25 January 2000 External T.I. 1999-0006475 - SALARY AND NON-TAXABLE

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: As part of the settlement of a new collective agreement, arrangements would be made for the employer to establish a dental plan (the "Plan") for certain employees with an appropriate third party insurance carrier. The collective agreement would indicate that the employer is obligated to pay the premiums. The concern is whether salary would be considered to have been converted into Plan benefits, with the attendant result that an income inclusion would occur in respect of the Plan.

Position: We generally accept the terms of a collective agreement. Accordingly, the fact that terms have been included in a collective agreement concerning a dental plan that qualifies as a PHSP, will not, in and by itself, give rise to adverse consequences..

Reasons: The position is consistent with the comments in 9 of IT-529.

As a further general comment, we have also mentioned that, in relation to the Department's position in paragraphs 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 1999-000647
M. Eisner
Attention: XXXXXXXXXX

January 25, 2000

Dear Sir:

Re: Salaries and Private Health Services Plans

This is in reply to your letter of November 10, 1999, concerning the above-noted subject.

In your letter, you identified 2 hypotheses on which you sought our confirmation that they would involve "private health services plans" ("PHSPs") as defined in subsection 248(1) of the Income Tax Act (the "Act"), as well as on what amounts are to be included in the employees' incomes. Since the request for a technical interpretation appears to relate to specific proposed transactions, an advance income tax ruling rather than technical interpretation must be requested. This is explained in paragraph 22 of Information Circular 70-6R3 "Advance Income Tax Rulings." However, we are prepared to offer the following general comments for your consideration.

In general terms, your concerns relate to a group of employees engaged in collective bargaining with their employer. As part of the settlement of a new collective agreement, arrangements would be made for the employer to establish a dental plan (the "Plan") for certain employees with an appropriate third party insurance carrier. There would be a plan year in respect of the Plan. The collective agreement would indicate that the employer is obligated to pay the premiums.

You have raised a number of concerns but the main concern seems to be whether salary reductions would be considered to have been converted into Plan benefits, so that an employment income inclusion would occur in respect of the Plan.

Our Comments

Our general position on PHSPs is set out in Interpretation Bulletin IT-339R2 "Meaning of Private Health Services Plan." Contributions made by an employer to or under a PHSP in respect of an employee are excluded from the employee's income from an office or employment by virtue of subparagraph 6(1)(a)(i) of the Act. The determination of whether a particular plan qualifies as a PHSP can only be made following a review of the relevant facts and documentation.

Our general position on a "life event" or "change in employment status" is set out in paragraph 6 of Interpretation Bulletin IT-529 "Flexible Employee Benefit Programs."

With respect to the concern of whether salary would be considered to have been converted into PHSP benefits, the comments on a flexible benefit program in paragraph 9 of IT-529 "Flexible Employee Benefit Programs" may be helpful. 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 (i.e., there are no adverse tax consequences in respect of the benefits).

Based on foregoing, when the terms of a collective agreement result in a salary decrease for employees because of a plan that qualifies as a PHSP, this will not, in and by itself, give rise to adverse income tax consequences. However, we also caution that, in relation to our position in respect of paragraph 9 of IT-529 set out above, the tax consequences of an actual situation can only be determined on a case-by-case basis following a review of all the relevant facts and documentation. Should you wish to request an advance income tax ruling on the proposed implementation of a particular PHSP, we would be pleased to consider it.

The above comments are of a general nature and, thus, do not apply to any proposed or completed transactions.

Yours truly,

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

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