14 January 1992 External T.I. 9128165 F - Flexible Benefits Plan - Vacation Selling

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.

24(1)

Attention:  19(1)

January 14, 1992

Dear Sirs:

Re:  Flexible Benefits Plan - Vacation Trading

This is in reply to your letter dated September 30, 1991 wherein you requested that we clarify our position on vacation trading within a flexible benefits plan.

It is the Department's position that vacation trading is taxable to an employee under either subsection 5(1) of the Income Tax Act (the "Act") or paragraph 6(1)(a) of the Act when the employee foregoes his/her vacation entitlement in exchange for notional flexible credits in a flexible benefits plan. With respect to the application of subsection 5(1) of the Act, we would mention, for example, that where notional flexible credits are obtained by selling vacation entitlement which are then converted into cash through a cash-out feature in the plan, this subsection would apply as, in our opinion, the cashing-out of vacation constitutes salary, wages or other remuneration.

However, in situations where notional flexible credits are used entirely to purchase coverage or benefits available under a flexible benefits plan, it is our opinion that paragraph 6(1)(a) of the Act would apply to tax a benefit to the employee at the time the vacation entitlement is converted into flexible credits since vacation entitlement is something of value to the employee. It should be noted that the words contained in paragraph 6(1)(a) of the Act, which states that the value of "other benefits of any kind whatever" enjoyed by the taxpayer "in respect of, in the course of, or by virtue of" an office or employment be included in income, has been interpreted by the Supreme Court of Canada, in the case of The Queen v. Savage, 83 DTC 5409, as a phrase with the widest possible scope intended to convey some connection between two related subject matters.

In our opinion, the fact that an employee trades vacation entitlement for health related coverage, which would have been non-taxable to the employee by virtue of subparagraph 6(1)(a)(i) of the Act if his or her employer had made the contribution to the specific plans mentioned therein, does not render the trading of vacation entitlement non-taxable. It is the trading of vacation entitlement by the employee that triggers a taxable event and not the use of the flexible credits obtained. The specific exemption from employment income in subparagraph 6(1)(a)(i) of the Act is intended to apply in respect of benefits received or enjoyed by an employee from his employer's contribution to the specified plans and therefore does not apply in a situation where an employee purchases coverage under a plan mentioned in subparagraph 6(1)(a)(i) of the Act, through the use of vacation trading as the contribution is not made by the employer.

As stated above, in order to be exempt under 6(1)(a)(i) of the Act, the contributions to the relevant plan must be made by the employer. An employee's entitlement to vacation is the property of that employee. If the employee decides to convert it to something of value (cash or other benefits) the employee will be taxed on that conversion up to the amount of the cash received or the market value of the benefit received. In our view, it cannot be said that the employer has made a contribution where an employee converts something of value to that employee to flex credits which provide the basis for the contributions or benefits under the plan. It is the employee who made the contribution by converting what he or she otherwise had as an employee benefit to some other property of value (the flex credits). It would be similar to a situation where the employee makes his own premium payment to, say, a private health services plan. Such premiums are paid for by the employee with after-tax dollars since they are not deductible, whereas contributions to such a plan by the employer would not be a taxable benefit.

We trust the above comments adequately clarify the Department's position on this issue.

Yours truly,

P.D. Fuocofor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch