October 2005

Utilizing Health & Welfare Trusts

A health and welfare trust is an arrangement that allows employers to fund a trust for the provision of certain health and welfare benefits (such as health coverage) for employees on a tax-deductible basis.

A payment by the health and welfare trust to cover medical expenses or provide insurance coverage does not give rise to a taxable benefit for the employee. An employee can be given the flexibility to choose how to spend their allocation provided the expenditure meets the definition of a medical expense which is deductible under the Income Tax Act.

To help understand when such an arrangement is beneficial, one only needs to look at the accompanying chart, which compares the cost of using a health and welfare trust funded by the employer to pay out $50,000 of medical expenses for an employee as opposed to having the employee pay for them directly.

By using the health and welfare trust there is a net savings of $9,500 since the medical expenses are funded by the corporation and the individual employee does not need to extract monies from the corporation on a taxable basis in order to fund the medical expenses.

The administrator of these plans are compensated by way of a maintenance fee based on the amount of monies that are flown through the health and welfare trust. Some providers also charge a set up fee for the establishment of a health and welfare trust. It is best to speak to a few providers and/or ask for a referral from one of your own financial advisors before proceeding.

If the benefits of the health and welfare trust will only be offered to persons who are shareholders of the company, care should be taken to ensure that the contributions will remain tax deductible to the company and to ensure that shareholder benefits are not assessable.

Rob Steven, MAcc, CA, CPA (Delaware)
Tax Associate, Crawford, Smith & Swallow, Chartered Accountants, LLP

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