18 April 1996 External T.I. 9606655 - MANDATORY CONVERSION OF SALARY TO FLEX

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

mandatory conversion of salary to flex credits

Position:

conversion of salary to flex credits creates a taxable event at the time of the conversion

Reasons:

it is the employer's contribution to the various benefits described in p 6(1)(a) that is non-taxable -where those benefits are funded out of the employees' salary there is no reduction in the taxable amount of salary -the fact that the conversion to flex credits is mandatory does not preclude a finding that the employee has concurred with the redirection of salary

A. Humenuk
XXXXXXXXXX 960665

Attention: XXXXXXXXXX

April 18, 1996

Dear Sirs:

Re: Flexible Benefit Plans

We are replying to your letter of February 15, 1996 concerning the establishment of a flexible benefit plan.

You have asked whether we would apply the doctrine of constructive receipt to an employee when, as part of the initial implementation of a flexible benefit plan, the employer unilaterally redirects a percentage of the existing salary to fund a "flexible benefit credit pool."

A flexible benefit plan is an arrangement to provide employees with greater flexibility in respect of benefits provided as part of a compensation package offered by the employer. Under a typical plan, an employee may choose, within the limits set out in the plan, the level of benefits to be provided and is often entitled to take cash in lieu of benefits. As we understand the hypothetical situation you describe, the employer would unilaterally reduce the base salary of each employee by a specified percentage of salary which would then be allocated to each employee's share of the flexible benefit credit pool. There would be no increase in its overall compensation package.

Taxable employee entitlements such as vacation pay, salary or an existing right to an increase in salary cannot be redirected and used to purchase various benefits (whether or not taxable to the employee) without income tax consequences, at the inauguration of a plan or during the course of a plan. If a plan involves the unilateral redirection of taxable employee entitlements to fund employee benefits, the employee will be taxed on that amount of income, by reason of subsections 56(2) and 5(1) of the Act in the year that it is redirected. While you stressed the fact that the initial redirection of salary is mandatory and that the employee has no choice as to the amount of salary redirected to the flexible benefit credit pool, an employee typically has a degree of control over the amount of salary redirected by means of the choices made by the employee under the flexible benefit plan.

Notwithstanding our general comments as provided above, the tax consequences of any particular transaction or plan can only be determined on a case by case basis and depend on all the facts of a particular situation. Should you wish to request an advance income tax ruling on the proposed implementation of a particular plan, we are prepared to consider a request for a ruling on this issue.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch