How do health & welfare trusts work?

An incorporated business establishes a trust to pay for the trust member’s (and family’s) health care costs. Health & Welfare Trusts follow the framework laid down in S. 248(1) of the Income Tax Act and CRA’s Interpretation Bulletins IT-85R2, IT-339R2, and IT-519. In order for CRA to allow for the cost of medical and dental expenses to be tax deductible for an employer and the benefits to be non-taxable in the hands of employees the administration and adjudication of claims of Health & Welfare Trusts must be operated through third party trustees that specialize in the administration of these types of plans.

Between the Medical Expense Tax Credit (METC) outlined in Section 118.2(2) of the Income Tax Act and 5700 in the Income Tax Regulation there are over 60 different eligible expenses availible for individual taxpayers to claim as METCs for themselves and their dependents who have been diagnosed with having learning disabilities on their after taxed expenses. By creating a Health & Welfare Trust a business owner can turn these same expenses into corporate deductions. The results of doing so are quite spectacular as illustrated towards the conclusion of this article.

The most popular special expenses unique to learning disabilities that can be claimed through a Health & Welfare Trust are:

Psychological Assessment: The cost of psychological assessments to determine if there is a diagnosis of a learning disability by either a registered psychologist or medical doctor.

Tutoring: The cost of tutoring to help with the four basic academic skills such as reading, spelling, writing and math provided these services are recommended in writing by either a doctor or registered psychologist as a remedy for the learning disability. For these tutoring services to qualify these services must not be provided by a family member.

Talking Textbooks: The cost of talking textbooks that have been prescribed in writing by a medical practitioner or psychologist for use by an individual with a learning disability. These talking textbooks must be needed in connection with the individual’s enrolment in a Canadian educational institution.

Transportation and Traveling: The cost for transportation and traveling to and from assessments, therapy, special educational facilities, special camps and tutoring sessions for the individual with the learning disability. If an individual with the learning disability needs to be accompanied by another person when traveling, the expenses for this traveling companion can be claimed through the Health & Welfare Trust provided that a qualified person (medical doctor or registered psychologist) has certified that the person with a learning disability needs this assistance while traveling.

Specialized Private Schools, Camps and Other Educational Institutions: The cost of specialized private schools, camps and other educational institutions can be put through a Health & Welfare Trust in accordance with the rules set down in S. 118.2(2) of the Income Tax Act provided that the following three criteria have been met:

Criteria One: A qualified person has certified that the individual has a learning disability;

Criteria Two: A qualified person certifies that the individual with the learning disability requires the equipment, facilities and personnel specialties provided by a named private school, camp or other educational institution;

Criteria Three: The specialized private school, camp or other educational institution has the required equipment, facilities and personnel to assist the individual with his/her learning disability needs.

“The numbers speak for themselves…”

Imagine you have a client who has an incorporated business in Ontario who earns a T4 income of $200,000 and has a marginal tax rate of 46.4%. This client has a son who has been diagnosed with a learning disability by a certified child psychologist (Criteria One met).

This psychologist recommends in writing that the best educational facility in Canada to meet this boy’s learning and developmental needs as a person with a learning disability is Robert Land Academy (RLA), a boarding school in Wellandport, Ontario. RLA has been widely recognized by qualified persons during the past 28 years in meeting the special needs of boys with Learning Disabilities (Criteria Two met).

RLA currently has in place the facilities and personal to meet the educational needs of boys who have been diagnosed with learning disabilities (Criteria Three met).

The school fee for attending RLA for the entire 2006-2007 academic year is $35,500.

Now let us compare this client’s two options and find out what the final financial outcomes for each are: In Option 1, the client plans to pay for the entire school fee with his after tax dollars. In Option 2, the client has set-up a Health & Welfare Trust with his company and plans to pay for the entire school fee through the trust.

In Option 1, the client will have to earn approximately $66,231 of personal income before taxes to pay with after tax dollars the school fees of $35,500. The school fees will have to be paid before the client can be eligible to apply for a personal METC.

In Option 2, the client’s company through using the Health & Welfare Trust Solution will pay $39,000 ($35,500 school fees plus $3,500 administration fee of 10 percent) into the trust. The total savings this client and his company receive for opting for Option 1 and setting-up the Health & Welfare Trust and then claiming the Robert Land Academy school fees through the trust is $27,231 over staying with Option 2. This savings equals approximately 75% of RLA’s entire school fees.

Health & Welfare Trusts require specialties in employment compensation, adjudication of eligible claims and benefit plan construction. Therefore if you are evaluating the suitability of a Health & Welfare Trust for your clients or yourself it is will worth the time and money to hire the right professionals to assist in the design, implementation, maintenance and adjudication of claims within the Health & Welfare Trust Solution.