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Draft employee life and health trust legislation released

In May 2019 the federal Department of Finance released draft legislation with respect to employee life and health trusts (ELHTs). The draft legislation implements proposals announced in the 2018 Federal Budget. The legislation sets out the process for conversion of existing health and welfare trusts (HWTs) to ELHTs, amends the existing ELHT rules to accommodate some stakeholder concerns and addresses a number of technical issues.


A HWT is a trust established to provide health and welfare benefits to employees. HWTs are not codified in the Income Tax Act, but are subject to administrative positions published by the Canada Revenue Agency.

Since 2010, the Income Tax Act has included rules relating to ELHTs. The rules for ELHTs are similar to those for HWTs but are generally more accommodating with respect to certain issues such as surpluses and pre-funding of benefits.

It was announced in the 2018 federal budget that the rules relating to HWTs will cease to apply after December 31, 2020. Existing HWTs will have the option to convert to ELHTs or be subject to the usual taxation rules relating to trusts.

Proposed rules for converting HWTs

The current ELHT rules will be extended to apply to trusts created before 2010. Existing HWTs will be permitted to elect to continue as ELHTs without any adverse tax implications and without having to create a new trust. A tax-free rollover of assets is permitted where a new trust is created or two or more existing trusts merge.

A HWT must notify the Canada Revenue Agency in the prescribed form and manner in order to become an ELHT. Transitional rules will allow existing HWTs to be deemed to be ELHTs until the end of 2022, subject to certain conditions, since many HWTs will need time to address the issue in collective bargaining and/or amend their trust documents.

Changes to current ELHT rules

Several changes to existing ELHT rules have been proposed based on feedback in the stakeholder consultation process:

  • The requirements for an employer to be allowed to deduct contributions required by a collective agreement have been simplified by removing the test for a minimum number of employers.
  • Employer representatives currently cannot constitute a majority of ELHT trustees. This requirement will be replaced by one that requires that a majority of trustees deal at arm’s length with all participating employers (i.e., they must exercise independent judgment).
  • Mergers of HWTs and ELHTs will be allowed without any adverse tax consequences.
  • ELHTs will not be considered to have breached their terms with respect to the participation of non-eligible beneficiaries if the trustees could not reasonably have known that the beneficiaries were ineligible.
  • The existing ELHT rules provide that benefits may only be paid to employees of participating employers, and certain individuals related to those employees. The rules will be expanded to include employees of former employers, and certain related individuals.
  • The draft legislation allows an ELHT to be resident outside Canada if it provides employee benefits to Canadian residents and non-Canadian residents, if at least one participating employer is resident outside Canada and if the trust is required to be resident in a country in a which a participating employer resides.
  • An ELHT currently cannot make a loan to, or an investment in, a participating employer or a person not dealing at arm’s length with that employer. That rule will be repealed and a new tax will be levied on an ELHT that acquires a prohibited investment as defined in a new Part XI.5 of the Income Tax Act.

Consequences if a HWT does not convert

The Canada Revenue Agency has announced that it will cease to apply its HWT rules after 2020. HWTs that do not convert to ELHTs by the end of 2020 will become employee benefit plans, with negative tax consequences.

Future considerations

The Department of Finance indicated that several issues were identified in stakeholder feedback and continue to be considered:

  • The types of benefits that currently qualify as “designated employee benefits” under an ELHT and whether other benefits should be considered;
  • Expanding the scope of the Private Health Services Plan component of designated employee benefits;
  • The use of ELHTs to provide benefits to “key employees”; and
  • The rules related to carry back and carry forward on non-capital losses under ELHTs.


These changes provide more flexibility than the existing ELHT rules and the simplified conversion process for a HWT to become an ELHT is welcome. The management of trust funds is complex and trustees should be in close contact with their advisors to review these changes and govern their plans successfully.

As an advisor to many trustees of HWTs and ELHTs, Morneau Shepell made a submission to the Department of Finance in the 2018 stakeholder consultation on behalf of clients. Further comments on the draft legislation can be submitted to the Department of Finance by the end of July 2019 and Morneau Shepell intends to make another submission.

News & Views - July 2019 (PDF)