2010 Federal Budget Highlights

The 2010 Federal Budget had a minimal impact on employer benefit plans. The following highlights the relevant sections of the budget.

Medical Expense Tax Credit — Purely Cosmetic Procedures
Purely cosmetic procedures became ineligible for the Medical Expense Tax Credit (METC) as of March 4, 2010. This generally includes surgical and non-surgical procedures purely aimed at enhancing one's appearance such as: liposuction, hair replacement, botulinum toxin injections and teeth whitening. An exception is made for a deformity arising from an accident, disease or congenital abnormality. In order to remain tax-free to employees claiming, an employer sponsored Healthcare Spending Account may no longer cover expenses that are purely for cosmetic procedures. We anticipate insurers will take the appropriate action to ensure Healthcare Spending Account claims for cosmetic procedures are not paid under these accounts to protect their tax status. We will keep you advised of insurer reaction to this news.

Further the budget clarifies that GST/HST is applicable to the cost of services related to purely cosmetic procedures as well as to devices or other goods used or provided with cosmetic procedures. GST/HST will not apply if the cosmetic procedure is required for medical or reconstructive purposes or if the procedure is paid for by a provincial health insurance plan.

Employee Life and Health Trust (ELHT)
The Budget proposes to move ahead with the implementation of the amendments to the Income Tax Act in relation to Employee Life and Health Trusts. Currently, trusts to provide benefits are referred to as Health and Welfare Trusts and are governed by provisions detailed by the Canada Revenue Agency. These are widely used by multi-employer plans, such as plans for workers in the construction trades, and to provide benefit arrangements outside the scope of traditional plans. The proposed amendments to the Income Tax Act are intended to ensure fair tax treatment of the contributions made to these plans, particularly relating to pre-funding of benefits.

Under the proposal, the Income Tax Act would define an “employee life and health trust” as a trust, established by one or more employers, to provide “designated employee benefits”, which are described generally as health and insurance benefits for both current and former employees, allowing this plan to include retirees.

Employer contributions to the trust, in so far as they are to cover the cost of the benefits provided by the plan, would be tax deductible, while employee contributions could qualify for the Medical Expense Tax Credit, employee contributions would not be tax deductible. Employee contributions paid into a trust in respect of disability benefits would be used to reduce the taxable portion of benefits received by the employee at the time of claim. Employer contributions in respect of Life insurance would continue to be a taxable benefit to employees.

Not surprisingly, there are rules governing these trusts which may reflect the current administration for Health and Welfare trusts but in some cases, such as residency of the trust, are very different from current practices.

This type of trust will not be useful for every employer, but the automakers are moving to use this as a vehicle to facilitate plans for retired and active employees.

Employee Stock Options
The budget proposes to change the treatment of stock option cash outs. Currently, under a stock option agreement, when an employee acquires stock, the difference between the fair market value and the amount paid by the employee is a taxable employment benefit. However if certain conditions are met, the employee is eligible for the stock option deduction, a deduction equal to half of the employment benefit. Alternatively, stock option agreements may allow employees to trade their stock options for a cash payment from the employer, which generates an employment benefit that is still eligible for the reduction in tax due to the stock option deduction, while the cash payment is fully tax deductible to the employer.

The proposed limits will prevent both the stock option deduction and a deduction by the employer from being claimed for the same employee benefit. This means, the stock option deduction will generally be available to employees only in situations where they exercise their options by acquiring securities of their employer. In other words, if the employee receives preferential tax treatment on stock-based benefits, the employer can no longer deduct the costs of the benefits.

In 2007, over 78,000 employees took advantage of the stock option deduction, claiming an average amount of $53,000.

Please do not hesitate to contact K+A if you have any questions or concerns about implementing these changes and/or communicating these changes to your organization.