English | French Canada
Information Bulletin: Draft Legislative Proposals Supporting the Conversion of Health and Welfare Trusts
Aon Insights

Information Bulletin: Draft Legislative Proposals Supporting the Conversion of Health and Welfare Trusts


Health and Welfare Trusts (HWT) and Employee Life and Health Trusts (ELHT) are two similar trust arrangements that allow employers to fund designated benefits for employees and their dependents (such as group life, disability, sickness and accident insurance) while benefiting from favorable tax treatment. Employer contributions are deductible business expenses for the employer and can be tax exempt revenue for employees as per regular applicable tax rules for these group plans. One of the advantages of using these trust arrangements is to secure the funding of contributions without the employer being directly responsible for providing the benefits.

HWTs are regulated under an administrative policy of the Canada Revenue Agency, while ELHTs are addressed specifically by the Income Tax Act. As previously announced in federal budget 2018, proposed legislation was introduced on May 27, 2019, which would make only one set of tax rules apply to these trust arrangements.

Conversion of HWT

In order to facilitate the conversion of existing HWTs to ELHTs, the Government proposes that:

  • the ELHT rules be extended to apply to trusts created prior to 2010 (the current rules apply only to trusts created after 2009);
  • existing HWTs be amended to, or their assets transferred to an ELHT by the end of 2020;
  • certain collectively bargained HWTs be deemed to be ELHTs until December 31, 2022, if certain conditions are met, since many of these HWT Trusts will need time to adjust; and
  • transitional rules provide for a tax-free rollover of assets where a new trust is created, or where existing trusts merge, such that the assets accumulated in an existing HWT will continue to be available to provide benefits to employees.

Amendments to the Existing Employee Life and Health Trust Rules

The Government also proposes changes to the Income Tax Act in an effort to improve the operation of the rules applicable to ELHTs:

  • no adverse consequence when trusts inadvertently cover non-eligible beneficiaries;
  • prohibited investments would not cause the entire trust to become offside but would instead impose a tax on the portion of the prohibited investments; and
  • allow certain non-resident trusts, that otherwise meet the relevant conditions, to qualify as ELHTs.

Existing Employee Life and Health Trust Rules

Characteristics of ELHTs that differentiate them from HWTs will remain applicable under the proposed new rules and therefore may need to be addressed by an HWT seeking to transition to an EHLT:

  • the trust is to contain at least one class of beneficiaries where the members represent at least 25% of all of the beneficiaries, 75% of whom are not key employees of a participating employer; and
  • the rights under the trust of each key employee of a participating employer cannot be more advantageous than the rights of that class of beneficiaries described above (where a key employee is a person related to the employer, a determined shareholder or an employee whose employment income exceeds five times the Year’s Maximum Pensionable Earnings).

HWT trusts that do not transition to an ELHT (or wind up) by the end of 2020 (or 2022 for collectively bargained deemed trusts) will generally be an Employee Benefit Plan as defined in the Income Tax Act disallowing or otherwise delaying tax deduction of employer related costs. It is therefore recommended that existing HWT agreements be revised or assets transferred in order to comply with the ELHT rules within the applicable timeframe.

Interested parties are invited to provide comments to the government on this proposed legislation by July 31, 2019 at [email protected].

Contact your Aon Consultant for more information on this subject and to discuss the issues and opportunities within your organization.

Related links