2008 Ruling 2007-0257631R3 - Health Care 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: Whether the creation and allocation of health care spending credits under the Company's flexible health care benefit plan, which is linked to a bonus the employee may receive, would result in employment income to an employee?

Position: No.

Reasons: The allocation of the credits takes place under a private health services plan as defined in subsection 248(1) of the Act and meets the administrative guidelines as described in IT-339R2 and IT-529.

XXXXXXXXXX 								2007-025763

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX - ("Aco") - BN XXXXXXXXXX
XXXXXXXXXX - ("Bco") - BN XXXXXXXXXX
XXXXXXXXXX - ("Cco") - BN XXXXXXXXXX
XXXXXXXXXX - ("Dco") - BN XXXXXXXXXX
Health Care Spending Account ("HCSA")

This is in reply to your letter of XXXXXXXXXX that we received on XXXXXXXXXX , and your other correspondence, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised that to the best of your knowledge, and that of the taxpayer, none of the issues involved in this Ruling is:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office (TSO) or taxation centre (TC) in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or if a judgment has been issued the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the taxpayer, that the proposed transactions will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and unless otherwise expressly stated every reference herein to a part, section or subsection, paragraph or subparagraph, and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the Regulations;

"arm's length" has the meaning assigned by subsection 251(1);

"Bonus Plan" means the annual or quarterly bonus plan used by Aco or Bco, as the case may be, or the annual bonus plan used by Cco or Dco, as the case may be, as described in Paragraphs 3 to 5;

"CRA" means the Canada Revenue Agency;

"Dependant" has the meaning assigned by subsection 118(6);

"Eligible Employees" are individuals who are either full-time or part-time employees of Aco or Bco, as the case may be, or individuals who are full-time employees of Cco or Dco, as the case may be, at the end of the particular year. Any one of the Eligible Employees is referred to as an "Eligible Employee";

"Eligible Medical Expenses" has the meaning assigned by subsection 118.2(2) and includes expenses of an Eligible Employee or of a Dependant of the Eligible Employee;

"HCSA" refers to the proposed health care spending account plan described in the Proposed Transactions;

"HCSA Administrator" means XXXXXXXXXX ;

"Paragraph" refers to a numbered paragraph in this advance income tax ruling;

"private health services plan" has the meaning assigned by subsection 248(1);

"Proposed Transactions" means the transactions described in Paragraphs 7 to 13; and

"taxable Canadian corporation" has the meaning assigned by subsection 89(1).

FACTS

1. Each of Aco, Bco, Cco and Dco (each also referred to as the "employer corporation" where appropriate) is a taxable Canadian corporation that is owned by XXXXXXXXXX ("US ParentXXXXXXXXXX . Each of Aco, Bco, Cco and Dco has a taxation year ending on XXXXXXXXXX and each files its tax returns at the XXXXXXXXXX TC and otherwise deals with the XXXXXXXXXX TSO.

2. Each of Aco, Bco, Cco and Dco provides its Eligible Employees with various insurance benefits including medical and dental insurance, disability insurance, group life insurance, and group sickness and accident insurance. All of these benefits are offered through a traditional benefit plan. Once an employee is enrolled in the benefit plan the employee's coverage remains the same unless a life event occurs (such as marriage) that requires the employee to make a change to his or her coverage or other agreed changes are introduced to the benefit plan.

3. Each of Aco, Bco, Cco and Dco compensates its Eligible Employees in the form of a base annual salary plus an incentive bonus arrangement (the "Bonus Plan"). The determination of the amount of an Eligible Employee's bonus is based on the financial results of the particular employer corporation for the particular bonus period as well as the achievement of the Eligible Employee's individual performance targets to the extent that they contribute to the goals and objectives of the employer corporation.

For example, for Eligible Employees who normally receive sales commissions, the amount of bonus under the Bonus Plan is based on whether certain pre-determined productivity targets, service standards, client calls and new business opportunities are met. If the measurement targets are not met, no bonus will be paid to such Eligible Employee for the particular bonus period. However, if the measurement targets are exceeded a larger bonus will generally be paid. It is anticipated that XXXXXXXXXX % of such sales employees will not receive a bonus in any given Bonus Year.

