taxable

Posted on June 13, 2011 by Lesha Van Der Bij

Employers considering payouts in lieu of health and dental benefits should move quickly, as the Canada Revenue Agency (the CRA) has indicated that (subject to certain exceptions for insolvent employers) such payments will be taxable beginning in 2012.

In response to commentary included in the federal budget, the CRA recently posted a series of Qs & As clarifying its administration of the rules regarding the tax treatment of lump sum amounts received in lieu of health and dental coverage. In the past, the CRA had taken the position that lump sum amounts received by retirees or employees upon cancellation of their private health coverage could be considered “advance reimbursements of medical expenses” and, as a result, not taxable when received. Upon reconsideration, the CRA has changed its position and concluded that such amounts are in fact taxable when received.

The CRA is providing advance notice of this change in position, by allowing these lump sum payments to continue on a tax-free basis until 2012. However, where the payments are in relation to an employer’s insolvency that arose prior to 2012, the payment eventually made to any retirees or former employees would not be subject to CRA’s new position on taxability even if it is made in 2012 or later.

Further details regarding reporting and withholding requirements are included in the CRA Qs & As.

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Employers Should Review Plan Terms Defining Eligibility for Retiree Benefits

Posted on May 2, 2011 by Paul Litner

Even though post-retirement benefit (PRB) plans are not the same as registered pension plans, and are not subject to pension standards legislation, the recent arbitration decision in Regional Municipality (Durham) v. Canadian Union of Public Employees, Local 1764 is an important reminder to both employers and employees that benefits under pension plans and PRB plans can often be linked, with the result that a decision to take a transfer of the lump sum value (commuted value) of pension benefits could render a former employee ineligible for PRBs.

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Proposed Amendments under the Income Tax Act for Employee Life and Health Trusts

Posted on March 9, 2010 by Stephanie Kauffman

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.
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