24 February 2000 Internal T.I. 1999-0006570 - TEI XI PHSP

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

1999 TEI

QUESTION X1

Over many years, Revenue Canada has developed a number of administrative positions to which company benefit plans are required to adhere that are beyond the requirements explicitly imposed by statute. As a result of changes in company compensation policies and practices as well as the evolution of non-tax laws affecting pension and welfare benefit plans, many company benefit plans may not fit squarely within Revenue Canada's published administrative positions, even though the plans clearly satisfy the requisite statutory definitions for a plan. For example, Revenue Canada maintains the medical expenses paid by a "private health services plan" must qualify for the medical expense tax credit. That requirement, however, is not explicit in the definition of a private health services plan. As another example, many companies extended plan benefits to the same-sex partners of employees long before the courts agreed that same-sex partners qualify as a spouse for income tax purposes. Another example involves a plan that provides spousal benefits to a non-employee (whether or the same or opposite sex) where the employee and his or her partner have not cohabited for a period of 12 months.

Questions:

1. What administrative remedy (or sanction) will Revenue Canada apply to employer health and dental plans that do not satisfy all of the administrative requirements for a private health services plan? More specifically, what is the tax effect to the employee and the employer of being offside of Revenue Canada's administrative positions? Are the scope and frequency of the violations of the administrative positions relevant in determining the sanctions or remedies applied?

2. What is the legal basis for Revenue Canada's imposing a requirement that a "private health services plan" can only pay expenses that are otherwise eligible for the medical expense tax credit?

3. Has Revenue Canada considered establishing a program to permit established private health services plans that are in technical violation of Revenue Canada's administrative requirements to return to full compliance with all of the rules?

Response:

• In general terms, we look to the definition of a "private health services plan" in subsection 248 (1) the Act as the legal basis to support our position, that coverage can only be for hospital expenses, medical expenses or any combination thereof. It is our view that such expenses normally qualify as medical expenses under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit. This position has been published in paragraph 4 of IT-339R2, Meaning of "Private Health Services Plan."
• One notable exception to the foregoing, is for PHSPs that provide coverage for same sex couples. This came about as a result of the June 13, 1996, Tribunal Decision by the Canadian Human Rights Commission in the case of Stanley Moore and Dale Akerstrom. We expect that employers will require that employees in such a relationship will have to co-habit for at least 12 months before being eligible for medical benefits from their employer's PHSP. This would be the same requirement contained in the Act for common law spouses.
• If a particular plan provides coverage for expenses other than those described in subsection 118.2(2) of the Act, it is our view that the entire plan will not qualify as a PHSP. In such cases, the rules for "employee benefit plans" could apply. Employees are taxable on amounts paid out of an employee benefit plan. As well, an employer ordinarily may not deduct contributions for employees until they actually receive a corresponding benefit out of the plan.
• If an employer-sponsored plan which purports to be a PHSP is discovered to contain certain elements which would disqualify the plan, we will encourage the employer to consider a corrective course of action. This will likely include discussions with the plan administrator so that the plan may be modified as required, in order to maintain its status as a PHSP.
• When an employer wishes to provide non-qualifying benefits, in addition to those that do qualify, we will allow the employer to establish a separate plan, thereby preserving the more favourable income tax treatment for reimbursements of qualifying medical expenses.
• Where it is not feasible to set up two separate plans, we are prepared to treat the plan as two separate plans, provided that the plan administrator accounts separately for the non-taxable and the taxable portions.

Prepared by:

John Oulton
Section 25
957-2098

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