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Canada To Amend Trust Tax

Thursday, March 4, 2010

Canadian Minister of Finance, Jim Flaherty last week announced his intention to propose amendments to the Income Tax Act that will be beneficial to employee life and health trusts.

“These proposed amendments will ensure that a fair and neutral tax regime applies to employee life and health trusts,” Flaherty said, making the announcement, adding: “The government of Canada remains committed to a fair and competitive tax system.”

The proposed amendments, which will apply to trusts established after 2009, would:

  • Create a new type of taxable trust in the Income Tax Act, an employee life and health trust;
  • Provide rules regarding the timing of deductions of any pre-funding of such a trust by an employer;
  • Allow the trust to deduct in computing its income all amounts paid from the trust to employees or retirees in respect of benefits, even if employees receive those amounts tax-free;
  • Provide rules governing the carryback and carryforward of any losses arising after the deduction of employee benefit payments by the trust;
  • Preserve the same tax treatment for employee benefits received from the trust as if they had been received directly from the employer (many types of health and welfare employment benefits are tax-exempt for employees under the existing income tax rules); and
  • Provide special rules applicable to employee life and health trusts whose beneficiaries include employee shareholders, highly compensated employees or related persons to ensure that the trusts do not offer unfair advantages to these individuals.

The government intends to introduce legislation in respect of these proposals at an early opportunity. The Department of Finance is seeking comment on the new proposals by April 30, 2010.

Amendments to regulations regarding withholding and reporting in relation to employee benefits paid by employee life and health trusts will be brought forward when the legislation is introduced.