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: Will the proposed benefits under a flex plan cause the arrangement to be an SDA, EBP or RCA?
Position: Question of fact; however, it appears that the proposed benefits under the flex plan are contrary to our positions stated in IT-529 and paragraph 6801(a) of the Regulations for purposes of the SDA rules.
Reasons: The proposed benefits allow the use of vacation past the year of purchase, and in some cases, permit a cash-out of unused leave upon termination and/or retirement, which is strictly prohibited. Further, the proposal does not ensure compliance with subparagraph 6801(a)(v) of the Regulations for purposes of a DSLP.
2007-023896
XXXXXXXXXX W. C. Harding
613-957-8953
September 13, 2007
Dear XXXXXXXXXX:
Re: Tax consequences of proposed benefits under a Flexible Benefit Plan
This is in response to your letter of May 30, 2007, in which you asked us to comment on the income tax implications with respect to certain benefits offered under a proposed flexible benefit program. Specifically, you have asked for our comments as to whether a particular flex plan would be considered an employee benefit plan ("EBP"), a retirement compensation arrangement ("RCA") or a salary deferral arrangement ("SDA") under the Income Tax Act (the "Act") where a plan offers the following benefits:
1. employees may be permitted to use their flex credits to acquire additional vacation time in excess of their normal entitlement and be permitted to carry forward any unused vacation time beyond the end of the plan year;
2. employees may be offered an "administrative leave" prior to retirement, or
3. employees may be able to cash-out the value of these unused vacation and "administrative leave" benefits upon termination and/or retirement.
The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. However, we are prepared to offer the following general comments that may be of assistance to you, but are not binding on the Canada Revenue Agency ("CRA"). Note that all publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.
The Act does not contain provisions that specifically apply to flex programs as a whole, and the specific design of each program must satisfy certain conditions in order to avoid adverse tax consequences for some or all benefits provided under the plan. Whether or not any particular plan would be considered an EBP, an RCA or an SDA for income tax purposes is a question of fact and would be dependent on the ultimate structure and design of each plan.
The CRA has provided some general guidelines with respect to the features of flexible benefits plans in Interpretation Bulletin IT-529 entitled "Flexible Employee Benefit Programs". Paragraph 23 of IT-529 specifically addresses the purchase of additional vacation time through the allocation of flex credits. As stated in that paragraph, it is CRA's view that to the extent the plan (other than a vacation pay trust as defined in paragraph 149(1)(y)) permits vacation leave so purchased to be carried forward to a subsequent plan year, the arrangement may be considered an SDA since the deferral of the vacation time postpones the tax payable which would otherwise be payable on that vacation. However, as stated above, this determination is a question of fact and would only be considered in the context on an advanced income tax ruling.
The second proposed benefit contemplated under the plan is to permit employees to take a period of funded leave of absence prior to retirement to determine whether the employee is, in fact, ready to retire. It is your view that this period of leave would comply with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations") and consequently this component of the plan would be considered a deferred salary leave plan ("DSLP"), except that an employee may decide, after the leave commences, not to return to work for the specified period.
In order for a particular plan to comply with paragraph 6801(a) of the Regulations, subparagraph 6801(a)(v) must also be satisfied. The purpose of subparagraph 6801(a)(v) of the Regulations is to ensure that a period of leave of absence from employment is a bona fide period of leave that is not followed by a subsequent retirement. Accordingly, where it is evident that an employee has not entered into a contractual obligation to return to work, the arrangement would not qualify as a DSLP and any deferred salary would be taxable in the year earned rather than in the year received.
Similarly, where an employee has the ability to cash-out any accumulated flex credits under a flexible benefit program for cash at any time, including upon termination and/or retirement, it is the CRA's view that the employee has a right to the amount at the time the flex credit is allocated and the SDA provisions of the Act will apply. As such, where an individual is allocated a flex credit that has a cash-out value, he or she has a right at the end of a year to receive an amount, payment of which is deferred, subsection 6(11) of the Act will require the individual to include the value of the deferred amount in income to the extent the amount was not included in the individual's income in the year or a prior year.
We trust this explanation will be of assistance to you.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content