2006 Ruling 2006-0197511R3 - Bonus - Employee Benefit Plan

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 the allocation of credits to a flex benefits plan, which is linked to the bonus the employee is entitled to receive, would result in employment income to the employee.

Position: No

Reasons: The allocation of credits falls within the guidelines for flex plans set out in IT-529 in that there is an irrevocable election made prior to the plan year and prior to the employee being entitled to receive any bonus.

XXXXXXXXXX 							2006-019751

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 on behalf of the above named company concerning a flexible benefits program (the "Flex Plan") that it is introducing for the Company's head office and XXXXXXXXXX employees (the "Employees").

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 Canadian corporation located in XXXXXXXXXX. Its tax account number is XXXXXXXXXX.

2. The Company files its returns at the XXXXXXXXXX taxation office of the Canada Revenue Agency ("CRA").

3. The Company compensates its Employees in the form of base salary and incentive pay. Incentive pay for an Employee is based on both the Company's success in attaining corporate objectives, and the Employee's success in attaining individual objectives in the applicable fiscal year.

4. The Company's fiscal year for XXXXXXXXXX is XXXXXXXXXX. The period for Employee's performance measurement for XXXXXXXXXX is the same as the fiscal year.

5. The amount of incentive pay, if any, to be awarded to 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. Employees are advised of the amount of incentive pay in XXXXXXXXXX following the end of the fiscal year.

6. The amount of incentive pay determined is paid to the Employees in the month of XXXXXXXXXX following the end of the fiscal year. There is no minimum guaranteed amount of incentive pay, and it is possible that an Employee may not receive any incentive pay in respect of a fiscal year.

7. An 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, subject to applicable labour and employment laws and whether the Employee has retired from active employment. For example, subject to the exception noted above, an Employee must be employed on XXXXXXXXXX to be eligible for an incentive payment in XXXXXXXXXX.

PROPOSED TRANSACTIONS

8. The Company is implementing a Flex Plan for the Employees effective XXXXXXXXXX. The following benefits will be available through the Flex Plan: medical insurance, dental insurance, disability insurance, group life insurance, group sickness and accident insurance, health care spending account, and purchase of additional vacation days (which must be used in that Flex Plan year, and may not be carried forward).

The Flex Plan year will be the calendar year. The enrolment date will be in XXXXXXXXXX prior to the commencement of the Flex Plan year. For the XXXXXXXXXX Plan year, the enrolment will take place in XXXXXXXXXX. In addition to the proposed Employee option discussed below, the employer will also allocate flex credits based on a percentage of an Employee's salary and a flat dollar amount.

9. The Company proposes to give Employees the option to direct that all or a portion of their incentive pay be allocated to the Flex Plan as flex credits. This option would be available commencing with the XXXXXXXXXX Flex Plan year and an Employee would be able to make such an election in XXXXXXXXXX. The amount elected by the Employee would be credited to a flex credit account from which the Employee could allocate the amount among the different options available under the Flex Plan.

10. The Company will credit the flex credit account each Flex Plan year to reflect the election made by each Employee in advance of the Plan year.

11. The amount of incentive pay that an Employee may elect to allocate to flex credits would be subject to a maximum of $XXXXXXXXXX.

12. The election by an Employee to allocate incentive pay to flex credits, and the amount of incentive pay to be allocated will be made in November of the fiscal year to which the incentive pay relates. Once made by the Employee, the election will be irrevocable and cannot be changed.

13. If an Employee elects to allocate incentive pay to flex credits, the incentive payment that will be made to such Employee in XXXXXXXXXX of the following fiscal year will be reduced by the amount that the Employee elected to allocate as flex credits.

14. Flex credits will be allocated among the various Flex Plan options at the enrolment date. An Employee has the option on the enrolment date to elect to receive flex credits that are not allocated among the various options as taxable cash to be received within the Flex Plan year. As a result, there will not be any excess flex credits at the end of the Flex Plan year (i.e., the Employee will have elected on the enrolment date to pay premiums, buy vacation days, allocate credits to the HSA or receive taxable cash).

PURPOSE OF THE PROPOSED TRANSACTIONS

15. The Company desires to enhance its employee benefit program by allowing Employees the option to allocate all or a portion of their incentive pay, up to the specified maximum, to flex credits.

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 rulings requested,

our rulings are as follows:

A. The allocation of incentive pay by an Employee to the Flex Plan as flex credits, as described in the preceding paragraphs, will not, in and of itself, be considered income from employment pursuant to subsection 5(1) or paragraph 6(1)(a) of the Act.

B. When the incentive payment is declared in XXXXXXXXXX of the Flex Plan year, the reduction in the incentive payment paid to the Employee to account for credits allocated to the Flex Plan 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.

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 the proposed transactions are carried out 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