Employee Benefit Plan
An employee benefit plan is an arrangement under which an employer remits contributions to another person, referred to as the “custodian of an employee benefit plan,” in order to pay benefits to employees, former employees or persons not dealing at arm's length with an employee or former employee, or to pay such benefits on their behalf.
The employer may deduct employer contributions to the plan only if they are distributed to the beneficiaries of the plan (that is the employees, or former employees, or their legatees by particular title) or their legal representatives. The beneficiaries must include in their income the amount of the benefits received during the year, minus the portion of this amount that constitutes their contributions to the plan.
An amount received by a beneficiary of the plan, who is a person not dealing at arm's length with an employee, is deemed to have been received by the employee if the beneficiary receives it by reason of the employee's office or employment and if the employee is alive at the time the beneficiary receives the amount.
As a rule, the benefits paid by the plan are considered to be employment income for the beneficiaries. They must be reported on RL-1 slips (see courtesy translation RL-1-T) rather than on RL-16 slips. The total amount of benefits must be entered on form RLZ-1.S-V, Summary of Source Deductions and Employer Contributions. The RL-1 slips and form RLZ-1.S-V must be filed no later than the last day of February of the year following the year in which the benefits were paid.
If the employee benefit plan is a trust, the trustee must file a Trust Income Tax Return (form TP-646-V) in accordance with the usual rules. A statement of receipts and disbursements for the year must be enclosed with the return, and the receipts (contributions, investment income, etc.) and disbursements must be broken down by type.
If, in the taxation year, a portion of the investment income is retained by the trust instead of being allocated to the employees, the trustee must report this income as dividends, taxable capital gains or other investment income, as applicable. This breakdown of income is necessary in order to calculate the dividend tax credit and the alternative minimum tax (AMT), and to carry over net capital losses from other years.
If a trust constituted under an employee benefit plan becomes a retirement compensation arrangement (RCA) trust, it must still file an income tax return for the portion of the investment income attributable to the plan. The fair market value of the plan's property immediately before the change is considered to be a payment out of or under the plan to the employees or former employees.