2006 Ruling 2005-0163541R3 - 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: Under a health care spending account, 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 allocation of credits will not result in taxable employment income to the employees.

Reasons: Consistent with IT-529 and previous rulings.

XXXXXXXXXX 							2005-016354

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of XXXXXXXXXX (the "Company") employee health care expense account (the "HCEA").

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 are as follows:

Facts

1. The Company is a federal crown corporation. The fiscal year of the Company is XXXXXXXXXX. The Company's business number is XXXXXXXXXX.

2. 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 or to make changes to their benefits coverage each year. The plan year runs from 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.

3. The Company compensates their employees in the form of a base salary and annual bonuses. The amount of the bonus is based on the following components:

• The financial results of the Company for the fiscal year; and
• The achievement of their individual business goals and objectives and the extent to which they contributed to team goals and objectives.

4. The amount of bonuses are determined and declared following a determination of the Company's financial performance for the fiscal year. Payments of bonuses are made in XXXXXXXXXX respectively, following the end of the fiscal year.

5. To be entitled to the bonus, an employee must be employed by the Company on the date the bonus is paid. An employee who terminated employment prior to such date is not entitled to a bonus payment, subject to employment standards and labour laws.

6. The Company currently has an HCEA for its employees, effective XXXXXXXXXX of each year, which it uses to provide part of the insurance benefits discussed in paragraph 2 above. The HCEA qualifies as a "private health services plan", as defined in subsection 248(1) of the Act. All of the expenses reimbursed through the HCEA are qualified medical expenses under subsection 118.2(2) of the Act and are expenses of an employee or of the employee's "dependants", as that term is defined in subsection 118(6) of the Act.

7. Employees are entitled to enroll in the HCEA each plan year during the annual enrolment period, XXXXXXXXXX of the current plan year.

8. Unclaimed expenses during the plan year, in respect of an employee, may be carried forward to the next plan year and can be reimbursed from the subsequent plan year HCEA. The maximum carry forward of expenses is one year. Any unused balances in a plan year are not rolled over to the next plan year and are not payable in cash.

Proposed Transactions

9. The Company proposes to amend the HCEA so that employees will be entitled to apply all or a part of their annual bonuses towards additional credits in the HCEA.

10. The Company will credit the HCEA each plan year in accordance with elections made by each employee. For the first year of the program, 2006, the Company will credit the HCEA in accordance with elections made by each employee in XXXXXXXXXX of 2006 to allocate all or a portion of their bonus for the year, if any, into their HCEA. For all subsequent years, the Company will credit the HCEA in accordance with elections made by each employee during the annual enrolment period. Any election of bonus will be credited to the employee's HCEA on XXXXXXXXXX of each 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. The amount elected may be a lump-sum amount or a percentage of the bonus. In the event that the bonus payable is less than the lump-sum amount, the full amount of the bonus will be credited to the HCEA. If no bonus is payable, no amount will be credited to the employee's HCEA.

11. The election to participate and the amount allocated will be irrevocable. 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 are not entitled to any reimbursement of medical expenses.

12. The amount of bonus payable to an employee in XXXXXXXXXX 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.

Purpose of the Proposed Transactions

13. The Company wants to enhance its employee benefit program through 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

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 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.

B. When a bonus is declared in XXXXXXXXXX, the amount of the reduction in the 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 income under subsection 5(1) and paragraph 6(1)(a) of the Act.

C. 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 Canada Revenue Agency ("CRA") on May 17, 2002, and are binding on the CRA 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
Legislative Policy and Regulatory Affairs Branch