2002 Ruling 2002-0141723 - ATR FLEXIBLE BENEFIT PLAN

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Changes to an existing flexible benefit plan, whereby an employee would forgo the right earn further continuous service for the purposes of long-service payments, in lieu of additional flex credits under the plan.

Position:

Favourable ruling given.

Reasons:

See Statement of Principal Issues.

XXXXXXXXXX 2002-014172

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request - XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, as amended through further written submissions dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX with respect to changes to an existing flexible employee benefits program.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of a taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of a taxpayer or a related person,

(iii) is under objection by a taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

1. "The Employer" is XXXXXXXXXX.

2. "The CCRA" is the Canada Customs and Revenue Agency.

3. "The Plan" is the Employer's flexible employee benefits program.

4. "Flex Credits" are notional credits received by employees participating in the Plan, in the manner described below.

5. "Regular Employees" are all employees of the Employer, except Contract Employees and Temporary Employees. Regular Employees are hired for an indefinite period of time.

6. "Contract Employees" are employees hired for a fixed period of at least one year, which may subsequently be extended.

7. "Temporary Employees" are employees hired for a fixed period of less than one year, which may subsequently be extended.

8. "Senior Officers" are Regular Employees, Contract Employees or Temporary Employees occupying positions considered to be at the senior level.

9. "The PHSP" is the Employer's "private health services plan", as defined in subsection 248(1) of the Act.

10. "The LTD Plan" is the Employer's "disability insurance plan", for purposes of subparagraph 6(1)(f)(ii) of the Act.

11. "The AIP Plan" is the Employer's "group sickness or accident insurance plan", for purposes of subparagraph 6(1)(f)(i) of the Act.

12. "The RPP" is the Employer's "registered pension plan", as defined in subsection 248(1) of the Act.

13. "RCA" is a "retirement compensation arrangement", as defined in subsection 248(1) of the Act.

14. "EBP" is an "employee benefit plan", as defined in subsection 248(1) of the Act.

15. "ET" is an "employee trust", as defined in subsection 248(1) of the Act.

16. "SDA" is a "salary deferral arrangement", as defined in subsection 248(1) of the Act.

17. "Life Event" for an employee under the Plan is defined to include the birth or death of a dependant, a change in marital status or the loss of insurance coverage under a spouse's benefit plan.

Facts

18. XXXXXXXXXX.

19. The Employer has approximately XXXXXXXXXX employees, XXXXXXXXXX of which are Regular Employees. The remainder is made up of Contract Employees or Temporary Employees. These employees are non-unionized and most have no formal written employment agreements, other than brief standardized letters of offer that they sign indicating acceptance of employment with the Employer.

20. The Employer provides a broad range of compensation to both current and former employees, including:

(a) Salary;

(b) Health and dental insurance coverage under the PHSP;

(c) Employer-paid long-term disability coverage under the LTD Plan;

(d) Accidental death and dismemberment coverage under the AIP Plan; and

(e) A defined benefit registered pension plan under the RPP.

21. Many of the benefits provided to Regular Employees and Contract Employees are under the Plan.

22. The Employer also has four other benefit programmes directly relevant for the purposes of the ruling request, as follows:

(a) A RCA, referred to as a "supplementary pension arrangement" (the SPA), which provides benefits to employees whose benefits under the Employer's RPP, are capped by the maximum pension limitations prescribed for purposes of the Act.

(b) A one-time retirement allowance to each Regular Employee who retires on immediate pension and has at least XXXXXXXXXX years of continuous service with the Employer. The retirement allowance equals XXXXXXXXXX of annual salary at the time of retirement, multiplied by years of continuous service up to XXXXXXXXXX;

(c) At the Employer's discretion, a one-time severance payment to each Regular Employee who voluntarily terminates employment with at least XXXXXXXXXX years of continuous service with the Employer prior to drawing a pension. The severance payment equals XXXXXXXXXX of annual salary at the time of termination, multiplied by years of continuous service; and

(d) A one-time death benefit in respect of each Regular Employee, who dies in service, payable to the surviving spouse or estate. The death benefit equals the greater of XXXXXXXXXX of annual salary at the time of death or XXXXXXXXXX of such salary, multiplied by years of continuous service up to XXXXXXXXXX.

23. The retirement allowance, severance payment, and death benefit described above are collectively referred to hereafter as the "Long-Service Payments". The eligibility criteria for the Long-Service Payments are such that a Regular Employee can only qualify for one type of payment. Further, the conditions for payment are such that there is no guarantee that a Regular Employee will qualify for any of the Long-Service Payments.

24. Under the Plan, all Regular Employees and Contract Employees receive an annual award of Flex Credits. Each of these employees are required to make an irrevocable allocation (except in the case of a Life Event) of the Flex Credits in respect of a calendar year among various benefit choices, prior to the beginning of that year. If an employee does not allocate all the Flex Credits he or she is awarded at the beginning of the calendar year, no value relating to the Flex Credits in respect of a particular Plan year may be carried forward to a subsequent year.

