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.
Principal Issues: Effective January 1, 2013, employees will no longer be allowed to convert a future bonus to obtain additional flex credits in a HCSA.
Position: An election to allocate flex credits to a HCSA is an allocation of forgone cash remuneration and should be subject to tax.
Canadian Tax Foundation
2011 CRA Roundtable November 27-29, 2011
Question 27
Change in position: employee bonus allocated to health care spending account
1. We understand that the CRA is changing its administrative policy that allows an employee to redirect a portion of his or her bonus to obtain additional flex credits in a health care spending account ("HCSA") on a tax free basis. Why is the CRA changing its position and when will the change be effective?
2. What will happen to taxpayers who received an advance tax ruling ("ATR") allowing employees to convert all or part of a future bonus into additional HCSA credits?
Response
1. The CRA had issued a number of previous ATRs that allowed employees to convert all or part of a future bonus to the employee's HCSA under the employer's flexible benefit plan. We ruled that neither the conversion nor the receipt of benefits under the HCSA would be included in the employee's income under the Income Tax Act (the "Act") provided the HCSA qualified as a private health services plan ("PHSP"). These rulings represented an extension of the administrative position in Interpretation Bulletin IT-529, Flexible Employee Benefit Plans, dated February 20, 1998, and reflected the views of the CRA at the time the ATR's were issued. Recently, the ongoing acceptability of this administrative position was re-examined and, as a result, it is the CRA's opinion that in these situations, the allocation of a future bonus to a HCSA should be taxed as employment income. This is because the allocation of a bonus to obtain additional flex credits in a HCSA is an allocation of forgone cash remuneration and should be subject to tax. The value of the amount forgone will now be included in the employee's income in the year the additional flex credits are credited to the HCSA. This change in administrative policy will take effect on a prospective basis, starting January 1, 2013. We believe that this is sufficient notice in order to facilitate employers' administration of their flexible benefits plans and to comply with the change in position.
2. In accordance with paragraphs 10-12 of IC70-6R5, Advance Income Tax Rulings, the CRA has made contact and apprised each applicable ATR recipient of the change in policy. On or after January 1, 2013, any bonus to which an employee is or will become entitled will be included in income in the year in which the amount is converted to flex credits.
2011-042657
Tom Posadovsky
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