The Department of Finance recently released proposed amendments to the Income Tax Act (Canada) (the “ITA”) relating to employee life and health trusts. The proposals will be of interest to employers who provide or are considering providing health and welfare benefits to their employees through trust arrangements. To date, trusts of this nature have not been specifically provided for in the ITA. Rather “health and welfare trusts” have been subject to administrative requirements established by the Canada Revenue Agency (“CRA”) which are currently set out in its Interpretation Bulletin IT-85R2.

The ITA will be amended to add new section 144.1 which will provide for a new type of trust called the “employee life and health trust” (“ELHT”). Consequential changes will be made to numerous other provisions of the ITA. The amendments will apply to trusts established after 2009.

The new rules both codify certain current administrative practices of CRA and make changes to others. Over the years CRA has taken issue with trusts established by some employers on the basis that they do not meet the conditions to qualify as a health and welfare trust. Some of the arrangements attacked by CRA involve trusts established offshore for the benefit of non-arm’s length employees where the contribution to the trust is viewed by CRA as unreasonably high. CRA has also, in Technical News No. 25, expressed its concerns with what it considers to be the over-funding of benefits through lump sum payments to health and welfare trusts. The new rules include provisions which seem intended to address these concerns.

Qualification as an ELHT

A trust established for the benefit of the employees of one or more employers will qualify as an ELHT in a taxation year if throughout that year it satisfies all of the following conditions:

  • Its objects are limited to the provision of “designated employee benefits” (described below) and to paying out any remaining surplus on wind-up. For this purpose, the investment and management of funds and administration of arrangements for benefit payments are generally considered to be activities performed in furtherance of the object of providing designated employee benefits.
  • The trust is resident in Canada.  
  • Each beneficiary of the trust is an employee of a participating employer, a person related to an employee or another ELHT. For this purpose, “employee” includes both current and former employees as well as individuals for whom an employer has assumed the responsibility of providing benefits as a result of a business acquisition.  
  • The trust cannot be maintained primarily for the benefit of beneficiaries who are “key employees”. In general, a key employee means either a significant shareholder or a high income employee (earnings exceed five times the Year’s Maximum Pensionable Earnings).  
  • Where key employees are beneficiaries of the trust, they must be treated no more advantageously than a group, at least 75% of which are not key employees, representing at least 25% of all of the beneficiaries of the trust.  
  • The employer and any person not dealing at arm’s length with the employer may not have any rights to distributions. There is a limited exception which would allow designated employee benefits to be provided to a non-arm’s length person who is an employee of the employer, e.g. a controlling shareholder of the employer.  
  • The trust is administered in accordance with its terms.  
  • The trust has a legal right to enforce payment of contributions to the trust.  
  • Employer representatives do not form a majority of the trustees of the trust.

“Designated employee benefits” means any combination of group sickness or accident insurance benefits, private health services plan benefits or group term life insurance benefits.

Income Tax Implications

The income tax implications for the employee, the employer and the trust are described below.  


  • The tax treatment to an employee of designated employee benefits received from the ELHT will depend on the nature of the benefit. Benefits which would be taxable in the hands of the employee if received directly (e.g. certain disability insurance benefits) will be taxable, while other benefits which are non-taxable when directly received (e.g. medical and dental benefits) will be received by the employee free of tax. In other words, the existence of the trust does not change the tax treatment to the employee of benefits received.
  • Contributions by the employer to the ELHT will not result in any taxable benefit to the employee. An exception is where the ELHT provides group term life insurance coverage.  
  • Amounts received by the employee from the ELHT which do not qualify as designated employee benefits (e.g. a distribution of residual surplus on wind-up) will be taxable.  
  • Any employee contributions made to the ELHT will generally not be eligible for a deduction or credit in the hands of the employee. However, there is a look through rule so that to the extent any contribution would receive particular tax treatment if made directly rather than through the ELHT (for example, eligibility for the medical expense tax credit) the same tax treatment would apply.  


The timing of deductions by the employer for contributions made by it to the ELHT will be subject to specific rules. The employer will be entitled to deduct ELHT contributions made in a year to the extent they relate to designated employee benefits that are payable in that year. If the contributions relate to liabilities to make benefit payments in future years, they will not be deductible until the later year to which they reasonably relate. Accordingly, to the extent benefits are prefunded, the deduction to the employer will be delayed.


  • An ELHT will generally be subject to tax on its net income. However, in computing its income the ELHT will be entitled to deduct all amounts payable by it in the year as designated employee benefits. Where the amount of designated employee benefits payable in a year exceeds the trust’s income for that year, the excess will be treated as a loss (rather than as a distribution from trust capital) and will be deductible against income in any of the three preceding years or three following years so long as the trust retains its status as an ELHT.
  • ELHTs will not be subject to the 21 year deemed disposition rule that is applicable to most trusts.
  • ELHTs will not be subject to the alternative minimum tax.
  • Where benefits are administered on behalf of employees of more than one employer, an election may be made for the ELHT to be treated for tax purposes as two or more separate trusts.