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 allocation of health care spending account credits to a flexible benefits plan, which is linked to a bonus the employee may receive, would result in employment income to the employee.
Position: No.
Reasons: The allocation of credits falls within the guidelines for flex plans set out in IT-529. There is an irrevocable election made prior to the plan year and prior to the employee being entitled to receive a bonus.
XXXXXXXXXX 2006-020888
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted company in connection with the implementation of a health care spending account, and additional information submitted in November and December.
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request:
(i) is in an earlier return of a taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of a taxpayer or a related person;
(iii) is under objection by a taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is 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.
Definitions
1. The "Company" is XXXXXXXXXX.
2. "Eligible medical expenses" are defined in subsection 118.2(2) of the Act and are expenses of the employee or the employee's "dependants" (as defined in subsection 118(6) of the Act).
3. "HSSA" is a health services spending account of an Employee.
4. "Incentive Plan" is an existing incentive award plan, described more fully as Plan A, B or C below, and "Incentive Plans" refers to all three collectively.
5. The "Plan Year" is the calendar year.
6. "Employee" is an individual employed by the Company.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
7. The Company is amalgamated under the laws of the Province of XXXXXXXXXX and is a "private corporation" as defined in subsection 89(1) of the Act.
8. The Company's business number is XXXXXXXXXX.
9. The Company has a fiscal year end of XXXXXXXXXX.
10. The Company files income tax returns at the XXXXXXXXXX Taxation Centre and its Tax Services Office is XXXXXXXXXX.
11. The Company provides Employees with medical and dental insurance, disability insurance, group life insurance and group sickness and accident insurance through a group benefits plan.
12. The Company compensates Employees with a base salary and annual incentive payments through the Incentive Plans, which have targets and goals that are set annually. The Incentive Plans are available to different categories of Employees. Each Employee participates in one of the Incentive Plans.
13. Incentive payments are generally made to eligible Employees who are employed on the date the payments are made. However, if an Employee dies, retires, becomes disabled or goes on maternity or parental leave, a pro-rata payment is made to the Employee or the Employee's estate in respect of the partial year in which the Employee was actively employed.
14. Incentive payments for Plans A and C are determined and paid to Employees in the first quarter of the calendar year following the particular Plan Year to which they relate, typically in XXXXXXXXXX. For Plan B, the criteria for measurement (other than Company performance) are assessed and payments are made twice per year, with one payment during the Plan Year and the second payment in the first quarter of the calendar year following the Plan Year.
15. Plan A is for Employees in eligible salaried positions at the Company's head office and administrative staff employed within defined position bands. Incentive payments have two components, the first based on Company financial results and the second on Employee performance.
16. Plan B is for eligible wage and hourly Employees who work in the manufacturing plants and distribution centres. Incentive payments are based on workplace safety, product quality, service, cost efficiency, facility specific goals, Company performance and Employee performance.
17. Plan C is for Employees in salaried sales positions. Incentive payments are based on territory profit and volume, individual market plans and team goals.
PROPOSED TRANSACTIONS
18. If a favourable advance income tax ruling is issued, the Company proposes to amend the Incentive Plans to provide for an HSSA effective XXXXXXXXXX, which will allow Employees to elect before the end of a Plan Year and the determination of the amount of their Incentive Plan payment for the Plan Year, to allocate some or all of that Incentive Plan payment to credits in their HSSA in the subsequent Plan Year. An arm's length third party will administer the HSSA and all expenses reimbursed through the HSSA will be eligible medical expenses.
19. Employees may elect in writing to enrol in an HSSA before the end of each Plan Year in respect of credits to be allocated to their HSSA in the immediately following calendar year and prior to the Company determining an amount otherwise payable to an Employee under an Incentive Plan for the Plan Year. Plan B Employees may only elect with respect to amounts payable during the first quarter of the following Plan Year.
