4 April 2005 External T.I. 2005-0115681E5 - Income Allocation to an Employee Benefit Program

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: Once a year, an employee can allocate certain income to either a health spending account that is a private health services plan (PHSP) or to a flexible spending account that is not a PHSP. Whether or not either of these allocations will reduce the employee's income.

Position: No.

Reasons: The conversion or allocation of any portion of an employee's salary to a health care spending account will result in an income inclusion of the amount of salary so converted.

XXXXXXXXXX 2005-011568
Kathryn McCarthy, CA
April 4, 2005

Dear XXXXXXXXXX:

Re: Income Allocation to a Flexible Employee Benefit Program

We are writing in response to your letter of February 3, 2005, concerning the above noted subject.

You described a situation where, once a year, an employee can allocate certain income to either a health spending account that is a private health services plan (PHSP) or to a flexible spending account that is not a PHSP. You enquired as to whether or not either of these allocations will reduce the employee's income under the Income Tax Act (the Act).

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following comments.

In our view, the conversion or allocation of any portion of an employee's salary to a health care spending account will result in an income inclusion of the amount of salary so converted. Thus, if an employee forgoes an amount to which the employee is or will become entitled, the amount of remuneration forgone is included in income in the year in which the amount is 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 and wages.

For more information consult Interpretation Bulletin IT-529, Flexible Employee Benefit Programs, which is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it529/README.html (in particular paragraphs 3 and 9) and IT-339R2, Meaning of private health services plan, at http://www.cra-arc.gc.ca/E/pub/tp/it339r2/README.html.

We trust our comments will be of assistance to you.

Yours truly,

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