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: 1. Whether the implementation of the New Plan will cause the New Plan to be considered an EBP, an ET, an RCA or an SDA pursuant to subsection 248(1). 2. Whether the election to allocate different Flex Credits under the proposed HSA including a potential $XXXXXXXXXX decrease in salary during the annual salary review will result in an amount being included in computing the Employee's income pursuant to sections 3 or 6, subsection 5(1) or paragraph 56(1)(a). 3. Whether the New Plan is a PHSP pursuant to subsection 248(1).
Position: 1. No. 2. No. 3. Yes.
Reasons: 1. The New Plan is not an EBP, an ET an RCA or an SDA. 2. The Flex credits are notional and the employee is required to make an irrevocable selection before the beginning of the Plan Year. Each employee will not be permitted to allocate HSA credits that will result in any more than $XXXXXXXXXX in notional credits being in the employee's HSA at the beginning of any Plan Year. 3. The New Plan is a PHSP.
Re: Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the above-noted company and an amended flexible benefit program for its current employees. This letter confirms rulings that were discussed in our telephone conversation on XXXXXXXXXX, in respect of transactions that were proposed at that time and implemented on XXXXXXXXXX. We also acknowledge the additional information supplied in subsequent e-mails and telephone discussions.
We understand that, to the best of your knowledge and that of the taxpayer 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.
1. The "Employer" is the XXXXXXXXXX.
2. The "CRA" is the Canada Revenue Agency.
3. The "Current Plan" is the current Employer's flexible employee benefits program, XXXXXXXXXX.
4. The "New Plan" is the proposed amended version of the Current Plan.
5. The "HSA" is the healthcare spending account.
6. The "Employees" are the current employees of the Employer.
7. The "Plan Year" is the calendar year.
8. "Flex Credits" are credits allocated to employees participating in the New Plan.
9. An "RCA" is a "retirement compensation arrangement" as defined in subsection 248(1) of the Act.
10. An "EBP" is an "employee benefit plan" as defined in subsection 248(1) of the Act.
11. An "ET" is an "employee trust" as defined in subsection 248(1) of the Act.
12. An "SDA" is a "salary deferral arrangement" as defined in subsection 248(1) of the Act.
13. A "PHSP" is a "private health services plan" as defined in subsection 248(1) of the Act.
14. A "Life Event" is a change in marital status, the birth or death of a child or the loss of insurance coverage under a spouse's employer's plan.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
15. The Employer is operating as XXXXXXXXXX.
16. The Employer is incorporated under the XXXXXXXXXX as a "not-for-profit organization".
17. No income tax is payable by the Employer pursuant to section 149 of the Act.
18. The address of the Employer is XXXXXXXXXX
19. The Employer's business number is XXXXXXXXXX.
20. The Employer files income tax returns at the XXXXXXXXXX Tax Centre and its Tax Services Office is located in XXXXXXXXXX.
21. The Employer's taxation year ends on XXXXXXXXXX.
23. The Employees are currently engaged in a contract with an indefinite term that provides for an annual salary review.
24. The Current Plan is a group plan and a PHSP. It is a plan in the nature of insurance that provides for the reimbursement of certain expenses that would qualify for a medical expense credit pursuant to subsection 118.2(2) of the Act.
25. The Employer intends to implement the New Plan for its Employees effective XXXXXXXXXX.
26. The Employer will provide each Employee with a copy of the New Plan document which will describe potential entitlements under the New Plan and will assist Employees in making their choices.
27. Flex Credits in the New Plan will be a notional amount which have no intrinsic value and will not be redeemable for cash. Nothing of value will be forfeited by the Employee to acquire such credits. In addition, the Flex Credits will not be transferable between different benefit options in the New Plan.
28. Prior to the beginning of the Plan Year, the Employer will allocate Flex Credits to each Employee. The allocation of Flex Credits by the Employer to its Employees will represent the Employer's contribution to benefits. The participating Employee will decide how to allocate the Flex Credits between a menu of various benefits under the New Plan.
29. There will be two components of the New Plan.
(a) An HSA, and
(b) Health and Dental group benefits.
These will be the only benefits offered under the New Plan. The Health and Dental group benefits will be available to all Employees. Only Employees with spousal group benefits will be eligible to opt-out of the Health and Dental group benefits. Employees who opt-out of the group benefits will still be able to enrol under the HSA.
30. The HSA will be made up of individual Employee accounts that provide for the reimbursement of any expense that would qualify for a medical expense credit pursuant to subsection 118.2(2) of the Act.
31. An Employee's contract will provide for an annual review of total compensation and benefits. The Employer will provide each Employee with an annual HSA survey and an opportunity to propose an ideal mix of HSA credits and annual salary on the basis of the total compensation available. The Employee will not be permitted to allocate HSA credits that will result in more than a $XXXXXXXXXX decrease in the annual salary that was paid in the previous year. Each employee will not be permitted to allocate HSA credits that will result in any more than $XXXXXXXXXX in notional credits being in the employee's HSA at the beginning of any Plan Year. The Employer will review the HSA surveys to determine if it is able to provide the proposed amounts within the total compensation structure. The Employer will either approve or modify the request and will issue each Employee an offer with the proposed salary, group benefits and HSA balances. The offer will be signed by the Employee upon acceptance and submitted to the Employer. The Employer will make the final decision with respect to an Employee's compensation package. There will be no renegotiation of salary during a Plan Year. An Employee will not be allowed to convert existing salary or other benefits such as vacation pay or bonus into an increased HSA balance during a Plan Year.
32. The HSA in the New Plan will be a plan of insurance and there will be a ceiling on the amount that can be claimed. The ceiling will differ for each Employee based on their employment contract. The HSA in the New Plan will allow for the carry forward of the unused allocation for a maximum period of twelve months. To the extent that the Employee does not use the allocation, it will be forfeited.
33. An Employee will not be allowed to transfer or withdraw any amount from the HSA. The HSA will not be redeemable for cash.
34. Each Employee will be required to make their selections with respect to their desired levels of coverage under the New Plan before the Plan Year begins, generally in November. The Employee's choices will be irrevocable for the Plan Year except for the occurrence of a Life Event or a change in employment status that is a change from part-time to full-time status or vice-versa. A change in an Employee's place of residence, which does not result in a change to the amount of Flex Credits allocated to the Employee, will not be considered a Life Event allowing for a change in New Plan choices. The changes to Flex Credits will only be available on a prospective basis.
35. The New Plan will permit an Employee to allocate Flex Credits to benefit options which are expected to be provided before retirement.
36. The Employer will segregate contributions to, and distributions from, each component of the New Plan.
Purpose of the Proposed Transactions
37. The New Plan will allow the Employer to deliver competitive benefits to Employees for development and retention purposes.
(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;
(c) There are no other transactions which may be relevant to the ruling requested; and
(d) The New Plan is implemented on XXXXXXXXXX,
our rulings are as follows:
A. The implementation of the New Plan will not, in and by itself, cause the New Plan to be considered an EBP, an ET, an RCA or an SDA pursuant to subsection 248(1) of the Act.
B. The New Plan will be considered a PHSP as defined in subsection 248(1) of the Act.
C. The allocation of additional Flex Credits under the proposed HSA or additional group health and dental benefits to an Employee will not, in and by itself, result in an amount being included in computing the Employee's income pursuant to sections 3 or 6, subsection 5(1) or paragraph 56(1)(a) of the Act.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, issued by the CRA on May 17, 2002, and are binding on the CRA provided the Proposed Transactions are carried out on or 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.
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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