18 November 2008 External T.I. 2008-0272891E5 - Flexible Employee Benefit Program - TFSA

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: Can Tax-Free Savings Accounts be part of a flexible employee benefit program?

Position: Yes. Where an employee has either received cash for, or used flex credits to contribute to a TFSA, the amount would be included in an employee's income as salary or wages when it is received or deposited. Any amounts deposited into a TFSA would be subject to the rules governing TFSAs.

Reasons: IT-529, as well as comments in the technical notes.

2008-027289

XXXXXXXXXX Bruce Hartt

(613) 948-5273

November 18, 2008

Dear XXXXXXXXXX :

Re: Tax-Free Savings Accounts ("TFSA") and Flexible Benefits

This is in response to your facsimile of March 28, 2008, wherein you requested our comments on whether or not TFSAs can be part of a flexible employee benefit program wherein the employee can use flex credits to contribute to a TFSA or direct their employer to contribute the amounts to a TFSA on the employee's behalf.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

The Income Tax Act ("Act") does not contain provisions that specifically apply to flexible employee benefit 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 of the benefits provided under a plan. Whether or not a taxable benefit arises upon the employee's use of unused flex credits is dependent on the facts in each situation and as stated above, would only be considered in the context of an advance income tax ruling.

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". Although paragraph 24 of IT-529 provides comments with respect to flex credits and RRSPs, the comments could also apply to flex credits and TFSAs. Paragraph 24 states "that when an employee chooses, prior to the beginning of the plan year, to receive a portion of his or her flex credits in cash or deposited into an RRSP, the amount so received or deposited is included in the employee's income as salary or wages when it is received or deposited. If the amount is placed into a registered plan such as an RRSP or an RESP, the terms of which require contributions to be made by the planholder or subscriber, the employee is considered to have received the amount of flex credits allocated to that benefit option and must include that amount in income. In the case of a contribution to an RRSP, the employee is entitled to a deduction to the extent permitted under the rules governing RRSPs. Other benefits available under a Flex Program will be included in an employee's income in the same way as they would if offered separately from the plan."

With respect to whether or not flexible employee benefit programs can allow for employees to either contribute flex credits to a TFSA or direct their employer to contribute the amounts to a TFSA on the employee's behalf, it is our view, that if the election is made prior to the beginning of the plan year, an employee can choose to receive a portion of his or her flex credits in cash and deposit this amount into a TFSA, or have the employer contribute the amount to a TFSA on the employee's behalf. The amount so received or deposited would be included in the employee's income as salary or wages when it is received or deposited and would be subject to withholdings. The amount contributed to a TFSA will be subject to the rules and contribution limits governing TFSAs.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch