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 the benefits under two different flexible employee benefit plans are taxable.
Position: General comments provided since the question involves a finding of fact.
Reasons: It seems that one of the plans would be subject to the comments in paragraph 18 of IT-529, since the documentation indicates that the employees would pay for the medical coverage, on a pre-tax basis. The other plan relates to the 1998 Budget proposal, which provides an income tax deduction to individual sole proprietors and partners in respect of contributions to a “private health services plan.” In an interpretation dated April 28, 1999 (#E9904155), we gave general comments concerning a plan that consisted of a contract between a proprietor and an administrator, under which the administrator agreed to reimburse the proprietor, his spouse and members of his household for actual medical and hospital expenses and received, as consideration, an amount equal to the amount reimbursed plus an administrative fee. We gave the opinion that such a plan does not qualify as a PHSP since it did not contain the necessary elements of insurance.
XXXXXXXXXX J. Gibbons
5-991603
Attention: XXXXXXXXXX
August 3, 1999
Dear XXXXXXXXXX:
This is in response to your letter of May 30, 1999, in which you requested our views concerning flexible benefit plans that have health spending accounts, which apparently allow employees to contribute pre-tax dollars. You question whether these plans are valid and have included example documentation for two such plans.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where 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. The following comments are, therefore, of a general nature only.
Generally, our position concerning employee contributions to a health spending account has not changed. In this regard, we refer you to paragraph 18 of IT-529, Flexible Benefit Employee Benefit Programs. This paragraph states that there will generally be no advantage to an employee in using payroll deductions to contribute to a health care spending account. Since the flex credits allocated to a health care spending account will typically set a limit on the maximum reimbursement payable under the plan and the employee is taxed on the gross amount of salary paid, including the amount withheld through payroll deductions to pay for benefits under the plan, a contribution of salary may result in the taxation of more income than the employee actually receives. While any contributions that are made by the employee to a health care spending account that is a private health services plan would qualify as a medical expense for the purpose of the medical expense tax credit, the medical expense tax credit may not fully offset the income inclusion, and there is no mechanism by which an amount forfeited at the end of the year can be refunded to the employee. This bulletin can be found at Revenue Canada’s internet site at www.rc.gc.ca.
In regards to the specific plans for which you have submitted documentation, we have reviewed them briefly and have provided some general comments. It seems that the “XXXXXXXXXX ” would be subject to the comments above on paragraph 18 of IT-529, since the documentation indicates that the employees would pay for the medical coverage, on a pre-tax basis. The other plan relates to the 1998 Budget proposal, which provides an income tax deduction to individual sole proprietors and partners in respect of contributions to a “private health services plan.” (Bill C-72, which contained this and other 1998 Budget proposals, received Royal Assent on June 17, 1999.) This deduction is found in new section 20.01.
Subject to certain conditions, new section 20.01 of the Act permits an individual to deduct, in computing the individual's income from a business carried on by the individual and in which the individual is actively engaged on a regular and continuous basis (directly or as a member of a partnership), amounts payable under a private health services plan (PHSP) for the benefit of the individual, the individual's spouse and members of the individual's household. The meaning of “private health services plan” is discussed in Interpretation Bulletin IT-339R2, Meaning of “Private Health Services Plan.” In an interpretation dated April 28, 1999 (#E9904155), we gave general comments concerning a plan that consisted of a contract between a proprietor and an administrator, under which the administrator agreed to reimburse the proprietor, his spouse and members of his household for actual medical and hospital expenses and received, as consideration, an amount equal to the amount reimbursed plus an administrative fee. We gave the opinion that such a plan does not qualify as a PHSP since it did not contain the necessary elements of insurance.
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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