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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 1. Whether health spending account offered to senior executives who are already covered by two other corporate group phsp's, would qualify as a phsp;
2. whether the allocation of credits, which is linked to the bonus the executive is entitled to receive, would result in employment income to the executives.
Position: 1. Plan would qualify as a phsp
2. Allocation of credits would not result in employment income to the executive.
Reasons: 1. The plan falls within the definition of phsp, and meets the guidelines set out in IT-529 for health spending accounts.
2. The allocation of credits falls within the guidelines for flex plans set out in IT-529 in that there is an irrevocable election made prior to the plan year, and prior to the executive being entitled to receive any bonus.
XXXXXXXXXX 2003-004517
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX ("XCo"). We also acknowledge the additional information provided on XXXXXXXXXX, and in our various telephone conversations (XXXXXXXXXX).
We understand that, 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 related persons,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or related persons,
(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 are as defined in the Act unless otherwise indicated. In addition, all references to PHSP in this ruling refer to a "private health services plan" as defined in subsection 248(1) of the Act.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. XCo currently sponsors a group benefits plan for all employees, which includes a PHSP that reimburses employees for eligible medical expenses, subject to the limits contained in the plan. The group benefits plan also includes group term life insurance, disability insurance, weekly indemnity, dental insurance, and accidental death and dismemberment insurance.
2. In addition, XCo also provides a Cost-Plus benefit account, which operates as a PHSP. This plan provides up to $XXXXXXXXXX per year of coverage for medical expenses (as defined in subsection 118.2(2) of the Act) that were either not covered by the basic plan, or outside the limits set under the basic plan for certain expenses.
3. Executives at XCo are compensated by way of regular salary and an annual bonus. The amount of the bonus is based on two components:
a. the financial results of XCo for the fiscal year ("Component A"), and
b. the achievement of personal goals and objectives set for each executive, as well as the results achieved by the unit or division for which the executive is responsible ("Component B").
4. The fiscal year of XCo runs from XXXXXXXXXX.
5. Component A accounts for XXXXXXXXXX% of the bonus, and the remaining XXXXXXXXXX% is derived from Component B.
6. The bonus plan for a fiscal year, which is approved by the Board of Directors in XXXXXXXXXX of that year, specifies the bonus formula (based on the performance of XCo) for each executive, used to calculate Component A for the fiscal year.
7. The targets and objectives for the executive and the unit or division for which the executive is responsible, which are used to determine Component B, are set in XXXXXXXXXX preceding the fiscal year.
8. In XXXXXXXXXX draft financial statements regarding the fiscal year just ended are available to senior management of XCo. The final audited financial statements are forwarded to the Board of Directors in XXXXXXXXXX for their approval.
9. The amount of bonus for the executives is then determined according to the formula set in XXXXXXXXXX of the previous year, and the President's assessment of their individual and unit performance against objectives. The Chairman of the Board performs a similar assessment to the President using the same timeframe. The Board of Directors reviews this material and approves the net income to be used for bonus purposes.
10. The bonus amounts are declared and paid out in XXXXXXXXXX, following the fiscal year.
11. Any bonus amount, regardless of individual or unit performance, is only payable if certain net income thresholds are achieved as determined by the Board in XXXXXXXXXX following the fiscal year.
12. The executives have no legal entitlement to the bonus until it is declared in XXXXXXXXXX following the fiscal year. In fact, regardless of their performance or the performance of XCo, if an executive is no longer employed by XCo at the time the bonus is declared, he or she will not be entitled to receive the bonus.
Proposed Transactions
13. XCo proposes to introduce a Health Care Reimbursement Account ("HCRA") effective XXXXXXXXXX. This HCRA is intended to operate as a PHSP.
14. Eligibility for membership in the HCRA is limited to persons occupying the positions of XXXXXXXXXX (the "Executives") of XCo.
15. The HCRA will have a plan year that runs from XXXXXXXXXX.
16. Each Executive participating in the HCRA (the "Participating Executive") will have the opportunity to elect whether to participate in the HCRA for the upcoming year.
17. A Participating Executive can choose the amount that XCo will credit to his or her HCRA for the upcoming plan year. The Participating Executive can choose any amount (in increments of $XXXXXXXXXX) from a minimum of $XXXXXXXXXX to a maximum of:
a. $XXXXXXXXXX, or
b. XXXXXXXXXX % of his or her salary,
whichever is less.
18. The allocation will be further limited to the amount of the bonus ultimately determined for the Participating Executive in XXXXXXXXXX of the plan year.
19. The election to participate and the amount allocated will be irrevocable and these elections must be made prior to the start of the plan year.
20. The amount of bonus payable to a Participating Executive in XXXXXXXXXX of the following year will be reduced by any amount that the Participating Executive has allocated as credits to his or her HCRA. A Participating Executive will not be paid any bonus in a year where his or her bonus is calculated to be less than the amount of credits allocated to his or her HCRA in the prior year.
21. A Participating Executive may seek reimbursement from his or her HCRA for any expense incurred by the Participating Executive during the plan year, which would otherwise have qualified as a medical expense of the Participating Executive under subsection 118.2(2) of the Act, and that would not otherwise be covered by the applicable provincial health care plan or any other PHSP, including the XCo plans described above.
22. Eligible expenses are restricted to expenses incurred on behalf of the Participating Executive or the Participating Executive's dependants, as that term is defined in subsection 118(6) of the Act.
23. A Participating Executive must submit a claim for reimbursement no later than XXXXXXXXXX days after the end of the plan year in which the expense was incurred.
24. If the reimbursable expenses for a Participating Executive in a year when he or she was participating in the plan exceed the credits available to the Participating Executive for that plan year, the expenses may be reimbursed from credits allocated to his or her HCRA for the immediately following plan year.
25. If a Participating Executive's reimbursable expenses for a plan year are less than the credits allocated to his or her HCRA then the remaining credits for that year are lost.
26. Once a Participating Executive has made his or her election for the upcoming plan year, it is irrevocable and the Participating Executive cannot subsequently change that election, nor may he or she take any of the credits in cash.
Purpose of the Proposed Transactions
27. XCo wishes to enhance its employee benefit program by adding the HCRA as an aid in retaining its current executives and attracting future executives. In addition, XCo recognizes that the needs of its executives and their families depend upon their individual circumstances, including such factors as family status, number of dependants, existence of alternate sources of coverage, etc. The HCRA will provide the executives with the flexibility to tailor their benefit coverage, within certain parameters, to best suit their needs.
RULINGS
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 provided further that the proposed transactions are carried out as described in paragraphs 13 to 27 above, our rulings are as follows:
A. The HCRA will be considered a "private health services plan" as that term is defined in subsection 248(1) of the Act.
B. The allocation of credits to the HCRA by the Participating Executive will not, in and of itself, be considered income from employment pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.
C. When the bonus is declared in XXXXXXXXXX of the year following the plan year, the reduction in the bonus paid to the Participating Executive to account for credits allocated to the HCRA by the Participating Executive will not be included in the Participating Executive's employment income pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.
D. Any payments from the HCRA to the Participating Executive to reimburse the Participating Executive for medical expenses within the terms of the HCRA will not be included in employment income, by virtue of the exception provided for by subparagraph 6(1)(a)(i) of the Act.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that participation in the HCRA will be offered to the executives before XXXXXXXXXX.
The 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.
Yours truly
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 5 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content