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 health spending account credits to a flexible benefits plan, which is linked to a bonus the employee may 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. There is an irrevocable election made prior to the plan year and prior to the employee being entitled to receive any bonus.
XXXXXXXXXX 2006-020738
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 on behalf of the following taxpayers:
XXXXXXXXXX.
The above named group of Canadian corporations (the "Corporate Group") propose certain changes to a flexible benefits program (the "Flex Plan"), which is available to the Corporate Group's 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 following members of the Corporate Group are located in XXXXXXXXXX and file their returns at the XXXXXXXXXX taxation centre ("TC") of the Canada Revenue Agency ("CRA"):
XXXXXXXXXX.
2. XXXXXXXXXX is also located in XXXXXXXXXX and files returns at the XXXXXXXXXX TC of the CRA. Its other BN is XXXXXXXXXX.
3. XXXXXXXXXX is located in XXXXXXXXXX and files its returns at the XXXXXXXXXX TC of the CRA. Its BN is XXXXXXXXXX.
4. XXXXXXXXXX is located in XXXXXXXXXX and files its returns at the XXXXXXXXXX TC of the CRA. Its BN is XXXXXXXXXX.
5. XXXXXXXXXX is located in XXXXXXXXXX and files its returns at the XXXXXXXXXX TC of the CRA. Its BN is XXXXXXXXXX.
6. The Flex Plan operates on a calendar year basis (the "Plan Year") and annual enrolment occurs in XXXXXXXXXX for each subsequent Plan Year. A Flex Plan document, which describes benefit entitlements under the Flex Plan, is provided to Employees who enrol.
7. One component of the Flex Plan is a health spending account (the "HSA"), which operates during the Plan Year. The HSA is a "private health services plan", as defined in subsection 248(1) of the Act. All expenses reimbursed through the HSA qualify as medical expenses pursuant to subsection 118.2(2) of the Act and are expenses of either an Employee or one of his or her "dependants", as defined in subsection 118(6) of the Act.
8. The Corporate Group has a variable pay program ("Variable Pay") for Employees. Variable Pay is one component of the Employees' total compensation and is paid in a lump sum.
9. Variable Pay is a percentage of a target amount and is based on corporate, business unit and individual Employee performance.
10. The Variable Pay program is discretionary and may be changed or discontinued at any time. To be eligible, an Employee must achieve a specified individual level of performance. If corporate or business unit performance does not exceed a specified level, an Employee will not be awarded Variable Pay. There is no minimum guaranteed amount of Variable Pay and an Employee may not be awarded any amount.
11. The performance measurement period for Variable Pay is the calendar year, with two opportunities for payout: mid-year (the "Mid-Year Payout") and year-end (the "Year-End Payout"). An Employee has no legal entitlement to the Year-End Payout until XXXXXXXXXX of the year performance is measured.
12. The Mid-Year Payout is calculated following a review of corporate and Employee performance from XXXXXXXXXX to XXXXXXXXXX. This calculation occurs in XXXXXXXXXX, and Employees are advised of the amount and paid in XXXXXXXXXX.
13. The Year-End Payout is calculated following a review of corporate and business unit performance for the year and Employee performance for the last XXXXXXXXXX months of the year. The calculation occurs in XXXXXXXXXX of the following calendar year, and Employees are advised of the amount and paid in XXXXXXXXXX or XXXXXXXXXX.
14. To determine the amount of the Year-End Payout, the amount of the Mid-Year Payout in respect of the corporate results is subtracted from the Year-End Payout. The portion of the Mid-Year Payout related to individual performance is not subtracted from the Year-End Payout.
15. If the Year-End Payout is less than the Mid-Year Payout received by the Employee, the Employee will not receive a Year-End Payout. In this situation, the Employee is not required to repay the difference between the Year-End Payout and the Mid-Year Payout (i.e., the Employee is entitled to keep the Mid-Year Payout, but is not awarded a Year-End Payout).
16. To be eligible, an Employee must be employed by the Company on XXXXXXXXXX of the year in which performance is being measured for a Mid-Year Payout, and for a Year-End Payout, on XXXXXXXXXX of the year in which performance is being measured. The exceptions are if employment is terminated due to death, disability, retirement or elimination of the position because of organizational change. In these situations the payout is pro-rated based on the period worked.
PROPOSED TRANSACTIONS
17. Various business units in the Corporate Group will be integrated into the Flex Plan and consequently certain changes are proposed to Variable Pay and the HSA for XXXXXXXXXX and subsequent years.
18. Eligible Employees will elect to allocate all or a portion of their Year-End Payout to the HSA. An Employee will not be permitted to elect to allocate any amount received as a Mid-Year Payout to the HSA.
19. The election by an Employee to allocate the Year-End Payout to the HSA, and the amount of the Year-End Payout to be allocated, will be irrevocable. It must be made at the time of the annual enrolment in the Flex Plan in the calendar year prior to the year in which the Year-End Payout is made. Employees elected in XXXXXXXXXX in respect of a Year-End Payout that relates to XXXXXXXXXX performance and which is to be paid in XXXXXXXXXX or XXXXXXXXXX.
20. The maximum amount of the Year-End Payout that an eligible Employee will be permitted to elect to allocate to the HSA is $XXXXXXXXXX.
21. If an Employee elects to allocate all (or part) of the Year-End Payout to the HSA, the Year-End Payout in XXXXXXXXXX or XXXXXXXXXX of the following calendar year will be reduced by the amount of the Employee allocation.
22. Unused balances in the HSA at the end of the Plan Year will be forfeited and will not be permitted to be carried forward or paid out in cash. Eligible expenses incurred in a Plan Year will only be permitted to be carried forward a maximum of one year and reimbursed in the subsequent Plan Year.
Purpose of the Proposed Transactions
23. The Corporate Group is making changes to its Flex Plan as part of the integration of additional business units into the Flex Plan. Providing Employees with the option to allocate Variable Pay to the HSA is one of the changes. It will provide greater flexibility for Employees and will help attract and retain Employees.
RULINGS
Provided that
a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes 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 irrevocable allocation that will be made by an Employee to allocate all or part of a Year-End Payout to the HSA as described above, will not, in and of itself, be considered income from employment pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act.
B. When the Year-End Payout is declared in XXXXXXXXXX or XXXXXXXXXX of the following Flex Plan Year, the Year-End Payout reduction due to the Employee HSA allocation will not be included in the Employee's employment income pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act.
C. Where an Employee has allocated all or part of a Year-End Payout to the HSA, no amount in respect of the Year-End Payout that has been allocated to the HSA will be deductible by a particular member of the Corporate Group until such amount becomes payable to the Employee under the terms of the HSA.
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
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