The Voice of Multi-Employer Plan Interests in Canada


October 26, 2015

Via E-Mail

Canada  Revenue Agency

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Dear  Sirs/Mesdames:

Re: Submissions of the Multi-Employer Benefit Plan Council of Canada Regarding Income Tax Folio S2-Fl-Cl: Health and Welfare Trusts.

The Multi-Employer Benefit Plan Council of Canada (MEBCO) is a federal no-share capital corporation operating on a not-for profit basis representing the interests of Canadian multi­ employer pension and benefit plans with respect to proposed or existing legislation and policies affecting these plans.

We are writing to submit our comments with respect to the Canada Revenue Agency's (CRA's) recent draft Income Tax Folio S2-Fl-Cl concerning the taxation and regulation of Health and Welfare  Trusts (HWTs).



MEBCO was established in 1992 to represent the interests of  multi-employer  benefit  plans  (MEPs) in Canada. MEBCO advocates on behalf of all stakeholders involved  with  MEPs, including union and employer trustees, independent and professional trustees, professional  third party administrators, non-profit or "in house" plan administrators and professionals including actuaries, benefit consultants, lawyers, investment managers, and chartered  professional  accountants. MEBCO's Board of Directors is composed of volunteer representatives of  these  groups, and is responsible for identifying, addressing, and advocating with respect to all issues impacting  multi-employer  plans  in Canada.


Background on Multi-Employer Plans

Multi-employer plans are essential to over one million workers and their families in industries including construction, food service, retail, hotel and restaurant, graphic arts, garment manufacturing, security, textiles, transportation and entertainment. MEPs are a response to the difficulties of delivering quality health care services, disability and other income replacement benefits and life insurance to workers and their families in industries typified by small employers and mobile work  forces. These plans  ensure that  seamless benefit  coverage  is provided  to workers  and their families as they move from one contributing  employer  to the next. This  seamless coverage is especially  important  in mobile  and/or  seasonal  industries where  it is often expected that workers will be employed by multiple employers in a single year and/or may experience significant periods of non-employment or disability. In these industries, it is not uncommon for a worker to be employed by one employer for a matter of days or weeks before moving on to a different project with a different employer. A centralized MEP ensures these workers have access to necessary benefit coverage regardless of the sometimes intermittent nature of these work relationships.

In addition to providing seamless benefit coverage, MEPs are economically efficient in the sense of providing economies of scale by bringing together large numbers of smaller employers who receive financial savings in respect to administration and the purchasing of benefits. In other words, the pooling of collectively bargained contributions in these industries is beneficial both to workers and smaller employers who may wish to extend benefit coverage to their workers.

MEPs are generally administered by an independent joint board of trustees, comprised of an equal number of trustees appointed by the participating union or unions and employer bargaining associations. As with any trust, the MEP trustees owe a fiduciary obligation to act in the best interest of the trust beneficiaries, not the sponsoring employers or unions. The trustees do not determine the contribution rates, which are negotiated between the employers and the unions as part of the collective bargaining process. The contribution rates are typically based on hours worked.

MEPs deliver what are effectively public health care services and related benefits through privately funded vehicles. Without MEPs, millions of Canadians would not have access to these supplementary benefits, the cost of which would otherwise be borne by the government and Canadian taxpayers.


Comments on the Income Tax Folio S2-Fl-Cl

MEBCO acknowledges and applauds the recognition and express confirmation in the Folio that multi-employer health and welfare trusts are permissible.  However, MEBCO is concerned that  in a number of respects the new Folio does not address or is inconsistent with the unique character of MEP arrangements. The Folio also does not extend similar treatment to multi­ employer HWTs as is applicable to multi-employer employee life and health trusts (ELHTs), which provide identical benefits. There is no apparent policy reason for the differential  treatment.  We set out below our specific concerns and comments with respect to these issues.


Exclusion  of Non-Employees:


The Folio explicitly precludes an HWT from providing benefit coverage to non-employees "such as partners, shareholders or independent contractors." This language potentially captures a broad range of individuals not previously excluded and is not warranted, particularly for MEPs. Specifically, we are concerned with the exclusion of the following groups typically covered:


  Eligible  beneficiaries  and dependants:

We do not believe that the CRA intends to exclude beneficiaries and dependants who are eligible for coverage under a private health insurance plan, group sickness and accident insurance plan, or group life insurance policy. If the Folio is intended to be a complete "code" governing HWTs, it should expressly confirm these eligibility rules.


