2000 Ruling 2000-0057363 - FLEX PLAN USING DEMUTUALIZATION PROCEEDS

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: Whether the establishment of a flexible benefit plan using the proceeds from the demutualization of life insurers where the proceeds relate to group insurance polices for the Taxpayer's employees will result in the employees being considered to have constructively received income. Some of these group insurance policies were employee-paid or cost-shared between the employees and the Taxpayer.

Position: No.

Reasons: The Income Tax Act contains specific rules to address the taxation of demutualization benefits. In some cases, there may be a flow-through of benefits to employees if the employer elects under subsection 139.1(16). However, where the employer does not elect, as in this case, the proceeds are to be taxed in the employer's hands pursuant to subsection 139.1(4).

XXXXXXXXXX 2000-005736

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") (XXXXXXXXXX)

We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Taxpayer.

To the best of your knowledge, and that of the Taxpayer involved, none of the issues involved in the ruling request is:

i. in an earlier return of the Taxpayer or a related person;

ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Taxpayer or a related person;

iii. under objection by the Taxpayer or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

v. the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1. The Taxpayer is a public corporation and a taxable Canadian Corporation for the purposes of the Act. The common shares of the Taxpayer are listed on the XXXXXXXXXX Stock Exchange.

2. The Taxpayer sponsors group benefit programs for its employees and has established a Flexible Benefit Plan (the "Existing Flex Plan") as part of these programs. The details of the Existing Flex Plan are described in an advance income tax ruling given on XXXXXXXXXX, 1996 (the "1996 Ruling").

3. As group policyholder of record, the Taxpayer received, in its XXXXXXXXXX taxation year, XXXXXXXXXX (the "demutualization proceeds") in respect of the demutualization of these insurers.

4. The Taxpayer has included the demutualization proceeds in income as a taxable dividend received in XXXXXXXXXX respectively in accordance with subsection 139.1(4) of the Act.

PROPOSED TRANSACTIONS

5. The Taxpayer proposes to establish a new and distinct Flexible Benefit Plan (the "Special Flex Plan").

6. The Existing Flex Plan will continue to operate independently of the Special Flex Plan. The Special Flex Plan will differ from the Existing Flex Plan with respect to the class of eligible participants, the manner in which the number of flex credits are determined, the options available, the plan year, and the manner in which the plan is communicated to participants.

7. The details of the Special Flex Plan will be communicated to employees and retirees through a communication letter and individualized election form delivered to each eligible participant.

8. Eligible participants in the Special Flex Plan will include active employees, retired employees, and surviving spouses of deceased former employees who:

XXXXXXXXXX.

9. Eligible participants will be awarded a flat amount of notional Special Flex Plan credits per year of service with the Taxpayer. XXXXXXXXXX.

10. Eligible participants will be required to make an irrevocable election before the beginning of the Special Flex Plan year. Participants must elect one of three options with respect to the application of their Special Flex Plan credits: a taxable cash payment, a taxable cash payment applied to the Taxpayer's Employee Stock Purchase Plan, or notional credits in a health services spending account (an "HSSA"). Participants who fail to complete their elections will be deemed by the Taxpayer to have elected to receive a taxable cash payment. Participants must apply all available Special Flex Plan credits to one of the three options and will not be permitted to carry forward any credits to another plan year.

11. Eligible participants who terminate employment with the Taxpayer (other than through retirement) before the beginning of the Special Flex Plan year will not be entitled to any benefit or payment from or in respect of the Special Flex Plan.

12. Eligible participants who elect the HSSA option will not be permitted to change their election in any event. Eligible participants cannot contribute their own funds to the HSSA.

13. The Taxpayer is not obliged, nor does it anticipate, at this time, awarding further Special Flex Plan credits with respect to future Special Flex Plan years. This absence of any obligation on the part of the Taxpayer will be clearly communicated to all eligible participants.

14. The following is a brief description of the three options under the Special Flex Plan:

(a) Cash

• Where an employee elects to receive cash, the amount of the cash payment will be paid in one lump sum, within weeks of the first day of the Special Flex Plan plan year.
• Lump sum payments will be treated as taxable income from employment under subsection 5(1) of the Act, subject to all regular source deduction and payroll withholdings and remittings as of the date paid.

(b) Cash and Application to the Employee Stock Purchase Plan

• Where an employee elects to apply his or her Special Flex Plan credits to the Employee Stock Purchase Plan, the nominal dollar amount of the credits will be used to acquire common shares of the Taxpayer from a prescribed stock exchange.
• The common shares will not be issued from treasury. An amount equal to the nominal dollar amount of the credits will be treated as income from employment and will be subject to all regular source deduction and payroll withholdings and reportings as of the date the shares are acquired.
• The Taxpayer will not subsidize nor match any share purchases through the Special Flex Plan.
• Eligible participants can choose to hold the stock directly or through a group registered retirement savings plan (RRSP).
• Where employees direct the Taxpayer to contribute the shares to a group RRSP, the Taxpayer will do so as agent for the employees.
• Where the Taxpayer contributes the shares to an employee's RRSP account, the value of the shares at the date of the contribution will be considered to be a contribution by the employee to an RRSP.

(c) Notional HSSA credits

• Notional Special Flex plan credits will be allocated to individual HSSA accounts. Eligible participants will be reimbursed by the Taxpayer for 100% of eligible medical expenses to the extent of the available HSSA credits (based on one notional dollar per notional HSSA credit).
• Eligible medical expenses will include only expenses incurred by the participant, or the participant's dependant as defined under subsection 118(6) of the Act, during a 20 month period beginning on the first day of the Special Flex Plan plan year.
• Eligible medical expenses will not include expenses incurred after or before this 20 month period. Eligible medical expenses will only include expenses that would otherwise have qualified as medical expenses under subsection 118.2(2) of the Act.
• Unused HSSA credits will be forfeited.
• An expense reimbursed through the Special Flex Plan will not be eligible for reimbursement under the Existing Flex Plan.

15. The HSSA will comply in all respects with the requirements of a private health services plan as described under paragraphs 14 through 17 of IT-529, IT-339, Meaning of "Private Health Services Plan" and subsection 248(1).

16. The Taxpayer has not and will not file an election under paragraph 139.1(16)(f) of the Act.

PURPOSE OF PROPOSED TRANSACTIONS

17. The Taxpayer has decided that employees and retirees should benefit from demutalization as an aid to retaining current employees and maintaining excellent employee, retiree and public relations.

18. It is the Taxpayer's view that through the Special Flex Plan, special benefits (such as those funded with the demutualization proceeds) can be delivered in the most advantageous form to the greatest percentage of the eligible participants on a cost effective basis.

RULINGS REQUESTED AND GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our rulings are as follows:

A. The establishment of the Special Flex Plan will not alter, compromise or in any way affect the tax consequences related to the Existing Flex Plan as described in the 1996 Ruling.

B. The allocation of notional Special Flex Plan credits to eligible participants will not, in and by itself, be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor a benefit received by the employee within the meaning of section 6 of the Act.

C. The allocation of notional Special Flex Plan credits to individual HSSA accounts will not, in and by itself, be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor a benefit received by the employee within the meaning of section 6 of the Act.

D. Payments made under the HSSA account to eligible participants as reimbursements for eligible medical expenses will not be considered a taxable benefit.

E. Payments made by the Taxpayer, under the Special Flex Plan, as lump sum cash payments, Employee Stock Purchase Plan share distributions, Employee Stock Purchase Plan RRSP contributions or reimbursements of eligible medical expenses under the HSSA will be fully deductible as business expenses in computing the Taxpayer's income for income tax purposes.

F. No amount will be considered to be constructively received by any eligible participant as a result of an election by the eligible participant to receive HSSA credits.

CAVEAT

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency has agreed to or reviewed the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate

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