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Olympics and new tax legislation: Employee Life and Health Trusts

First off, what an Olympics!  As a proud Canadian, yesterday will certainly go down in the memory banks as one of the most significant days in Canadian sports history.  Vancouver did an amazing job hosting the Olympics and did Canada proud.  Of course, many of us were interested in the Canadian men’s hockey team result and watching the game was a “pins and needles” exercise but when Sidney Crosby scored the overtime goal what a rush of excitement!  Oh Canada!!

Two weeks ago, I was fortunate to attend the Olympics and watch three hockey games.  What a fascinating experience to walk the streets of Vancouver and soak in the atmosphere and watch excellent hockey.  Like my recent trip to Vancouver to watch AC/DC, one could not help but think about tax.  With the many countries in attendance, I sat in the audience and thought about all the different international tax jurisdictions that were at play.  How were the Olympic athletes being taxed?  Was Canada going to tax such international athlete’s income?  (The answer to the latter question is “generally no” given that various technical amendments were added to the Income Tax Act – see, for example subsection 115(2.3) that exempts the international athlete’s income earned during the Olympics).  Notwithstanding, the Vancouver Olympics was certainly an eye opener and a very good lesson that the world is small, constantly changing and the tax implications of earning income around the world are extremely complex!

In Canada, income tax law is also changing quickly.  This week will be significant in that the Federal Budget will be released on March 4.  In addition, on Friday, February 26, 2010, the Department of Finance released new tax proposals to accommodate Employee Life and Health Trusts (“ELHTs”).  The proposals (which, if passed, will apply for 2010 forward) create a new type of taxable inter-vivos trust that will enable funds to be accumulated within the ELHT by employer contributions for the benefit of employees’ health benefits.  To re-emphasize, the new trust would be a taxable trust which would need to meet very specific requirements with respect to the types of beneficiaries (generally employees, but “key employees” like shareholders need to be carefully considered).  Generally, subject to specific rules, the contributions by an employer to an ELHT will be deductible to the employer.  Again, very generally, the new proposals enable that any distributions of income to the employee beneficiaries of the ELHT will also be deductible to the trust including amounts that, prior to these previous proposals, would not have been deductible to the trust (such as reimbursements to employees) under existing law.

While the new proposals for ELHTs appear to be positive, our firm will continue to study the new material but I query whether or not such proposals are intended to replace “health and welfare trusts” (that are not defined in the Income Tax Act but the CRA’s administrative comments on health and welfare trusts are laid out in Interpretation Bulletin IT-85R2).  Will IT-85R2 eventually be withdrawn by the CRA?

As stated, this is an interesting new set of proposals which we will continue to keep you up-to-date on.  Stay tuned.