Does your organization provide employees with a Health Care Spending Account (HCSA)? Are employees allowed to purchase additional credits or allocate the bonus to their HCSA and subsequently are not taxed on the bonus? If you answered yes to either or both of these questions keep reading as the Canada Revenue Agency (CRA) is changing its administrative policy on tax-free bonus allocations to a HCSA effective January 1, 2013.
Many Canadian employers commonly provide extended health and dental plans to their employees. Excluding Quebec, employer paid premiums for extended health and dental plans are not a taxable benefit to employees, provided the programs fall within the definition of a private health services plan (PHSP).
Section 248 (1) of the Income Tax Act provides the definition for a PHSP and the CRA’s Interpretation Bulletin IT-339R2 Meaning of private health services plan (http://www.cra-arc.gc.ca/E/pub/tp/it339r2/it339r2-e.html) provides additional guidance for employer’s on the treatment of such plans.
A private health services plan means:
(a) a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or
(b) a medical care insurance plan or hospital care insurance plan or any combination of such plans, except any such contract or plan established by or pursuant to;
(c) a law of a province that establishes a health care insurance plan as defined in Section 2 of the Canada Health Act, or
(d) an Act of Parliament or a regulation made there under that authorizes the provision of a medical care insurance plan or hospital care insurance plan for employees of Canada and their dependents and for dependents of members of the Royal Canadian Mounted Police and the regular force where such employees or members were appointed in Canada and are serving outside Canada.
IT-339 R2 provides additional clarification that a PHSP also includes contracts or plans that are either in whole or in part in respect of dental care and expenses. Some organizations choose to provide their employees with enhanced group insurance benefits including extended health and dental programs which may fall within the realm of a Health Care Spending Account (HCSA) or Flexible Benefits programs.
Generally speaking, a HCSA is plan or program that is comprised of individual employee accounts that provide for the reimbursement of eligible medical and dental expenses as defined by the terms of the plan. An organization’s HCSA may qualify as a private health services plan (PHSP) provided the plan involves a reasonable element of risk assumed by the employer as detailed in the CRA’s IT-529 “Flexible Employee Benefit Programs” (http://www.craarc.gc.ca/E/pub/tp/it529/it529-e.html).
If an organization’s HCSA does not qualify as a private health services plan, the amount of any benefit received out of the plan will be taxable to the employee. Although a Flexible Benefit Program is not defined within the Income Tax Act, the IT-529 also provides the following:
- Flexible Benefit programs can generally be described as a program of delivering company benefits where the employees are able to select the type and level of coverage from among a menu of available benefits. These programs are generally implemented to permit employees to build an individualized benefit program that most closely meets their coverage needs and budget requirements and to change their benefit elections over time as their life circumstances change.
As stated at the outset, as long as employers provide and pay premiums towards extended health and dental programs falling within the above guidelines for their employees (excluding Quebec), there is no taxable benefit enjoyed.
Under the terms of some HCSAs and employer obtained CRA rulings, employees have been permitted to redirect their bonus, or portion thereof, on a tax-free basis to obtain additional credits for their HCSAs. Put another way, CRA issued rulings stating that the allocation of credits to an HCSA in lieu of payment of a cash bonus would not result in employment income to the employee.
This income exclusion and tax-free relief is technically only available to those organizations that obtained a CRA ruling; however, it is likely that other businesses took the approach that the HCSA program they offered employees followed the same criteria outlined in the CRA issued rulings. Therefore these employers allowed for the tax-free treatment of bonuses provided the bonus was redirected to the HCSA to purchase additional credits.
However, CRA recently announced that they are officially changing their administrative position in this regard. It was at the Canadian Tax Foundation’s Annual General Meeting held in Montreal, QC on November 29, 2011, that CRA made the public announcement of their administrative change in position. CRA states that past rulings represented an extension of the administrative position found in IT-529 Flexible Benefit Plans and reflected the CRA’s views at the time the IT was issued – February 20, 1998.
Effective on and after January 1, 2013, any bonus to which an employee is or will become entitled will be included in income in the year in which the amount is converted to flex credits. The allocation of a bonus to obtain additional flex credits in a HCSA is an allocation of forgone cash remuneration and should be subject to tax.
CRA is contacting all those organizations that were issued rulings letting them know of their administrative policy change.
Therefore if your employer currently permits bonus allocations to a HCSA as tax-free, this practice must end by December 31, 2012.
However, the net amount of the bonus remaining after statutory deductions can still be directed to the HCSA if the plan permits and the employees so choose. We suggest employers be pro-active in this regard and inform employees now that as of January 2013 bonuses will no longer be permitted to be allocated to a HCSA on a tax-free basis.Categories: Articles