4. For certain Eligible Employees of Aco and Bco, under the Bonus Plan the amount of any bonuses are determined and paid on a quarterly basis.

In respect of Aco, the bonus for each quarter ending XXXXXXXXXX , respectively, is determined and paid as soon as possible following the completion of the particular quarter. In respect of the quarter ending XXXXXXXXXX (the "Final Quarter"), the bonus is determined after XXXXXXXXXX (the "Final Quarter Bonus") and such amount is paid on XXXXXXXXXX following the end of the Final Quarter.

In respect of Bco, the bonus for each quarter ending XXXXXXXXXX , respectively, is determined and paid as soon as possible following the completion of the particular quarter. In respect of the quarter ending XXXXXXXXXX (the "Final Quarter"), the bonus is determined after XXXXXXXXXX (the "Final Quarter Bonus") and such amount is paid on XXXXXXXXXX following the end of the Final Quarter.

5. For all other Eligible Employees of Aco and Bco whose bonuses are not determined and paid on a quarterly basis as described in Paragraph 4 and for all Eligible Employees of Cco and Dco, the amount of the bonus under the Bonus Plan is determined and paid annually ("Annual Bonus") based on the particular employer corporation's XXXXXXXXXX taxation year and with reference to the measurement criteria described in Paragraph 3. However, the amount of the Annual Bonus will be determined prior to the end of the particular employer corporation's taxation year and is paid by XXXXXXXXXX of that particular year.

6. Subject to employment standards and labour laws, in order for an Eligible Employee to be able to receive a bonus, the particular employee must generally continue to be employed by the particular employer corporation on the date that the bonus would otherwise become due and payable as described above.

PROPOSED TRANSACTIONS

7. Upon receipt of a favourable advance income tax ruling, each of Aco, Bco, Cco and Dco will amend the terms of their respective Bonus Plan to provide for a health care spending account plan ("HCSA") for its Eligible Employees effective XXXXXXXXXX . The proposed HCSA would allow an Eligible Employee to allocate all or a portion of his or her Final Quarter Bonus or Annual Bonus, as the case may be, towards credits in the HCSA for the following year.

8. The HCSA will cover only Eligible Medical Expenses of Eligible Employees and their Dependants. Where an Eligible Employee participates in the HCSA, any Eligible Medical Expenses of an Eligible Employee or a Dependant of such person will be reimbursed by the HCSA Administrator, subject to the amount of such Eligible Employee's available credits in the HCSA. Aco, Bco, Cco or Dco, as the case may be, will reimburse the HCSA Administrator for the cost of any eligible claims that were paid by the HCSA Administrator in respect of its own Eligible Employees plus a reasonable administration fee. The HCSA Administrator deals at arm's length with each of Aco, Bco, Cco and Dco.

9. Generally speaking, the HCSA will require an Eligible Employee to make an irrevocable election before October 1 of the particular employer corporation's taxation year and before the determination of the amount of his or her Final Quarter Bonus or Annual Bonus, as the case may be. In the irrevocable election, the Eligible Employee will have to specify the amount of his or her Final Quarter Bonus or Annual Bonus, as the case may be, to be allocated as credits under the HCSA. The actual allocation of credits under the HCSA will take place following the end of the particular employer corporation's taxation year in which the irrevocable election was made and after the bonus is determined and becomes payable. An Eligible Employee will be able to use such allocated HCSA credits for any Eligible Medical Expenses incurred in the Eligible Employee's taxation year in which the HCSA credits were so allocated.

For greater certainty, in respect of Eligible Employees of Aco and Bco who are entitled to quarterly bonuses, such employees will also be required to make the irrevocable election prior to XXXXXXXXXX of the taxation year in which the particular Final Quarter commenced. In these circumstances, such HCSA credits will only be allocated once the amount of the particular Eligible Employee's Final Quarter Bonus has been otherwise determined and becomes payable as described in Paragraph 4.

Since an Eligible Employee wanting to participate in the HCSA is required to enrol in the HCSA prior to the determination of his or her Final Quarter Bonus or Annual Bonus, as the case may be, for the XXXXXXXXXX and each subsequent year an Eligible Employee will be required to enrol in the HCSA and make the irrevocable election before XXXXXXXXXX of each such year.

10. The maximum amount of bonus that can be allocated as HCSA credits under an Eligible Employee's irrevocable election described in Paragraph 9 is limited to the amount of his or her Final Quarter Bonus or Annual Bonus, as the case may be. In addition, in no case will any allocation of HCSA credits be able to exceed $XXXXXXXXXX in a particular year. For greater certainty, Eligible Employees of Aco and Bco who receive bonus pay on a quarterly basis as described in Paragraph 4 will not be permitted to elect to allocate any amount of bonus pay for any quarter other than the Final Quarter Bonus.

11. Where an Eligible Employee irrevocably elects to allocate all or a portion of his or her Final Quarter Bonus or Annual Bonus, as the case may be, as credits under the HCSA the amount of that Eligible Employee's bonus pay for that period, as otherwise subsequently determined, will be reduced by the amount of the particular Eligible Employee's HCSA credit allocation.

12. The credit allocation under the HCSA will only be effective once the amount of an Eligible Employee's Final Quarter Bonus or Annual Bonus, as the case may be, has been determined and would otherwise become payable to the particular Eligible Employee as described in Paragraphs 4 or 5. Moreover, the allocation of the credits under the HCSA will only be done in respect of Eligible Employees who are still employed by the particular employer corporation on the date that such Final Quarter Bonus or Annual Bonus, as the case may be, would otherwise become payable as described above. For example, where an Eligible Employee had elected to allocate credits to the HCSA for the particular year but his or her employment with the particular employer corporation ended after the election was made and prior to the time his or her Final Quarter Bonus or Annual Bonus for that year, as the case may be, becomes payable no credits would be allocated to such person's HCSA and any bonus, to the extent that it would otherwise be payable, would be paid in cash.

13. Unused HCSA credits in an Eligible Employee's HCSA at the end of the Eligible Employee's taxation year in which the credits were initially allocated as described in Paragraph 9 may only be carried forward to the next immediately following taxation year after which such unused HCSA credits will be forfeited. In no case can HCSA credits be exchanged for cash. Eligible Medical Expenses of an Eligible Employee for a year that exceed that amount of available HCSA credits for that particular year will not be permitted to be carried forward to a subsequent year.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. Each of Aco, Bco, Cco and Dco would like to enhance the existing employee health benefit plan through the HCSA. The HCSA will help provide more flexibility in the benefits coverage for their employees. The HCSA will also assist in the attraction and retention of employees.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are set forth below.

A. The HCSA to be implemented by each of Aco, Bco, Cco and Dco as described in the Proposed Transactions will be a private health services plan.

B. Provided an Eligible Employee's irrevocable election to allocate all or a portion of that Eligible Employee's Final Quarter Bonus or Annual Bonus, as the case may be, to credits under the HCSA for a particular year is made as described in Paragraph 9 and such allocation respects the $XXXXXXXXXX annual limit described in Paragraph 10, such election will not, in and of itself, result in an income inclusion pursuant to either subsection 5(1) or paragraph 6(1)(a).

C. Payments by Aco, Bco, Cco and Dco, as the case may be, to reimburse the HCSA Administrator or by the HCSA Administrator to reimburse an Eligible Employee's Eligible Medical Expenses under the terms of the HCSA will not be included in the employment income of the Eligible Employee pursuant to either subsection 5(1) or paragraph 6(1)(a), by virtue of the exclusion in subparagraph 6(1)(a)(i).

D. Where an Eligible Employee has allocated all or portion of his or her Final Quarter Bonus or Annual Bonus, as the case may be, as credits under the HCSA for the particular year as described in the Proposed Transactions, no amount may be deducted by the particular employer corporation under the Act in respect of such HCSA allocation until the particular employer corporation becomes legally obligated to reimburse the HCSA Administrator for an amount of Eligible Medical Expenses under the terms of the HCSA. Any such deduction will be subject to section 67.

E. Pursuant to subsection 118.2(3), there shall not be included as a medical expense of an Eligible Employee under subsection 118.2(1) any Eligible Medical Expense for which the Eligible Employee is entitled to be reimbursed by the HCSA Administrator under the terms of the HCSA.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX . The above rulings are based on the law as it presently reads and does not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above ruling, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any goods and services tax consequences, provincial income tax consequences or any other tax consequences relating to the facts or proposed transactions other than those specifically described in the ruling given above.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch