11 January 1990 Income Tax Severed Letter 5-8980 - [Taxation of Flexible Benefits]

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.

REVENUE CANADA TAXATION Head Office

J.D. Jones (613) 957-2104

JAN 11 1990

Attention: XXXX

Dear Sirs:

Re: Taxation of Flexible Benefits

This is in reply to your letter of October 27, 1989, and further to our meeting of October 31, 1989, wherein you requested our opinion on a number of issues relating to the taxation of flexible benefit plans.

We will respond to your questions in the order in which they were posed.

1. In our view, an employee may not elect in advance of a calendar year to reduce his or her salary in the calendar year in order to contribute to a flexible benefits plan without having that portion of the salary imputed as taxable income in the calendar year.

2. An employee may not elect in advance of a calendar year to forego his or her anticipated salary increase or bonus payable in the calendar year, or a specified part thereof, without having the increase or bonus imputed as income in the calendar year.

3. Our answer to question 1 or 2 would not depend upon whether or not unused balances in the flexible benefits account at the end of the calendar year must be refunded in cash or forfeited since, in our opinion, taxable benefits (such as salary, bonuses or the right to a salary increase) may not be converted to non-taxable benefits.

4. It is our view an employee who has unused monies in his or her flexible benefits account at the end of a calendar year may roll the balance forward to the flexible benefits account for the following calendar year. The carry forward of any unused monies from one calendar year to the next would be applied to the same benefit within the flexible benefits plan from which the surplus arose. The election to roll the account balance forward should be made prior to the beginning of the particular calendar year. Once this account balance has been carried forward to a subsequent calendar year, it may not be taken out of the plan in cash and added to the employee's income. An election would have to be made by the employee prior to the beginning of the calendar year as to whether any current year contributions should be carried forward or refunded if in a surplus position at the end of the calendar year. Any previous year excess which had been carried forward would have to be used during the year or carried forward indefinitely to a subsequent taxation year or forfeited on the death, retirement or resignation of the employee.

5. An employee who has used monies in his or her flexible benefits account to purchase additional vacation days may not "bank" those vacation days to a following year. The year in which the employee has purchased the additional vacation days is the year in which the employee will be taxed on the monies used to purchase the additional vacation days.

6. In our view, an employee may elect, prior to the beginning of a calendar year, to carry forward a balance remaining at the end of the calendar year in a health care expense reimbursement account to the following calendar year without having the balance imputed as taxable income in the calendar year.

7. Employer-paid premiums to purchase life insurance for an employee's dependent under a flexible benefits plan are, in our view, deductible from business or property income of the employer. We also advise that payment of such premiums would be a taxable benefit to the affected employees.

8. Generally, employer-paid premiums to purchase accidental death and dismemberment insurance for an employee under a flexible benefits plan are deductible from the business or property income of the employer.

9. On the assumption that the contributions to a group mortgage plan will pay only the difference between the mortgage rate of interest and the rate of interest prescribed under the Income Tax Act (the "Act") we confirm our view that an employee may not elect in advance of a calendar year to reduce his or her salary, or to forego anticipated salary increases or bonuses in the calendar year in order to contribute to a group mortgage plan without having that portion of the salary imputed as taxable income in the calendar year.

10. You have asked if, in the event a flexible benefits plan is established such that monies are placed into an account to provide benefits other than health benefits within the meaning of a "private health services plan" pursuant to subsection 248(1) of the Act, the account would be treated as an "employee benefit plan" as defined in subsection 248(1) of the Act and whether the employer would be entitled to a deduction when the monies are deposited in the account or when the monies are used to provide benefits for the employees.

As discussed in our meeting of October 31, 1989, the answer to this issue is dependent upon the type of benefits which may be provided under the plan. Whether a flexible benefits plan may be considered an "employee benefit plan" within the meaning of subsection 248(1) of the Act is a question of fact which would be determined once all the particulars of a situation were known.

11. Where a member of a flexible benefits plan allocates funds for the lease or purchase of a personal computer, it is our view that all of the funds allocated to such purchase or lease would be a taxable benefit to the employee regardless of the fact that the personal computer may be used in part for business purposes.

12. Where funds are paid by the employer to the employee as a reimbursement for the cost of a purchase or lease of a personal computer in the situation described in 11 above, it is our view that the employer would be entitled to a deduction from business or property income for the amounts so paid.

13. Where a member of a flexible benefits plan allocates funds toward the payment of a parking space at his or her workspace the funds so allocated are a taxable benefit to the employee regardless of the fact that the employee may be required to have an automobile available for his or her employment.

14. Where a member of a flexible benefits plan allocates funds towards the payment of private day care facilities, the funds so allocated will result in a taxable benefit to the employee whether or not the day care facility is located on the employer's premises. We would also advise, however, that in the case where an employer has established an in- house child care facility or where an employer leases space to provide child care facilities to its employees, defrays all operating expenses of that facility and further makes such facility available to all employees gratuitously or for a minimal fee, it is our position that a taxable benefit would not arise in the hands of such employees.

15. As discussed at our meeting of October 31, 1989, we will not comment on the copy of the unnamed advance income tax ruling submitted with your letter.

We trust our comments will be of assistance to you.

Yours truly,

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch