2007 Ruling 2006-0211191R3 - Flexible Employee Benefit Program

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 credits under a flex plan that are allocated in lieu of scheduled days off that were lost as a result of the implementation of the new plan will, in and of itself, result in an income inclusion for the employee pursuant to either subsection 5(1) or paragraph 6(1)(a).

Position: No.

Reasons: The allocation of flex credits falls within the guidelines for flex programs set out in IT-529 because there is a valid renegotiated employment contract in place for the new plan. Further, the employee may choose to replace the former scheduled days off with the same number of days off under the new plan, with the only change being that the days are not available for carry over to another year.

XXXXXXXXXX 									2006-021119

XXXXXXXXXX, 2007

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 above-noted XXXXXXXXXX corporation in connection with the implementation of a new flexible employee benefit program, and further information submitted on XXXXXXXXXX.

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.

Definitions

1. "The Province" is the province of XXXXXXXXXX.

2. The "Council" is the XXXXXXXXXX.

3. The "Guidelines" are the mandate of the Council for no net increases in compensation. The Guidelines provide that any increase in salary must be offset by a similar reduction in costs in another component of the overall compensation plan.

4. The "Corporation" is XXXXXXXXXX.

5. The "Employee" is an employee who is a manager of the Corporation.

6. The "New Plan" is a flexible benefit plan for Employees proposed by the Corporation.

7. The "Flex Credits" are notional amounts available under the New Plan that can be allocated by Employees among various Benefit Options.

8. "Benefit Options" are taxable and non-taxable choices available to Employees under the New Plan that can be selected with the Flex Credits.

9. "Days Off" is a Benefit Option under the New Plan that will allow Employees to take up to XXXXXXXXXX days off with pay, in addition to regular vacation time.

10. The "Program Guide" is the booklet that describes the Benefit Options for Employees under the New Plan.

11. The "Plan Year" of the New Plan is the calendar year.

12. "SDO" is the scheduled day off component of the compensation plan in place prior to implementation of the New Plan.

13. "HSA" is a proposed health care spending account that will provide Employees with the option to obtain supplementary health benefits under the New Plan.

14. A "PHSP" is a private health services plan as defined in subsection 248(1) of the Act.

Our understanding of the relevant facts, proposed transactions and the purposes of the proposed transactions is as follows:

FACTS

15. The Corporation was created in XXXXXXXXXX pursuant to the Province's XXXXXXXXXX exempt from income tax under section 149 of the Act.

16. The Corporation's address is XXXXXXXXXX.

17. The Corporation files income tax returns at the XXXXXXXXXX Taxation Centre and its Tax Services Office is XXXXXXXXXX.

18. The Corporation's business number is XXXXXXXXXX.

19. XXXXXXXXXX.

20. The Corporation currently has a compensation plan that allows Employees to take XXXXXXXXXX SDO's a year with pay, in addition to regular vacation time. Prior to XXXXXXXXXX, if Employees did not use all of their SDO's, they were permitted to bank the unused time at the end of each year and use it in subsequent years.

21. The Corporation periodically reviews and revises its benefits package and salary levels in order to attract and retain quality Employees. Since XXXXXXXXXX, the Council has been pressuring the Corporation to cancel the SDO program, in part because the Corporation must accrue a liability for accounting purposes to reflect the banked SDO time and corresponding salary increases in the future.

22. After extensive negotiations, a new compensation plan was developed that resulted in the discontinuance of the banking and accrual of SDO's effective XXXXXXXXXX, and in consideration for which the Council approved a general wage increase of XXXXXXXXXX% for all Employees.

23. From XXXXXXXXXX to XXXXXXXXXX, the Employees were given XXXXXXXXXX SDO's each calendar year, which expired if they were not used by XXXXXXXXXX of the calendar year in which they were given.

PROPOSED TRANSACTIONS

24. Due to the cancellation of the SDO program, the Corporation proposes to implement the New Plan effective XXXXXXXXXX. The elimination of the SDO program will be prospective only and the banked SDO's as at XXXXXXXXXX will not be affected.

25. Each year, the Corporation will calculate and create an individual spending account of Flex Credits for each Employee. The Flex Credits will include amounts equal to the value of:

(i) the XXXXXXXXXX SDO's lost through the implementation of the New Plan (thus allowing an Employee to choose XXXXXXXXXX Days Off); and

(ii) the most generous options for extended health and dental benefits, life insurance and long-term disability.

26. Under the New Plan, each Employee will be able to allocate his or her Flex Credits to the Benefit Options, according to a pre-determined price list. Benefit Options will include:

a) insured health and dental benefits under a PHSP;

b) long-term disability coverage under a "group sickness or accident insurance plan" as described in subparagraph 6(1)(a)(i) of the Act;

c) life insurance coverage included in an Employee's income as a taxable benefit;

d) Days Off;

e) supplementary health and dental benefits provided under the HSA; or

f) a cash payment.

Employees must first allocate Flex Credits to items a) to d) above. Remaining Flex Credits can then be allocated to items e) and/or f)

27. The Employee will be paid for the Days Off chosen as part of the Employee's salary in the pay period that the time off occurs and will be subject to regular payroll deductions for income tax, employment insurance premiums and Canada Pension Plan contributions. Employees who elect to take Days Off but fail to use them by the end of the Plan Year will forfeit their Days Off. Unlike regular vacation days not taken by year-end, unused Days Off will have no cash out option. Accordingly, any days Employees take off will be drawn first from their elected Days Off. If an Employee stops working for the Corporation, the Employee will forfeit any selected but untaken Days Off.

28. If an Employee chooses the Benefit Option of cash, the Employee will be paid the cash bi-weekly with regular pay and the cash amount will be included in employment income.

29. The HSA will be a PHSP administered by XXXXXXXXXX. All expenses reimbursed through the HSA will qualify as eligible medical and dental expenses pursuant to subsection 118.2(2) of the Act and will be expenses of either an Employee or an Employee's dependant, as defined in subsection 118(6) of the Act.

30. Any allocated but unused Flex Credits in the HSA will be forfeited at the end of the Plan Year. For example, if an Employee allocated $500 in Flex Credits to the Employee's HSA for XXXXXXXXXX and uses only $300 in the XXXXXXXXXX Plan Year, the remaining $200 will be forfeited. Eligible medical and dental expenses, however, will carry forward for one Plan Year. For example, excess expenses from an Employee's XXXXXXXXXX Plan Year will carry forward to the XXXXXXXXXX Plan Year and be eligible for reimbursement using the Employee's Flex Credits allocated to the Employee's XXXXXXXXXX HSA.

31. Employees may purchase additional benefits such as critical illness insurance, life insurance and accident insurance at an Employee's expense through payroll deductions.

32. The Corporation will provide each Employee with the Program Guide and an opportunity to attend an information session on the New Plan. Employees will also have access to online benefit and claims information provided by XXXXXXXXXX and intranet Employee self-service pages, which include information on the New Plan.

33. The New Plan will allow Employees to irrevocably elect to allocate Flex Credits to Benefit Options on an annual basis. Elections for the XXXXXXXXXX Plan Year were made prior to the issuance of this advance income tax ruling, but subsequent to the request for the ruling, between XXXXXXXXXX and XXXXXXXXXX. Enrolment for the XXXXXXXXXX and subsequent Plan Years will be made by XXXXXXXXXX preceding the Plan Year.

34. The selection of coverage for a Plan Year from the Benefit Options will be irrevocable except where changes in family status occur. To the extent coverage based on Employee elections can be provided at a price below the value of the dedicated Flex Credits, the "experience gain" will be realized by the Corporation and will not be paid out in cash to the Employee or used to increase the amount of Flex Credits available under an HSA.

35. Salary and wage rates for a Plan Year will be set by the Corporation and communicated to Employees towards the end of the immediately preceding calendar year. For the XXXXXXXXXX Plan Year, there was no salary or wage reduction. The Corporation will, on its own initiative and without consultation with individual Employees, adjust salary and wage rates by an amount bearing some relationship to the cost of benefits under the New Plan. However, any salary reductions relating to the ongoing operation of the New Plan will be minimal, if any, and only to the extent of the increased cost of insurance and will be applied consistently to all Employees. The Employees' only input in determining the amount of the salary adjustment would be through the selection of a level of coverage under the New Plan with a particular cost, which has been unilaterally determined by the Corporation. The new salary amount plus the notional value of the Flex Credits would, on average, equal the aggregate value of the previous year's salary, plus any merit or other increases, and the cost to the Corporation of the Benefit Options provided through the New Plan.

PURPOSES OF THE PROPOSED TRANSACTIONS

36. The main purposes of the Proposed Transactions are to enable the Corporation to contain its cost of providing benefits to the Employees and to provide Employees with greater flexibility in choosing those benefits.

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 were completed in the manner described above; and

c) There are no other transactions, which may be relevant to the ruling requested,

our ruling is as follows:

A. The allocation of Flex Credits under the New Plan in lieu of the XXXXXXXXXX SDO's that were lost will not, in and of itself, result in an income inclusion for the Employee pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act in the taxation year in which the Flex Credits are allocated.

This ruling is 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 is binding on the CRA provided the proposed transactions were carried out before XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Except as expressly stated, this ruling does 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