25. Under the Plan, each Senior Officer who is a Regular Employee or Contract Employee receives an annual award of Flex Credits varying in amount, according to his or her level. These employees are required to choose among the following benefits:

(a) Additional salary;

(b) A contribution by the Employer to the SPA, provided to Senior Officers who are members of the RPP;

(c) Various options for different levels of coverage under the PHSP, the LTD Plan and/or the AIP Plan; and

(d) A health and dental spending account, for the provision of additional health and dental benefits under the PHSP.

26. Under the Plan, each Regular Employee and each Contract Employee that is not a Senior Officer receives an annual award of Flex Credits equal to XXXXXXXXXX percent of his or her annual salary. These employees are required to choose among the following benefits:

(a) Additional salary;

(b) Various options for different levels of coverage under the PHSP, the LTD Plan and/or the AIP Plan; and

(c) A health and dental spending account, for the provision of additional health and dental benefits under the PHSP.

27. When an employee allocates Flex Credits to additional salary at the beginning of the calendar year, all of such additional salary is disbursed by the Employer in that year and reported on each employee's T4 for the year.

28. Prior to the beginning of a calendar year, all Regular Employees and Contract Employees may exchange existing vacation entitlements for additional salary. When an employee exchanges existing vacation entitlements for additional salary, the value of those vacation days is included by the Employer in the total employment income of the particular employee and is reported on his or her T4 for the year.

29. Prior to the beginning of a calendar year, all Regular Employees and Contract Employees may obtain additional vacation entitlements funded by way of payroll deductions from their salary. When an employee obtains additional vacation entitlements, he or she must utilize those days in the calendar year or forgo them without any further benefit.

Proposed Transactions

The Employer proposes to adopt the following changes to the compensation package it offers to Regular Employees, as follows:

30. Each individual employed by the Employer as a Regular Employee on XXXXXXXXXX, will receive written notice of an offer for a one-time opportunity to complete a form and elect to:

(a) Continue accruing continuous service for purposes of the Long-Service Payments; or

(b) Freeze such service as at XXXXXXXXXX, and expand his or her participation in the Plan beginning XXXXXXXXXX, in the manner described below. Electing employees will not forfeit any existing entitlement to Long-Service Payments based on their current years of continuous service, but merely cease to accrue additional years of service.

31. Regular Employees must return completed election forms to the Employer no later than XXXXXXXXXX.

32. Commencing in XXXXXXXXXX, each Regular Employee will receive an additional specified number of Flex Credits in respect of every calendar year as a result of his or her election to freeze continuous service for purposes of the Long-Service Payments.

33. Each Regular Employee shall be required to make an irrevocable allocation (except in the case of a Life Event) of his or her additional Flex Credits in respect of a calendar year, prior to the beginning of that year, among specified choices under the Plan.

34. For Regular Employees who are Senior Officers, the choices will be:

(a) Additional salary;

(b) A contribution by the Employer to the SPA;

(c) One of the specified levels of coverage under the PHSP, the LTD Plan and/or the AIP Plan; and

(d) A health and dental spending account, for the provision of additional health and dental benefits under the PHSP.

35. For Regular Employees who are not Senior Officers, the choices will be:

(a) Additional salary;

(b) One of the specified levels of coverage under the PHSP, the LTD Plan and/or the AIP Plan; and

(c) A health and dental spending account, for the provision of additional health and dental benefits under the PHSP.

36. In XXXXXXXXXX, the new Flex Credits awarded to each Regular Employee will approximate XXXXXXXXXX of his or her salary at the end of XXXXXXXXXX.

37. Regular Employees hired by the Employer on or after XXXXXXXXXX, will not be eligible for Long-Service Payments.

Purpose of the Proposed Transactions

38. The expansion of the Plan is part of a broader initiative to modernize the Employer's employee benefits package and to provide more choice in the use of benefits.

Rulings Given

Provided that:

(a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) The proposed transactions are completed in the manner described above; and

(c) There are no other transactions, which may be relevant to the ruling requested,

our rulings are as follows:

A. The election to participate in the Plan by a Regular Employee, will not, in and by itself, cause the Plan to be considered an EBP, an ET, or a SDA.

B. Subject to Ruling D, the election to cease accruing continuous service for purposes of the Long-Service Payments by a Regular Employee, and the resulting award of additional Flex Credits under the Plan, will not, in and by itself, result in an amount being included in computing his or her income pursuant to sections 3 or 6, subsection 5(1) or paragraph 56(1)(a) of the Act.

C. The election to allocate additional Flex Credits by a Regular Employee to coverage under the PHSP, the LTD Plan, the AIP Plan or the health and dental spending account for the provision of additional health and dental benefits under the PHSP, will not result in an amount being included in computing his or her income pursuant to section 3 or 6, subsection 5(1) or paragraph 56(1)(a) of the Act.

D. The election to allocate additional Flex Credits to the SPA by a Senior Officer, will cause that part of the Plan to be considered a RCA, and such allocation will be considered to be a contribution by the Employer to a RCA.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch