3 June 2013 External T.I. 2012-0467271E5 - Flexible Benefit Plans - Election to Participate

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: 1) Whether the existence of a feature which allows employees to opt in a flexible employee benefit plan at various times would result in the taxation of the flex credits allocated to participating employees?

Position: 1) No.

Reasons: 1) IT-529. Where the design of a flexible employee benefit plan satisfies all of the administrative requirements detailed in IT-529, the existence of an opt in provision of the type described would not, in and of itself, result in the taxation of the flex credits so allocated.

XXXXXXXXXX
2012-046727
T. Baltkois

June 3, 2013

Dear XXXXXXXXXX:

Re: Flexible Benefit Plans

We are writing in response to your letter of October 21, 2012, in which you requested our comments as to whether the existence of a certain feature of a new flexible employee benefits plan ("flex plan") would result in the taxation of the flexible dollar credits ("flex credits") allocated to employees under that plan.

In the situation described, all employees will be enrolled in the flex plan upon the commencement of a new collective labour agreement, unless prior to the commencement of the initial plan year, the employee elects not to join the plan. The flex plan provides participating employees with a health insurance plan with benefits similar to those in the existing health insurance plan, a reduced entitlement to vacation, and flex credits based on a formula contained within the new collective labour agreement. The flex plan does not permit participating employees to convert salary or vacation into additional flex credits.

Employees who do not join the new flex plan will continue to participate in the existing health insurance plan, but will retain a one-time right to opt into the flex plan at a later date. An employee who chooses to exercise this right must do so prior to the commencement of a particular plan year and may not opt out of the flex plan once he or she has become a participating employee.

Our Comments

As described in Interpretation Bulletin IT-529, Flexible Employee Benefit Programs, flexible benefit plans or arrangements are not defined in the Income Tax Act ("the Act"). However, although the Act does not contain provisions that specifically apply to these types of plans as a whole, the design of such plans must satisfy certain conditions in order to avoid adverse tax consequences for all benefits provided under the particular plan or arrangement.

As noted in paragraph 7 of 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 with no intrinsic value. In such cases, the allocation of flex credits by an employer would not, in and of itself, generally give rise to a taxable benefit in the hands of an employee. However, taxable employee entitlements such as vacation, salary, and the right to a salary increase may not be converted to non-taxable flex credits.

Paragraph 9 of IT-529 differentiates between the conversion of existing employee entitlements and changes to employee entitlements which result from the renegotiation of a labour contract. More specifically, "when a contract of employment is renegotiated upon the expiry of a former employment contract to incorporate a decrease in the level of salary or wages to be paid to an employee over the term of the new contract and the new contract also provides for additional flex credits, the additional credits will not be required to be included in the employee's income as part of salary and wages". You have stated that the reduced vacation entitlement for employees participating in the flex plan would form part of the terms of the new collective labour agreement.

It is our view that where the flex plan otherwise satisfies all of the conditions detailed in IT-529, the existence of a feature which permits employees to join the plan on a prospective basis before the start of a particular plan year, in and of itself, would not result in the taxation of the flex credits allocated to participating employees.

We trust these comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch