Originally from our sister publication, SmallBizAdvisor.ca.
The Canada Revenue Agency (CRA) has changed its position on the tax implications of employee bonuses directed to healthcare spending accounts (HCSAs). Employers that have or are considering HCSAs need to understand the significant change and how it affects their plans.
Read more: HCSA: What’s covered under CRA
A bit of background first. An HCSA provides for the reimbursement of eligible medical and hospital expenses to employees and their family members in accordance with the terms of the particular plan. So long as the HCSA qualifies as a “private health services plan” (PHSP) under the Income Tax Act (the ITA), employees are not taxed on the employer’s contribution made to the HCSA or the benefits received by the employee (or his/her family members) from the plan.
As a result, an HCSA is a very tax-effective means to provide hospital and medical benefits to employees.
Often, HCSAs are made available to employees as a component of a flex credits program. Under a flex credit program employees are given the opportunity to convert a bonus amount into “credits” which can be allocated to a HCSA, used to purchase other benefits (e.g., additional life insurance), or taken in cash.
Historically, credits directed to the HCSA were not taxed and benefits received from the HCSA are not taxed (again, so long as the HCSA qualifies as a PHSP). On the other hand, flex credits taken in cash are taxed as employment income and flex credits used for other benefits may or may not be taxed, depending on the benefit.
This past fall, the CRA announced that, effective Jan. 2, 2013, employees will no longer be able to redirect a portion of their bonus to an HCSA on a tax-free basis. The CRA’s new position is that a bonus directed to an HCSA must be taxed as employment income because it is forgone cash remuneration.
This change in CRA policy makes flex credit programs far less beneficial and tax-effective to employees. Employers that have existing flex credit programs will need to communicate these changes to employees.
Terra L. Klinck is a partner in the pension and benefits group with Hicks Morley Hamilton Stewart Storie LLP.