The 2018 Federal Budget was released on February 27, 2018, and amongst other things, included a major and somewhat surprising announcement regarding the phase out of the CRA’s Health and Welfare Trust Policy, which has governed health and welfare trusts (HWTs) since 1966.
The announcement was included in the Tax Measures: Supplementary Information document released with the Budget (see page 28).
The Budget proposes that the CRA will no longer apply its administrative policy with respect to existing HWTs after the end of 2020 and will not apply the administrative policy with respect to any trusts established after Budget Day. The CRA will announce transitional administrative guidance relating to winding up of existing HWTs and the Ministry of Finance will provide transitional rules to facilitate the conversion of existing HWTs to ELHTs.
We knew that the CRA and the Ministry of Finance have been discussing concerns regarding the HWTs rules since the new HWT Income Tax Folio was released in 2015. Each recognized that there was a problem with applying two different sets of rules for what are essentially the same benefit plan vehicles. While we expected them to address this, we did not think it would happen this quickly. The Ministry of Finance and the CRA teams that worked on this deserve a lot of credit for acting so quickly, particularly given the number of issues they have been dealing with.
We think for most in the benefits industry, particularly for multi-employer benefit plans, this announcement will be welcomed news. In general, the ELHT tax rules are more favourable than the health and welfare trust rules, including greater clarity on surplus, broader scope of tax deductions from the trusts’ income, and the ability to carry forward and back non-capital losses.
The change also eliminates the legal limbo in which HWTs have operated since 1966. Apart from the ITA equivalent of a footnote, the Act does not include a single reference to health and welfare trusts. The CRA policy, which is not binding, became very disconnected from the reality of these employee benefit funds and has several gaps, particularly as it applied to multi-employer HWTs.
One of the frustrations with the HWT Folio is that it did not address mergers and transfers between HWTs. The CRA has been reluctant to confirm that such transfers are permissible and hinted that such a transfer may constitute a taxable disposition. In contrast, the ELHT rules include a rollover provision expressly permitting tax free transfers between ELHTs.
Trustees and unions will want to monitor the transitional rules that Finance and the CRA will be developing. The announcement includes an invitation to make submissions during the consultation period which ends June 29, 2018.
We expect to be involved in that consultation process and will be providing updates on the transitional rules.
Other Item of Interest
Other items of interest affecting employee pension and benefit plans included in the 2018 Budget include:
- The government announced the creation of an Advisory Council on the Implementation of National Pharmacare. The recently resigned Ontario Minister of Health, Dr. Eric Hoskins, is appointed as the Chair of the Council that will ultimately recommend options for the implementation of a National Pharmacare program.
- The government will initiate a consultation process to address concerns related to underfunded pension plans, particularly associated with insolvencies such as Sears Canada where “workers and pensioners, who have paid into pension plans over their careers, are faced with unexpected financial losses that impact their retirement security.” The announcement notes, however, that the government is mindful of the “challenges facing courts as they try to maximize recovery in bankruptcies that affect not just workers and pensioners, but also small business, lenders and other creditors which are owed money.” This announcement follows on two private members’ bills which sought to address the same issue, which we have previously written about.
- The list of eligible Medical Expenses that can be provided by HWTs and ELHTs is expanded to include expenses incurred in respect of animals specially trained to perform tasks for a patient with a severe mental impairment. The coverage only applies to animals that are trained to assist in tasks to cope with their impairment, not for animals that provide “comfort or emotional support”.
- Proposed amendments to deductions available for employee contributions made to the enhanced portion of the Quebec Pension Plan which are similar to the amendments made for contributions made under the CPP enhancement. This measure kicks in starting in 2019.