20. Current Employees will be required to elect with respect to the Incentive Plans and their HSSA prior to XXXXXXXXXX and in subsequent years (with the exception of new Employees), Employees will be required to elect prior to XXXXXXXXXX of each Plan Year. For example, Employees with Incentive Plans for XXXXXXXXXX will be entitled to elect before XXXXXXXXXX to have credits allocated to their HSSA in the first quarter of XXXXXXXXXX with a corresponding XXXXXXXXXX Incentive Plan payment reduction in the first quarter of XXXXXXXXXX.
21. The election to participate for a particular Plan Year and the credits allocated will be irrevocable by the Employee.
22. On behalf of each participating Employee, the Company will credit their HSSA based on Employee elections. The credit to an HSSA shall be made at the time an incentive payment would otherwise be made to an Employee, in the first quarter of the calendar year immediately following the Plan Year in which the election is made. The credit will be equal to a maximum of the lesser of:
(a) the amount determined by the Company for the Plan Year in its sole discretion from time to time to a maximum of $XXXXXXXXXX per Employee per Plan Year; and
(b) the amount otherwise payable under the Incentive Plan in respect of the Employee for the Plan Year.
23. The amount payable to an Employee under an Incentive Plan for a Plan Year will be reduced by the amount the Employee has elected to allocate to his or her HSSA. An Employee will not be paid under an Incentive Plan for a Plan Year where his or her entitlement is less than or equal to the amount of credits which the Employee elected to allocate to his or her HSSA for the Plan Year.
24. The Company shall reimburse each participating Employee for eligible medical expenses incurred during the Plan Year in an amount not exceeding the credits made to the HSSA during the Plan Year plus any unused credits carried forward by the Employee from the immediately preceding year. No reimbursement for eligible medical expenses shall be made from the HSSA unless the Employee has available credits.
25. Credits made to an HSSA in a Plan Year, which are not used to reimburse eligible medical expenses incurred in the Plan Year or in the immediately following Plan Year, will be forfeited and have no cash surrender value.
26. Employees will be reimbursed for eligible medical expenses incurred while the Company employs them and anyone who ceases to be an Employee shall forfeit unused credits for which receipts have not been submitted to the Company within 30 days following the date the Employee ceases to be an Employee.
Purpose of the Proposed Transactions
27. The Company will enhance its Employee benefit program by adding the HSSA. The HSSA will provide greater flexibility in the benefit coverage of Employees and will help attract and retain Employees.
RULINGS
Provided that
a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions;
b) The proposed transactions are completed in the manner described above; and
c) There are no other transactions, which may be relevant to the rulings requested,
our rulings are as follows:
A. The HSSA's will be considered a "private health services plan" as defined in subsection 248(1) of the Act.
B. The irrevocable election that will be made by an Employee to allocate all or part of an Incentive Plan payment to an HSSA as described above, will not, in and of itself, result in an income inclusion for the Employee pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act.
C. When the Incentive Plan payments are determined by the Company in the year following a Plan Year, an Employee's Incentive Plan payment reduction caused by the HSSA allocation will not be included in the Employee's employment income pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act.
D. Payments by the Company or a third party administrator to reimburse an Employee for medical expenses under the terms of the HSSA will not be included in the employment income of the Employee pursuant to either subsection 5(1) or paragraph 6(1)(a) of the Act, by virtue of the exclusion in subparagraph 6(1)(a)(i) of the Act.
E. The Proposed Transactions will not, in and by themselves, cause an Employee's HSSA to be considered a "salary deferral arrangement" pursuant to subsection 248(1) of the Act.
F. Where an Employee has allocated all or part of an Incentive Plan payment to an HSSA, no amount in respect of the incentive payment that has been allocated to the Employee's HSSA may be deducted by the Company under the Act until the amount (subject to section 67) becomes payable to the Employee under the terms of the HSSA.
G. Pursuant to subsection 118.2(3) of the Act, there shall not be included as a medical expense of an Employee under subsection 118.2(1) any amount that the Employee is entitled to be reimbursed under the terms of the HSSA.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency (CRA) on May 17, 2002, and are binding on the CRA provided the proposed transactions are carried out before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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