The Folio should confirm that health and welfare trusts can continue to provide benefits to employees and their eligible beneficiaries and dependants.


Retirees and their eligible beneficiaries and dependants:

MEPs play an important role in alleviating the burden on the public system in providing supplementary health care coverage to retirees and their families. Prior to the Folio, the CRA has confirmed that HWTs could extend health and welfare benefits to retirees and their eligible dependants and beneficiaries. 1 This policy should be confirmed in the new Folio. This 1s consistent with the ELHT eligibility rules, which permit coverage for "former employees"



The Folio should confirm that health and welfare trusts can continue to provide benefits to former employees and their eligible beneficiaries and dependants.


Former Employees and Periods of Unemployment:


This includes individuals who may be unemployed at the time of coverage or benefit payment, including those individuals who are temporarily unemployed, on various temporary leaves, or experiencing extended periods of unemployment or disability. In the MEP context, these individuals may not retain employment status with any particular employer during these periods of leave or unemployment, but continue to be members of their union. Many MEPs utilize an hour or dollar bank system to fund continuing coverage during periods of unemployment or leaves whereby members continue coverage if they have sufficient work hours or dollars in their notional accounts. The hours or notional dollars required to maintain coverage is typically set at  a level reflecting the cost of such coverage. While the member may not be an employee of any particular employer during a period of unemployment, the benefits continue to be funded by employer contributions.


The Folio should confirm that health and welfare trusts can continue to provide benefits to such individuals, even if they may not be considered an employee of any particular employer during periods of unemployment or leave.


Employment Status Uncertain  or Unknown:


MEPs may cover numerous individuals who are members of a participating union and engaged  in the industry covered by the MEP, who may or may not be considered "employees" by the CRA, but whose employment status is not known to the MEP trustees. MEP trustees may have no information regarding the nature of the working relationship or ability to determine employment status, but risk losing HWT qualification if any one individual is deemed by the CRA to be a non-employee.


Workers in many industries who are members of a participating union and/or working under an applicable collective agreement may be identified or treated as independent contractors, dependent contractors, owner operators and in some cases, may establish a personal corporation. In all cases, contributions are remitted on behalf of the individual members by participating employers bound under collective agreements and eligibility is generally tied to union membership. In these industries, there is little rationale to tie benefit coverage in multi-employer HWTs to "employee" status.

1see e.g. Canada Revenue Agency, CRA Views 2005-0121151E5, "Health and Welfare Trusts," (May 5, 2005); Canada Revenue Agency, CRA Views Conference 2006-0174121C6, "CALU 2006 Conference Questions and Answers," (May 9, 2006).


The determination as to whether a given worker is an "employee" is difficult to make, even if the trustees had the necessary information about the various working relationships. Many workers may exhibit indicia of both employee/independent contractor status. The relative degree of these indicia may vary depending on the characteristics of the job and the relationship with a particular employer. In other words, "employee" status may be, at best, unclear, and, at worst, may vary over time. Regardless of status, these workers are subject to the same vulnerability and economic dependence as employees at various points in their work relationships. While a piece worker in the roofing industry, for instance, may work for multiple employers in the same year on a contract basis, he or she may be highly economically dependent on one employer/client at any given time - and it is unpredictable what percentage of the worker's year may be spent on each project. These workers may be classified as "dependent contractors" under provincial labour legislation, adding further uncertainty to their status as "employees" for ITA purposes.


Inclusion of these members in a plan established primarily for employees does not offend the tax policy guiding the exclusion. MEPs are not vehicles that could be used by shareholders or business owners to tax shelter income or otherwise receive an unfair tax advantage. In fact, the inclusion of the above beneficiaries supports the policy rationale favouring the establishment of MEPs to provide health benefits and insurance to workers and their dependants who may not be able to purchase coverage on their own behalf - thus relieving a potential burden on Canada's social safety net. MEBCO is concerned that the broad exclusion of all "non-employees" may disqualify many MEPs and unnecessarily impose significant adverse tax consequences on both the members and the employers and is simply unwarranted.


In light of the above, we recommend that an exemption from the non-employee exclusion be added for MEPs that are established to primarily provide benefits for employees. Alternatively, eligibility should be extended to any individual who is a member of a participating union or, on whose behalf contributions are required to be remitted to the MEP by a participating employer.




Temporary vs. Permanent Surplus


The Folio provides that "[t]he existence of a temporary or permanent surplus in any given year will not automatically affect the status of a trust as a health and welfare trust." However, it then states that "[a] trust that permits surplus accumulations under the terms of a trust agreement or through its method of funding may not qualify as a health and welfare trust."


The second statement is highly problematic for MEPs. As noted above, MEP contributions are fixed pursuant to negotiated contribution formulas that do not provide for variation in contributions determined by reference to the financial experience of the trust. During economic upturns and periods of increased hours of work, the contribution rates may generate a surplus in excess of current benefit costs. We would not consider such surplus to be "permanent" given the cyclical nature of the industries in which MEPs are prevalent. Today's surplus will likely be needed to continue to fund benefits during inevitable economic downturns. One need only consider the experience of pension plans that have seen dramatic losses of large surpluses existing in the 1990s and now face serious funding deficiencies to recognize that by its very nature, funding surplus is impermanent.


Like pension plans, health and welfare trusts are faced with an ageing population  and workforce with increasing life expectancy. Current surplus may seem large today, but may still  not  be sufficient to pay for the projected cost of benefits. The unexpected costs of benefits is even more significant for HWTs given escalating health care costs, including most significantly, the cost of drugs and other medications. One course of Biologic cancer treatments may impose costs in the millions  of dollars on these trusts.


The concern with surplus accumulation in health and welfare trusts, particularly with respect to MEPs, seems entirely unwarranted from a tax policy  perspective.  These  vehicles  by  design  cannot be utilized as a means of tax sheltering income, inflating income deductions or to provide non-taxable benefits to shareholders. Contribution  rates  are  collectively  bargained  by  arm's  length parties, the participating employers cannot receive a refund of surplus or any other benefit from the trust and to the extent that these plans have surplus that may be prudently  invested,  the trust is taxable on its  income.


Surplus  and Employer Deductions

In addition to the potential disqualification of a MEP due  to  surplus,  the  Folio  provides  that where a permanent surplus exists, employer contributions may not be deductible "if steps are not taken  within  a reasonable  time  to eliminate the surplus."

The Folio provides no guidance on  whether  contingency  reserves,  established  based  on reasonable expectations of future needs, will be excluded from the definition of a surplus,  considered a temporary surplus or considered a permanent surplus The  Folio  also  does  not  indicate if actuarial, or other third party, evidence will be accepted or required by the CRA to exclude such reserves from the calculation of "permanent" surplus." Maintaining adequate contingency reserves is mandated by the trustees' fiduciary  obligation  to  all  beneficiaries  to  ensure adequate funding to deliver benefits expected  to be provided  in the future, and  is essential  to the sustainability  of these plans.



If the CRA deems it necessary to continue to apply surplus limitations to MEPs, at the very least the Folio has to address how contingency reserves will be treated under the surplus rules.

Contribution  Holidays

The Folio proposes that a permanent surplus may be reduced by contribution holidays, providing additional benefits, or both. These options  are problematic  for MEPs  where  fixed  contributions are  established  pursuant  to  collective  agreements.  The  trustees  have  no  ability  to  amend    the collective  agreement  or extend  a contribution  holiday  to the  employers.Based  on the  Folio, the only option that may be available to the trustees is to eliminate surplus by improving benefits. However,  as  noted  above,  given  the  cyclical  nature  of  the  industries  and  sound administrative practice, it may be very imprudent for the trustees to promise increased benefits whenever a "permanent" surplus may arise, as these benefit improvements may be unsustainable in the near or long term.


2The Tax Court of Canada decision L.I.U.N.A Local 527 Members' Training Trust Fund v Canada, 92 DTC 2365 may provide guidance as to how surpluses arising in multi-employer HWTs should be considered. In that case, surpluses in a training trust fund resulted from higher contributions from union members due to increased employment rates, reduced training expenditures, and increased interest rates on investments. The Tax Court of Canada concluded, with respect to the not-for-profit test under section149(1}(1)  of the ITA, that there was no indication the fund was operating to earn a profit as contributions were fixed by collective agreement and the fund could not reduce the contributions it received from employers. Further, the Court noted it would have been irresponsible for the fund not to invest the surplus. In our view, similar considerations should apply with respect to the treatment of "surplus" under MEP HWTs.


Multi-Employer  ELHTs

The issues identified above would be rectified by extending to MEPs the same or similar rules available under s. 144.1(7) of the /TA for ELHTs. Under the ELHT rules all contributions to multi-employer ELHTs are permissible and deductible where employers contribute to the plan in accordance with a negotiated contribution formula. There is no apparent tax policy reason to treat multi-employer HWTs any differently than ELHTs. Both vehicles are taxable entities, and cannot be used as a means to tax shelter income or avoid taxation by accumulating significant surplus for the personal benefit of participating employers or shareholders.


Surplus Distribution to Employees:

The Folio now expressly prohibits all surplus distributions to employees, with the sole exception being upon wind up of the trust. The CRA has previously accepted in various advance  tax rulings and technical interpretations a distribution of "excess contributions" from HWTs to members on a taxable basis as an acceptable way of eliminating excess surplus - so long as the amounts were paid out in the same year the excess contributions were deducted by the  employer.3 In at least one interpretation letter, the CRA expressed the view that these refunds are not prohibited because the payment of "excess contributions" from the HWT to the members  on a taxable basis in the same year as the employer deducts the contribution essentially results in the contribution not being made to the HWT at all, but is rather redirected to the member as taxable wages. 4

To our knowledge, the advance tax rulings permitting such surplus distributions have not been revoked and it is not clear whether these limited surplus distributions continue to be permissible as a means of eliminating excess surplus. This should be clarified in the Folio. In our view,  given the limited options available to MEP trustees to reduce surplus, if the CRA continues to prohibit or limit surplus accumulations in MEPs, the Folio should extend other options to the trustees to reduce surplus, including the previously approved taxable distributions to members in limited circumstances.



The Folio provides that, upon wind-up of an HWT, funds may only be used to provide additional benefits, or be distributed to the employees or to a registered charity. The Folio does not provide that the remaining funds may be transferred to another HWT.


With increases in costs of maintaining HWTs, MEBCO expects an increasing number of smaller plans to seek consolidation and the ability to merge HWTs is an increasingly significant issue. Many participating unions have already consolidated smaller local unions, but are forced to maintain separate HWTs for their members because of a lack of guidance from the CRA on mergers  and  wind-ups,  including  distributions  to  other  qualifying  HWTs.    Given  that such mergers involve the transfer of beneficiaries from one HWT to another,  to  receive  eligible  benefits, such mergers pose no policy concerns.  Participating  employer  contributions  continue to be used exclusively to fund eligible benefits for the beneficiaries of the wound-up trust under the merged trust.


3 See e.g. Canada Revenue Agency, CRA Views Ruling 9904343, "Excess Contributions Health and Welfare Trust,"

{1999); Canada  Revenue Agency, CRA Views  2010-0376321ES, "Health and Welfare Trust," {March 15,   2011).

4 Canada Revenue Agency, CRA Views Ruling 9904343, "Excess Contributions Health and Welfare Trust," (1999) .


The Folio should be amended to permit and facilitate mergers and transfer  of  assets to  other qualifying health and welfare trusts on wind-up. The ability  to transfer  assets on a  tax free basis is already available to ELHTs under s. 144.1(2)((b)(ii) of the /TA, which permits distribution of property of an ELHT to another ELHT on wind-up  or  reorganization.  The same should be extended to HWTs.


Trust Deductions:


Interpretation Bulletin IT-85R2 previously limited deductions from trust income for benefit costs to those benefits paid that are taxable to the employees, pursuant to the trust rules under s. 104(6)(b) of the !TA. The Folio no longer includes a reference to s. 104(6)(b) and appears to allow for a broader range of acceptable deductions in paragraph 1.46. However, this is not clear as there is no comment in the Chapter History regarding this change.


