14 October 1999 External T.I. 9913035 - FLEXIBLE BENEFIT PLANS

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: Paragraph 9 of IT-529 indicates that if an employee forgoes an amount to which the employee is entitled, the amount of remuneration forgone gives rise to an income inclusion. In the alternative, this paragraph indicates that when a contract of employment is renegotiated upon the expiry of a former employment contract to incorporate a decrease in the level of salary or wages to be paid to an employee over the term of the new contract, the decrease in salary will not give rise to an income inclusion. In relation to these comments, we have been asked about three approaches with respect to establishing a flexible employee benefit plan.

(A) In the first approach, the employer would start the flex program at the beginning of the employer's business year for nonunion employees when compensation levels and other conditions of employment would normally be renegotiated.

(B) In the second scenario, the employer would terminate all employment contracts for its non-union employees and offer new contracts, which would establish flex credit formulas and wages at the appropriate levels.

(C) In the third approach, the employer would start the program for union employees as part of the collective bargaining process upon the expiry of the current collective agreement.

With respect to each approach, the issue is whether any salary has been forgone or whether contracts of employment has been renegotiated at the expiry of the former contracts.

Position: (A) The first approach should not give rise to any adverse tax consequences to the employees.,

(B) As in the case of A, this should not give rise to any adverse tax consequences to the employees. However, we have also indicated that it is a question of fact whether the old contracts have been terminated.

(C) It is our general position that once a collective agreement has expired and a new one negotiated to establish the level of wages and benefits in a flex program, there would likely be no adverse consequences to the employee.,

Reasons (A) Compensation levels and other conditions of employment of non-union employees are normally renegotiated and changed at the beginning of the employer's business year.

(B) The information provided indicates that the old contracts have expired. However, we have also pointed out that the issue of whether contracts have, in fact, been terminated, involves a question of fact.

(C) A collective agreement has expired and a new one negotiated to establish the level of wages and benefits in a flex program.

As a further general comment, we have also mentioned that, in relation to the Department's position in paragraph 9 of IT-529, the tax consequences of any particular situation can only be determined on a case-by-case basis and will depend on the relevant facts and documentation.

xxxxxxxxxx 991303
M. Eisner

October 14, 1999

Dear Sir:

Re: Allocation of Flex Credits - Flexible Employee Benefit Program

This is in reply to your letter of May 11, 1999, concerning the above-noted subject. We also acknowledge our telephone conversation (Eisner/XXXXXXXXXX) in which we obtained some clarification.

You have set out a situation where an employer has a variety of different employment contracts in place, with different levels of employer contributions toward the cost of benefits. However, the employer is proposing to offer a flexible employee benefit program (the "Program") to employees, including a package of group insurance and other related benefits. Under the Program, the employer will be obligated to provide a specified overall contribution for each employee towards the cost of options purchased by the employee and the employee will be allowed to choose the level of coverage for each benefit at the start of each plan year. Some of the employees (the "Union Employees") are subject to a collective agreement while this is not the case for other employees (the "Non-Union Employees").

The employer wishes to introduce the Program for the purpose of establishing a consistent approach to the determination of Credits for each employee. In introducing the Program, the employer is considering the approaches set out below.

With respect to the first proposal, the employer would start the Program at the beginning of the employer's business year when compensation levels and other conditions of employment of the Non-Union Employees are normally renegotiated and changed ("Approach A"). Under this approach, the employer would increase or decrease the wages, as appropriate, so that all Non-Union Employees would have a consistent formula in determining the flex credits in the new year.

A second approach would be to commence the Program as part of an overall change in employment contracts ("Approach B"). Under this approach, the employer would terminate all employment contracts for its Non-Union Employees and offer new contracts which would establish flex credit formulas and wages at the appropriate levels. Seniority and all other terms and conditions of the expired contracts would be carried forward to the new contracts.

Finally, for employees covered by a collective agreement, the employer proposes to introduce the Program as part of the collective bargaining process, upon the expiry of the current collective agreement ("Approach C"). Under this approach, the employer would introduce the Program at the start of the new collective agreement along with an increase or decrease in wages, as appropriate, so that all employees would have a consistent formula for flex credits under the new contract.

The concern is whether a conversion of any p6rtion of an employee's salary to flex credits, would result in an income inclusion.

Our Comments

With respect to all three approaches, we have considered comments in paragraph 9 of Interpretation Bulletin IT-529 "Flexible Employee Benefit Programs. This paragraph indicates that, in certain circumstances, the conversion of any portion of the employee's salary to flex credits will result in an income inclusion of the amount of salary so converted. On the other hand, when a contract of employment is renegotiated upon the expiry of a former employment contract to incorporate a decrease in the level of salary or wages to be paid to an employee over the term of the new contract and the new contract also provides for additional flex credits, the additional credits will not be required to be included in the employee's income as part of salary or wages.

On the understanding that these approaches are being considered, and that the guidelines in IT-529 are followed, our general comments follow.

Under Approach A, Non-Union Employees' compensation levels and other conditions of employment are normally renegotiated and changed at the beginning of the employer's business year. In our view, this approach should not result in any adverse tax consequences to the employees.

In the case of Approach B, you have suggested that the old contracts would be part of an overall change in employment contracts with the old ones terminated and new ones established with flex credit formulas and wages at the appropriate levels. As in Approach A, this would not result in adverse consequences to he employees. However, we also wish to emphasize that, in an actual situation, the issue of whether old contracts have been terminated, is a question of fact.

With respect to the Approach C. it is our general view that, once a collective agreement has expired and a new one renegotiated to establish the level of wages and benefits in a flex program, there would likely be no adverse consequences to the employee.

The above comments are of a general nature and, thus, do not apply to any proposed or completed transactions. In order to provide more definite comments, the relevant facts and documentation would have to be examined. We wish to emphasize that, in relation to the Department's position in paragraph 9 of IT-529, the tax consequences of any particular situation can only be determined on a case-by-case basis, Should you wish to request an advance income tax ruling on the proposed implementation of a particular plan, we would be pleased to consider it.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch