2004 Ruling 2004-0091211R3 - Health Care Expense Account

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.

Principal Issues: Whether a health care expense account offered to employees who are already covered by a flex benefits plan, would qualify as a private health services plan; and, whether the allocation of credits, which is linked to a bonus the employees may be entitled to receive, would result in employment income to the employees

Position: The plan is a private health services plan, and the allocation will not result in taxable employment income for the employees.

Reasons: Consistent with IT-529 and previous rulings on the issue.

XXXXXXXXXX 2004-009121

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Company")

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the Company's proposed employee health care expense account (the "HCEA"). We also acknowledge the additional information supplied in your letter of XXXXXXXXXX.

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 centre 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 relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. The Company is a taxable Canadian corporation. The fiscal year of the Company is XXXXXXXXXX.

2. The Company files its tax returns at the XXXXXXXXXX Tax Centre. The Company's business number is XXXXXXXXXX.

3. The Company currently provides its employees with insurance benefits including medical and dental insurance, disability insurance, group life insurance and group sickness and accident insurance. All of these benefits, except for disability insurance and sickness and accident insurance, are offered through a flexible benefits plan under which employees choose from a menu of benefits providing various levels of benefits coverage. Employees are entitled to enrol in the plan each year or to make changes to their benefits coverage each year. The plan year is XXXXXXXXXX. If an employee does not make changes to the benefits coverage that applied in the previous plan year, the same level of coverage will apply in the current plan year.

4. The Company compensates its employees in the form of a base salary and annual bonuses. The amount of the bonus is based on two components:

(a) The financial results of the Company for the fiscal year ("Component A"); and

(b) The achievement of personal business goals and objectives for each employee ("Component B").

5. Components A and B account for XXXXXXXXXX% and XXXXXXXXXX% of the bonus, respectively.

6. Component A is calculated each year based upon the "corporate operating ratio" of the Company, as a measure of financial performance. The corporate operating ratio is determined based upon the Company's financial results for the fiscal year.

7. Component B is calculated based on an employee's performance during the fiscal year, determined through a "XXXXXXXXXX" process.

8. The bonus payouts are made based upon an employee's pay band as of the end of the fiscal year. The target percentages range from XXXXXXXXXX% to XXXXXXXXXX% of base pay for non-executive employees and from XXXXXXXXXX% to XXXXXXXXXX% of base pay for executive employees.

9. The amount of bonuses are determined and declared following a determination of the Company's financial performance for the fiscal year. This occurs in the months of XXXXXXXXXX following the end of the fiscal year.

10. To be entitled to the bonus, an employee must be employed by the Company on the date the bonus is paid. Prior to such date, employees are not entitled to a bonus payment. An employee who terminates employment with the Company prior to such date is not entitled to a bonus payment, subject to employment standards and labour laws.

Proposed Transactions

11. The Company proposes to introduce the HCEA for its employees, effective XXXXXXXXXX. The HCEA is intended to qualify as a "private health services plan", as defined in subsection 248(1) of the Act. All of the expenses reimbursed through the HCEA must be qualified medical expenses under subsection 118.2(2) of the Act and must be expenses of an employee or of the employee's "dependants", as that term is defined in subsection 118(6) of the Act.

12. Employees will be entitled to enrol in the HCEA each year, within the same timeframe as the enrolment in the flexible benefits plan described in paragraph 3 above.

13. Unused balances in the HCEA at the end of a plan year in respect of an employee may be rolled over to the next plan year and can be used to reimburse eligible medical expenses incurred in that subsequent plan year. The maximum rollover of unused balances will be one year. Any excess expenses in a plan year may not be rolled over to the next plan year. Unused balances will not be payable in cash.

14. The Company will credit the HCEA each plan year in accordance with elections made by each employee in advance of the plan year. Such elections will indicate the amount to be credited in respect of the employee, but is limited to the lesser of the amount of bonus determined for the employee in XXXXXXXXXX of the plan year or $XXXXXXXXXX.

15. The election to participate and the amount allocated will be irrevocable and the elections must be made prior to the start of the plan year. Employees must complete an election form each plan year in respect of the amount of bonus they want to allocate to the HCEA. Employees who do not complete an election form in a particular plan year will not have any amount allocated to the HCEA for that plan year and will not be entitled to any reimbursement of medical expenses not otherwise eligible for reimbursement under the flexible benefits plan described in paragraph 3 above.

16.The amount of bonus payable to an employee in XXXXXXXXXX of the following year will be reduced by any amount that the employee has elected to allocate as credits to the HCEA. The Company will deduct the amount of the bonus not allocated to the HCEA in the fiscal year the bonus is declared payable. The Company will not deduct any amount in respect of the allocation to the HCEA until the employer becomes liable to actually reimburse an employee for an eligible medical expense from the credits in his or her HCEA. An employee will not be paid any bonus in a year where his or her bonus is calculated to be less than the amount of credits elected to be allocated to his or her HCEA in the prior year.

17. The following are examples of how the proposed HCEA will operate, where:

(a) The amount of the potential bonus exceeds the amount elected: Employee A makes an election in XXXXXXXXXX to have the Company credit the HCEA with $XXXXXXXXXX for the plan year XXXXXXXXXX. The amount of the potential bonus in respect of Employee A is declared on XXXXXXXXXX to be $XXXXXXXXXX. The actual amount of the bonus paid to Employee A is $XXXXXXXXXX and the HCEA is credited with $XXXXXXXXXX on XXXXXXXXXX. The credits is the HCEA can be used to reimburse Employee A for eligible medical expenses incurred at any time in the XXXXXXXXXX plan year. Unused credits in the HCEA may be carried forward one year to the following plan year.

(b) The amount of the potential bonus is less than the amount elected: Employee B makes an election in XXXXXXXXXX to have the Company credit the HCEA with $XXXXXXXXXX for the plan year XXXXXXXXXX, but the amount of the bonus in respect of Employee B is declared to be $XXXXXXXXXX. The amount credited to the HCEA is therefore reduced to $XXXXXXXXXX and no bonus is payable to Employee B.

(c) No bonus is declared: Employee C makes an election in XXXXXXXXXX to have the Company credit the HCEA with $XXXXXXXXXX for the plan year XXXXXXXXXX, but no bonus is declared. Nothing is credited to the HCEA for the XXXXXXXXXX plan year.

(d) An employee terminates employment prior to the bonus being declared: Employee D makes an election in XXXXXXXXXX to have the Company credit the HCEA with $XXXXXXXXXX for the plan year XXXXXXXXXX , but Employee D terminates employment on XXXXXXXXXX. Nothing is credited to the HCEA and any expenses incurred by Employee D in XXXXXXXXXX are not reimbursed through the HCEA.

Purpose of the Proposed Transactions

18. The Company desires to enhance its employee benefit program by adding the HCEA. The HCEA will help provide more flexibility in the benefits coverage of its employees. The HCEA will also assist in the attraction and retention of employees.

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 HCEA will be considered a "private health services plan" as that term is defined in subsection 248(1) of the Act.

B. The allocation of credits to the HCEA by an employee will not, in and of itself, be considered income from employment pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.

C. When a bonus is declared in XXXXXXXXXX of the year following the plan year, the reduction in bonus paid to an employee to account for the credits allocated to the HCEA by the employee will not be included in the employee's employment income pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.

D. Any payments from the HCEA to an employee to reimburse the employee for medical expenses within the terms of the HCEA will not be included in income, by virtue of the exception provided for by subparagraph 6(1)(a)(i) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the Canada Revenue Agency provided that participation in the proposed HCEA will be offered to the Company's employees before 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 Planning Branch