25 November 1999 External T.I. 9928225 - PHSP OFFERED BY ADMINISTRATOR

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.

Principal Issues: Whether an arrangement between an employer and an administrator under which the former pays the latter an administrative fee to review employees' claims and reimburse them will qualify as a private health services plan, even though it does not involve a trusteed plan or insurance company.

Position: Question of fact.

Reasons: i) It must be a plan of insurance;
ii) it must reimburse only eligible expenses;

iii) benefits must be received by an employee-shareholder qua employee.

XXXXXXXXXX 	J. Gibbons
		5-992882
November 25, 1999

Dear XXXXXXXXXX:

We are replying to your letter of August 10, 1999, in which you requested our comments on your brochure concerning a "cost plus private health services plan" (the "plan") that you intend to market.

As requested, we have reviewed your brochure and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Further, we are unable to give an advance income tax ruling in respect of a "model plan" since, in these circumstances, all of the parties to the transaction cannot be identified. Thus, our comments are of a general nature only.

The term "private health services plan" ("PHSP") is defined in subsection 248(1) of the Income Tax Act. Under the definition, a plan must be a plan in the nature of insurance. In order to be considered a plan of insurance, it is our view that the plan must contain the following basic elements:

(a) an undertaking by one person,

(b) to indemnify another person,

(c) for an agreed consideration,

(d) from a loss or liability in respect of an event,

(e) the happening of which is uncertain.

Coverage under a plan must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit (see IT-519). For further information on these and other points concerning PHSP's,
we refer you to Interpretation Bulletin IT-339R2, "Meaning of 'Private Health Services Plan'".

Paragraph 6 of IT-339R2 indicates that a "cost-plus" plan is a plan in which the employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan. Further, such cost-plus plans normally consist of a contract between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing. It is our view that these types of cost-plus plans may qualify as PHSP's. However, as we understand it, the type of plan discussed in your brochure differs from such a cost-plus plan. Your plan would consist of an arrangement between an employer and your company under which the employer would pay your company, as administrator, 100% of its employees' eligible medical expenses plus a fee. You would review employees' claims, which would be submitted to you, and issue reimbursements. Although your plan does not involve a trusteed plan or insurance company, it is our view that this aspect would not in itself prevent it from qualifying as a PHSP. However, it is emphasized that the employer must have an obligation under the employment contract to reimburse the eligible medical expenses of its employees.

We also noted the fact that your brochure indicates that employees would be entitled for reimbursement of "any medical expenses that qualifies under the Income Tax Act". Although it is true that a PHSP may cover such expenses, a PHSP normally has a ceiling in respect of amounts that may be reimbursed. In our view, a plan that has no limits may be subject to section 67 of the Act. This section provides that, in order to qualify as a deduction from income, an outlay or expense must be reasonable in the circumstances

Although there were indications in your brochure that your plan would be marketed to corporations only, this should be made clearer since parts of the discussion in your brochure appear to be addressed to proprietors as well. In a letter dated April 28, 1999 (Interpretation #990415), we considered whether a plan that consisted of a contract between a proprietor and an administrator under which the administrator would reimburse the proprietor, his spouse and members of his household for medical and hospital expenses in return for a cost-plus fee was a "private health insurance plan." Our view, expressed therein, is that such a plan would lack some of the requisite elements of a plan of insurance. Specifically, there is no undertaking by one person to indemnify another person. Rather the proprietor in these situations assumes all of the risks for his or her own personal hospital and medical bills.

Your brochure outlines the income tax results of subscribing to your plan for both the business and the employees. You should be aware that when benefits are provided to employee-shareholders, the income tax results will depend on whether the benefits are received by the particular individual in his or her capacity as an employee or a shareholder. The income tax results in each case differ substantially. Your brochure does not discuss this very important point.

If it is necessary to be a shareholder in order to receive coverage under a particular corporation's plan, and employees who are not shareholders are not provided with similar coverage, it will normally be reasonable to conclude that the employee-shareholder has obtained the benefit by reason of his or her shareholdings and not by reason of employment. Thus, when a private health services plan is established for the benefit of the employee-shareholders of a corporation and excludes employees who are not shareholders, there is a general presumption that the benefit is received because of the individual's shareholdings rather than by reason of his or her employment. As a consequence, the exclusion for benefits derived from contributions by an employer to a private health services plan contained in subparagraph 6(1)(a)(i) of the Act would not apply, and the individual would be considered to be in receipt of a benefit taxable under subsection 15(1) of the Act. It also follows that the contributions made on the shareholder's behalf would not be deductible to the corporation.

On the other hand, when equivalent coverage under a private health services plan is extended to all employees, including the employees who are shareholders, the benefit provided to the employee-shareholders from such coverage is normally considered to be an employment benefit rather than a shareholder benefit. Similarly, when all employees of a corporation are shareholders and it is reasonable to conclude, based on the particular facts of the situation, that the private health services plan coverage has been provided as part of a reasonable remuneration package, the benefit from such coverage is also considered to be an employment benefit rather than a shareholder benefit. In such a case, the benefit is not included in the employee-shareholders' income by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act, and the corporate employer is entitled to a deduction in respect of the contributions made for such coverage, subject to any limitations imposed under the Act.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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