CRA Reverses Position on Bonus Allocation to Healthcare Spending - 15.03.2012

The CRA was satisfied as long as the credits were allocated to the HCSA at the beginning of the HCSA plan year and an appropriate adjustment was made to the HCSA credits, if the amount allocated was different from the actual bonus declared.

The CRA has reversed their position. Effective January 1, 2013, the dollar value of any credits allocated to a HCSA in place of a bonus is to be included in the employee’s employment income in the year in which the bonus is converted to credits. This reversal may effectively eliminate or reduce any advantage for an employee to choose their bonus in the form of HCSA credits instead of cash.

The CRA has contacted the employers who received an Advance Income Tax Ruling to advise them of their changed position. However, the CRA’s position also affects employers who did not request a formal Advance Income Tax Ruling and whose employees are replacing their expected bonuses with HCSA credits.

Plan sponsors who are allowing their employees to choose HCSA credits in place of a bonus should be advised of the CRA’s change in position. It may not be tax effective for employees to allocate their bonus to a HCSA. Any bonuses converted to credits on or after January 1, 2013 will be subject to income tax at the employee’s marginal tax rate