2006 Ruling 2006-0169911R3 - Health Spending 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 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 for the employees.

Reasons: Consistent with IT-529 and previous rulings.

XXXXXXXXXX 						2006-016991

XXXXXXXXXX, 2006

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 Spending Account ("HSA").

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 Canadian corporation. Its tax account number is XXXXXXXXXX. The fiscal year of the Company is XXXXXXXXXX.

2. The Company files its returns electronically with the XXXXXXXXXX office of the Canada Revenue Agency.

3. The Company compensates its Management Employees in the form of base salary and incentive pay. Incentive pay is a percentage of a Management Employee's annual salary and is based on a Management Employee's degree of success in achieving corporate, divisional and individual objectives in the applicable fiscal year. The period for performance measurement for incentive pay is a fiscal year.

4. The amount of incentive pay, if any, to be awarded to Management Employees is determined following a review of the Company's financial performance for the fiscal year. This determination occurs in XXXXXXXXXX following the end of the fiscal year. Management Employees are then advised of the amount of incentive pay in XXXXXXXXXX following the end of the fiscal year.

5. The amount of incentive pay determined is paid to the Management Employees in the month of XXXXXXXXXX following the end of the fiscal year. There is no minimum guaranteed amount of incentive pay. A Management Employee may not be awarded any incentive pay.

6. A Management Employee must be employed by the Company on XXXXXXXXXX of the fiscal year to which the incentive pay relates in order to be eligible for an incentive payment in the following XXXXXXXXXX, unless: (a) the employee has been forced to retire by the Company during such year; or (b) the employee has been terminated without cause by the Company during such year. For example, subject to the exceptions noted in (a) and (b), an employee must be employed on XXXXXXXXXX to be eligible for an incentive payment in XXXXXXXXXX. In accordance with the exceptions in (a) and (b), if an employee was forced to retire by the Company or terminated without cause by the Company at any time during XXXXXXXXXX, he or she will also be eligible for an incentive payment in XXXXXXXXXX.

Proposed Transactions

7. If a favourable advance income tax ruling is issued, the Company proposes to introduce an amendment with respect to the payment of incentive pay to Management Employees.

8. Effective with the XXXXXXXXXX fiscal year, the Company proposes to give Management Employees the option, to be exercised prior to XXXXXXXXXX of the fiscal year to which the incentive pay relates, to direct that their incentive pay, if any, be allocated to a HSA. The proposed HSA is described below in paragraphs 12 to 14. The HSA plan year will coincide with the fiscal year.

9. The maximum amount that a Management Employee could elect to allocate to the HSA will be the lesser of XXXXXXXXXX% of a Management Employee's gross base pay or $XXXXXXXXXX.

10. The election by a Management Employee to allocate incentive pay to the HSA, and the amount of incentive pay, if any, to be allocated, will be irrevocable and the election must be made prior to XXXXXXXXXX of the fiscal year to which the incentive pay relates. For the XXXXXXXXXX fiscal year, the elections were made prior to XXXXXXXXXX.

11. If a Management Employee elects to allocate incentive pay to the HSA, the incentive payment to such employee in XXXXXXXXXX of the following fiscal year will be reduced by the amount that the employee elects to allocate as credits to the HSA.

12. If a favourable advance income tax ruling is issued, the Company proposes to introduce an HSA for its Management Employees, with effect retroactive from XXXXXXXXXX. The HSA is intended to qualify as a "private health services plan", within the meaning given that term in subsection 248(1) of the Act. All of the expenses reimbursed through the HSA will qualify as medical expenses within subsection 118.2(2) of the Act and must be expenses of the employee or of the employee's "dependants", as that term is defined in subsection 118(6) of the Act.

13. Management Employees will be entitled each year to elect the amount of incentive pay, if any, to be credited to the HSA. The election to allocate incentive pay, and the amount to be allocated, to the HSA will be irrevocable and will be made prior to the start of the HSA plan year.

14. Unused balances in the HSA 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 expenses incurred in that subsequent plan year. The maximum rollover of unused HSA credits will be one year. Any excess expenses in a plan year will not be rolled over to the next plan year. Unused HSA credits will not be payable in cash.

Purposes of the Proposed Transactions

15. The Company desires to enhance its Management Employee benefit program by adding the HSA. The HSA will help to provide more flexibility in the benefit coverages of its Management 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 HSA 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 HSA by a Management 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 incentive pay is paid in XXXXXXXXXX of the year following the plan year, the reduction in incentive pay to a Management Employee to account for the credits allocated to the HSA by the Management Employee will not be included in the Management Employee's employment income pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.

D. Any payments from the HSA to the Management Employee to reimburse the employee for medical expenses within the terms of the HSA will not be included in income, by virtue of 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 HSA 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