9 August 2011 External T.I. 2011-0404361E5 - Flexible Benefit Plans - Conversion of Salary

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 conversion of salary and/or vacation entitlements to flex credits after the initial commencement of a flexible employee benefits program would give rise to an income inclusion.

Position: Yes.

Reasons: As noted in IT-529, taxable employee entitlements such as vacation, salary, or the right to a salary increase may not be converted to non taxable benefits. Where a plan permits an employee to convert an amount of salary, wages or other taxable employee entitlement to something of value, the employee will be taxed on that conversion up to the amount of the cash received or the market value of the benefit received at the time of conversion in accordance with subsection 5(1) of the Act and IT-529.

XXXXXXXXXX 							2011-040436
								T. Baltkois
August 9, 2011

Dear XXXXXXXXXX :

Re: Conversion of Salary/Vacation to Flex Credits

I am writing in response to your letter of April 26, 2011 concerning flexible employee benefit programs. More specifically, you have requested general information on the application of the guidelines in Interpretation Bulletin IT-529, Flexible Employee Benefit Programs and have enquired whether the conversion of salary and/or vacation entitlements to flex credits after the initial commencement of a flexible employee benefits program would impact the tax status.

In the situation you described, an employee is enrolled in a flexible employee benefits program ("flex plan") upon the commencement of a new collective labour agreement. For a flex plan participant, salary and/or vacation are converted to flex credits on an annual basis according to a fixed formula. An employee may also opt out of the flex plan at the commencement of the collective labour agreement and participate in a traditional employee benefit plan instead. Where an employee exercises this option, flex credits are not allocated and the employee has a full income inclusion in respect of their salary and vacation entitlements at the time of payment.

If an employee is provided with a subsequent opportunity to participate in the flex plan on an individual basis during another plan year, you have requested confirmation as to whether the allocated flex credits would be taxable as income.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Subsection 5(1) of the Income Tax Act (the "Act") provides that an individual's income from an office or employment is the salary, wages and other remuneration, including gratuities, received by the individual in the year. Paragraph 6(1)(a) of the Act generally taxes the value of any benefits an individual may receive or enjoy in the year in respect of, in the course of, or by virtue of employment subject to certain listed exceptions. As described in IT-529, plans described as "flexible benefit plans" are not defined in the Act and although the Act does not contain provisions that specifically apply to these types of benefit plans as a whole, the design of such a flexible benefit plan must satisfy certain required administrative conditions in order to avoid adverse tax consequences for all benefits provided under the particular flexible benefit plan or arrangement.

As noted in IT-529, where flex credits have no redemptive value and nothing of value is forfeited by the employee to acquire such credits, the flex credits are considered to be notional amounts in that a flex credit has no intrinsic value by itself. In such cases, the allocation of flex credits by an employer would not, in and of itself, normally give rise to a taxable benefit in the hands of an employee.

However, taxable employee entitlements such as vacation, salary, or the right to a salary increase may not be converted to non-taxable benefits. If a flex plan permits an employee to convert an amount of salary, wages or other taxable employee entitlement to something of value (cash or other benefits), that employee will be taxed on the conversion up to the amount of the cash received or the market value of the benefit received pursuant to subsection 5(1) of the Act, at the time of the conversion. It is irrelevant whether the conversion occurs after the initial commencement of a flex plan.

We trust these comments will be of assistance to you.

Yours truly,

Phyllis Waugh
A/Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch