25 January 2000 External T.I. 1999-0014165 - EMPLOYEE CONTRIB. TO A HCSA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether an employee's contributions to a health care spending accounts can be made with before-tax dollars.

Position: No. An employee will be taxed on his gross salary and not the net amount after contributions.

Reasons: Paragraphs 3 and 22 of IT-529. An employee's contributions to a HCSA constitutes part of his or her salary.

XXXXXXXXXX 	(613) 957-2135
		1999-001416
Attention:  XXXXXXXXXX 

January 25, 2000

Dear XXXXXXXXXX:

We are replying to your letter of December 8, 1999, in which you requested our views concerning statements by a consultant that suggested that an employee can contribute to a flexible benefit using pre-tax dollars.

As requested, we have considered your questions and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

You state that employers are being advised that they can introduce a plan with a matching employer/employee contribution of, for example, 3% each, but the employee contributions can be made with pre-tax dollars. The proposal suggests that an employer can reduce the employee's gross earnings and contribute these before tax dollars to the program and can adjust these amounts on an annual basis as agreed with the employer based on his or her changing needs. If the employee does not utilize the full amount of the credit within the year, it is lost. The employee's withholding is calculated on the reduced gross amount of compensation.

The comments in our letter to you of August 3, 1999 (reference #9916035), would appear to be applicable in this case also. That is, as explained in paragraph 18 of Interpretation Bulletin IT-529, "Flexible Employee Benefit Programs," there will generally be no advantage to an employee in using payroll deductions to contribute to a "health care spending account." Further, if an employee forgoes part of his or her salary or other amount to which that employee is otherwise entitled, the amount forgone is included in the employee's income. In other words, the employee is taxed on the gross amount of salary received and not the net amount of his or her pay cheque. This is explained in paragraphs 3 and 22 of IT-529. However, if a contract of employment is renegotiated upon the expiration of a former contract, and the new contract results in a reduced salary in return for a corresponding increase in the amount of premiums paid by the employer to a private health services plan, the additional premiums paid by the employer will not be treated as part the employee's salary, nor will it result in a taxable benefit to him or her (because of the specific exemption in subparagraph 6(1)(a)(i) of the Act). If the previous contract of employment is only verbal, the onus will be on the employer to satisfy us that a valid renegotiated employment agreement is in place and that the increased benefits are funded by the employer.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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