MEBCO believes the  change  is  warranted  to  extend  to  HWTs  the  same  deductions currently available for ELHTs. Specifically, under section 104(6)(a.4) of the !TA, an ELHT is permitted to deduct any amount that became payable by the trust in the year as a designated employee benefit -which encompasses all benefits payable from the trust (in contrast to only the benefits taxable  to the employee for HWTs under  s.   104(6)(b)).


The wording in the Folio is unclear if all benefits can be deducted in the calculation of taxable income or if the deductions are limited to taxable benefits as they were under IT- 85R2. The CRA should clarify whether s. 104(6)(b) will continue to be relied on in limiting benefit and premium deductions for HWTs to those payments that are taxable to the beneficiaries.


Employer Deductions:


The Folio indicates generally that "contributions that are reasonable and laid out to earn income  from a business are generally deductible in the year in which the obligation to  make  the contribution arose." However, with respect to insured  plans,  the  Folio  provides  the  employer  may only deduct in the year contributions equal to the premiums paid or payable by the trust to acquire the  insurance  coverage, plus  reasonable  administrative costs.


In practice, MEPs may provide a combination of insured and  non-insured  benefits.  Employers remit a single contribution and do not know which portion of the contributions is used to fund insured benefits. Moreover, the proportion of contributions needed to fund  insured  and  non­ insured  benefits vary over time.


We submit that the same treatment that applies with respect to employers contributing to multi-em ployer ELHTs should be extended to employers contributing to multi-employer HWTs. Specifically, s. 144.1(7) of the /TA provides a deduction for the entire amount of the employer's  contributions where the employer contributes to the ELHT in accordance with   a negotiated contribution formula - regardless of whether the amounts fund insured or non-insured benefits. There appears to be no policy rationale to not extend the same treatment  to HWTs.


Related Party Investment  Restrictions:


Given that MEPs may include hundreds, in some cases thousands, of participating employers, monitoring and compliance with these rules is virtually impossible. This is particularly the case with HWT MEPs, which commonly invest in pooled vehicles with little knowledge or control over the underlying investments, which may, without the trustees' knowledge, include some investment in a participating employer or related entity. With respect to multi-employer pension plans, this unique concern has been acknowledged by provincial and federal regulations and is addressed through various exemptions for multi-employer  plans under the ITA and provincial and federal pension legislation. A similar exemption should  be  included  in  the  Folio  for health  and  welfare MEPs.


Trust Deductions


The new Folio now precludes deductions such as for provincial sales tax, paid by health and welfare MEPS. This results in double taxation of these trusts since, in Ontario for example, trusts collect retail sales tax on 100% of employer contributions and remit these funds to the applicable taxation authority. Trusts then bear retail sales tax on some purchases such as fiduciary liability insurance, property insurance and other operational costs.\

The new Folio now precludes deductions such as for provincial sales tax, paid by health and welfare MEPS. This results in double taxation of these trusts since, in Ontario for example, trusts collect retail sales tax on 100% of employer contributions and remit these funds to the applicable taxation authority. Trusts then bear retail sales tax on some purchases such as fiduciary liability insurance, property insurance and other operational costs.\

We submit that health and welfare MEPs should be able to deduct all provincial sales and other taxes incurred in the administration  of the  plan.

HWTs vs. ELHTs:

As noted above with respect to a number of the issues, MEBCO believes that the CRA's HWT policy should be harmonized with the ELHT rules to create a level playing field between these two vehicles, given that the CRA has decided that these trusts may continue to be established as either an HWT or ELHT. If the CRA does not accept this recommendation and create a level playing field, then it should introduce rules to easily permit a HWT to elect to convert to an ELHT, in collaboration with the Department of Finance to the extent ITA amendments are necessary.

Further Consultation  and Assistance:

We would be pleased to discuss our comments on the Folio and MEBCO can assist with developing and drafting the appropriate MEP rules recommended to be incorporated in the Folio. Please do not hesitate to contact us should you have any questions, or in the event that we can be of further assistance.

Yours truly, MEBCO

Robert Blakely, President robertblakely@mebco. org




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