13 February 2002 Ruling 2001-0116363 - WHETHER FLEX CREDITS PART OF SALARY

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 flex credits allocated to employees upon the establishment of a flex plan would be considered salary, where the employee's salary was reduced

Position: Question of fact.

Reasons: It must be determined whether the revised salary is set under a new contract of employment, or whether an existing contract is re-negotiated. If a new employment contract is put in place, then the flex credits will not likely be considered salary. It must also be determined whether the employee's salary is reduced by amounts withheld by the employer as the employee's benefit premiums, or whether the employer is funding the entire benefit programs.

XXXXXXXXXX 2001-011636
Wayne Antle, CGA
February 13, 2002

Dear XXXXXXXXXX:

Re: IT-529 - Flexible Employee Benefit Programs

This is in reply to your letter of December 20, 2001, in which you requested an advance income tax ruling with respect to the introduction of a flexible benefit plan.

As discussed in Information Circular 70-6R4 Advance Income Tax Rulings dated January 29, 2001, we will only consider a ruling request where it is made in respect of a specific proposed transaction, and it is submitted in the manner set out in this circular. Since you did not request a ruling on a specific proposed transaction, your deposit will be returned to you under separate cover. However, in accordance with paragraph 22 of this circular, we will provide the following general comments, which are not binding on the Canada Customs and Revenue Agency ("CCRA") with respect to any specific taxpayer.

In your correspondence, and our telephone conversation on February 11, 2002 (Antle/XXXXXXXXXX), you have asked us to consider the following hypothetical situation:

An employer is investigating the possibility of establishing a flexible benefit plan ("flex plan") to replace its existing range of employee benefits. You indicated that the employee's salary would be reduced by the amount of flex credits allocated to the flex plan. The employer's overall contributions towards funding the benefits would not change under the new flex plan. The employees must allocate their credits and select their benefit levels in the current year for the following year, and this benefit selection would be irrevocable. Any credits allocated in the year will not be refunded to the employees. The program is available to all employees, both unionized and salaried.

The salaried employees are not covered by individual written employment contracts. Pay grids are instituted by the employer for each job classification. The employer establishes pay scales based on provincial pay equity legislation, and internal job evaluations. Employees progress along the pay grid based on their experience, job performance, and years of service. Group benefit programs and the terms of employment are set unilaterally by the employer. Meetings are held periodically with each employee to discuss the employee's performance and determine whether he or she progress to the next pay scale on the grid.

Unionized employees are covered by a negotiated collective agreement that establishes pay rates, certain employment conditions, and the general policy on benefits. Typically the agreements are negotiated every two or three years. The agreements do not presently address the provision of flexible benefit plans.

Essentially, you have asked us to consider whether the flex credits allocated to each employee under a new flex plan would be considered part of the employee's salary where the employee's salary was reduced upon establishment of the plan.

Our comments

Paragraph 9 of Interpretation Bulletin IT-529 Flexible Employee Benefit Programs provides that the conversion of any portion of an employee's salary to flex credits will result in an income inclusion of the amount of salary so converted. However, where an employment contract ends, and a new contract is negotiated which provides for a reduction in salary and the provision of additional flex credits to the employees, the additional flex credits will not be considered foregone salary. On the other hand, where an existing employment contract is re-negotiated to reduce salary and increase the allocation of flex credits, the additional credits will be considered part of the employees salary.

In order to determine whether an existing employment contract has been terminated, we would need to consider all of the facts including the method by which employment conditions, benefits and salaries are set, the timing and method of communicating the salary and benefits to the employees, and any written agreements entered into by the employees. If the contract of employment is only verbal, the onus will be on the employer to satisfy the CCRA that a valid new employment agreement is in place and that the increased benefits are funded by the employer. Generally, if the employees are subject to a collective agreement, the employment contract will be considered to have ended at the expiration of the collective agreement.

With respect to the non-unionized salaried employees, it is unclear whether their employment contract is strictly verbal. It appears that their salary is determined in accordance with their classification and the existing pay grid. It is also not clear as to how the pay grid is established and revised, or how the other employment conditions and benefits are determined. This information is essential in order to ascertain whether or not the particular employment contract has ended. In our view, the periodic meeting with the employees to discuss their performance, and determine if they can progress to the next level in the pay scale would probably not constitute the negotiation of a new employment contract.

Concerning the unionized employees, the expiration of the collective agreement would likely be considered to be the termination of the employment contract. If the new collective agreement sets revised salary levels, and establishes a flexible benefit plan, then the allocated flex credits would generally not be considered part of the employee's salary.

In addition, even if it is established that a new employment contract has been negotiated, it must be determined whether the employer is withholding employee contributions from the employee's salary to fund various benefits, or whether these benefit programs are funded by the employer. This can only be determined after reviewing all of the facts including the various benefit plan agreements, and the employment contracts.

If you have a particular client who is contemplating setting up a flexible benefit plan, you may request an advance income tax ruling for the client in the manner set out in Information Circular IC 70-6R4.

We trust that our comments will be of assistance.

Yours truly

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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