25 September 2000 External T.I. 2000-0040445 - FLEX CREDITS WITH REDUCTED VACATION

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 the awarding of additional flex credits as part of a change to an employee's employment contract which includes a reduction in vacation entitlement results in additional employment income in the manner set out in paragraph 9 of IT-529. These changes will be made unilaterally by the employer, and it is the Company's practice to review and revise its employee benefit package and the employee salary levels every year. Further, the changes, which are effective January 1 of the next year, are communicated to the employees before the changes take place.

Position: Likely not.

Reasons: A strong argument may be made that a valid renegotiated employment contract is put in place every year.

XXXXXXXXXX 	J. Gibbons, CGA
		2000-004044
Attention: XXXXXXXXXX 

September 25, 2000

Dear XXXXXXXXXX:

We are replying to your facsimile dated July 31, 2000, in which you requested our views concerning the income tax consequences of a change to an employee's employment contract which includes an increase in the amount of flex credits in the employer's flexible benefit plan ("flex plan") and a reduction in vacation entitlement. In your letter, you described the following hypothetical situation:

• Each year the Company reviews and revises its employment benefit package and the employee salary level, with the changes taking effect on January 1 of the next year.
• The changes are generally made on a unilateral basis by the Company, and are documented in an employee benefit manual and communicated to the employees prior to the effective date of the changes.
• Each fall, the employees select the benefits that they will have for the following year in accordance with the terms of the flex plan.
• Once employees have made their selection, they are not able to amend their choices.
• The employees are not unionized.
• As a result of the current year's review of the entire employment benefit package, the Company will provide an additional 2% of salary as flex credits under its flex plan to employees with over ten years of service. At the same time, the vacation entitlement of such employees, which is currently either 4, 5 or 6 weeks, depending on years of service, would be reduced by one week.
• A vacation buying option will be added to the Company's flex plan to allow an employee to acquire up to one week of vacation. The paid vacation days would be reported as a taxable benefit and would be subject to the various withholding requirements.

In your view, the hypothetical situation described above would not be contrary to the comments in paragraph 9 of IT-529, "Flexible Employee Benefit Programs. This paragraph states that 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; however, 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 paid to an employee over the term of the new contract and the new contract also provides for additional flex credits, the additional flex credits will not be required to be included in the employee's income as part of salary and wages.

As requested, we have considered the situation outlined in your letter 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.

Our views

Since it is a question of fact whether an employment contract has expired, this determination can only be made after reviewing the actual employment contracts and other supporting documentation. Further, if the contract of employment is only verbal, the onus will be on the employer to satisfy the Agency that a valid renegotiated employment agreement is in place and that the increased benefits are funded by the employer. In your letter, you stressed the fact that the change in employment benefits will be made unilaterally by the employer, and the employees will have no choice as to whether to participate in the change. In our view, the fact that the employment benefits will be changed unilaterally by the employer does not, in and of itself, prove that a valid renegotiated employment agreement is in place. Nonetheless, given this fact along with the fact that it is the Company's practice to review and revise its employee benefit package and the employee salary levels every year, and the fact that the changes, which are effective January 1 of the next year, are communicated to the employees before the changes take place, it is our view that a strong argument may be made that a valid renegotiated employment contract is put in place every year. Therefore, we are inclined to agree with you that the awarding of additional flex credits in the fashion outlined would not result in additional employment income to the employees in the manner set out in paragraph 9 of IT-529.

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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