4 October 1999 External T.I. 9922475 - FLEXIBLE BENEFIT PROGRAMS

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: With respect to a flexible employee benefit program (the "Program") where the plan year commences on January 1, 2000, the employee's cost of the selected benefits are to be paid out of a bonus which the employee expects to receive in February of the year 2000. The employee selects the benefits in November of 1999 when there is a high degree of certainty that the bonus will be paid. We have been asked about the tax consequences of the selection of benefits in November of 1999 in relation to the funding of the benefits out of the bonus.

Position: We have provided some general comments and suggested that the submission of an advance income tax ruling be considered.

Reasons: It appears necessary to review the relevant facts and documentation before a final determination could be made.

XXXXXXXXXX 992247
M. Eisner

Attention: xxxxxxxxxx

October 4, 1999

Dear Sir:

Re: Flexible Employee Benefit Program (the "Program")

This is in reply to your facsimile of August 10, 1999 which is further to our letter of July 19, 1999.

You have asked us to consider a scenario where the plan year in respect of the Program, will commence on January 1, 2000. The employee's cost of the selected benefits are to be paid out of a bonus which the employee expects to receive in February of the year 2000. The employee selects the benefits in November of 1999 when there is a high degree of certainty that the bonus will be paid which will provide sufficient funds with respect to the employee's cost of the benefits.

You have asked about the tax consequences of the selection of the benefits in November of 1999 in relation to the funding of the benefits out of the bonus.

Our Comments

In the above scenario, it seems that the plan year would be the twelve month period which will begin on January 1, 2000. In our view, if the Program allows for a conversion of a bonus (taxable employment income) to fund the cost of non-taxable employment benefits paid by the employer after the plan year has commenced, there will be a concern about taxability at the time of conversion. As noted in paragraphs 8 and 9 of Interpretation Bulletin IT-529 "Flexible Employee Benefit Programs", a conversion of employment income will result in an employment income inclusion. It will be included in the employee's income when the conversion is made.

These comments reflect the Department's general position as set forth in the bulletin. As your situation involves a proposed transaction, we could offer more certainty if an advance income tax ruling request were to be submitted pursuant to Information Circular 70-6R3.

We trust that our comments are of assistance to you.

Yours truly,

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