PERSONAL TAX TRAINING

EMPLOYEE BENEFIT PLANS

An employee benefit plan (EBP) is a trust or other arrangement established to provide agreed-upon benefits to employees, such as pensions, health insurance, or disability support. The taxation of these benefits depends on whether the contributions and payouts are considered taxable under the Income Tax Act (ITA).

Tax Treatment of Employee Benefit Plans

The Canada Revenue Agency (CRA) considers the following tax rules for employee benefit plans:

• Employer contributions to an EBP are generally not taxable to the employee when made.
• Payouts from the plan to employees are taxable as income when received.
• The trust itself is taxed on the income it earns annually, and a T3 Trust Income Tax and Information Return must be filed.

The taxability of benefits under an EBP depends on the nature of the benefits and the timing of contributions and payouts. Employers must ensure compliance with CRA reporting requirements, including providing appropriate tax slips to employees.

Eligible Plans and Arrangements

The following types of plans or arrangements are specifically excluded from the definition of "employee benefit plan" under the ITA:

• Registered pension plans and pooled registered pension plans.
• Group sickness or accident insurance plans.
• Employee life and health trusts (ELHTs).
• Supplementary unemployment benefit plans.
• Employee profit-sharing plans.
• Disability or income maintenance insurance plans.

Employee Life and Health Trusts (ELHTs)

Employee Life and Health Trusts (ELHTs) are specialized trusts established by one or more employers to provide health and welfare benefits to employees. These trusts meet specific conditions under the ITA Section 144.1. Contributions made by employers are deductible if they meet the defined benefit conditions.

Key Features of ELHTs:

• Designed to replace traditional health and welfare plans.
• Payments from the trust to employees are taxable only when received.
• Employer contributions are deductible for tax purposes.

Reporting Requirements

Employers must accurately report benefits provided under EBPs. Key reporting obligations include:

• Issuing T4 slips to employees to report taxable payouts from EBPs.
• Filing a T3 Trust Income Tax and Information Return annually for the trust.
• Maintaining records of contributions, payouts, and administration fees.

Employee Responsibilities

Employees receiving payouts from EBPs must report these amounts as income on their tax returns. They should retain documentation, including T4 or T3 slips, to support their tax filings.

Key Considerations

Employers and employees must work together to ensure compliance with CRA regulations on EBPs. Understanding the nature of the plan, the tax treatment of contributions, and the timing of payouts is essential for tax planning and reporting.

Additional Resources

For more information, refer to CRA's guidelines on employee benefit plans and trusts:

• CRA - Benefits and Allowances
• Employers' Guide: Taxable Benefits and Allowances