Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 139614
Dear [Client]:
Subject: GST/HST INTERPRETATION
Claims made under an employee health plan
Thank you for your letter of October 19, 2011, concerning an employer’s eligibility to claim input tax credits (ITCs) for the goods and services tax/harmonized sales tax (GST/HST) payable in respect of employee medical and dental expenses. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that your firm represents a number of clients (employers) who sponsor group medical and dental plans for the benefit of their employees. Each of these plans qualifies as a private health services plan (PHSP), as described in Income Tax Interpretation Bulletin IT-339R2, Meaning of private health services plan (1988 and subsequent taxation years). These clients are typically GST/HST registrant businesses that are engaged exclusively in commercial activities.
The PHSPs sponsored by the employers are self-insured programs with all claims adjudicated and paid by a third party professional plan administrator on behalf of the employer, who retains the legal and financial liability to pay for the plan benefits. Some supplies of property and services covered by these PHSPs are either zero-rated (taxable at 0%) or exempt (not subject to the GST/HST) and accordingly, employees’ claims do not include an amount representing the GST/HST. However, employees are required to pay the GST/HST on certain other plan-eligible supplies that are not zero-rated or exempt. Claims made by employees in respect of those types of medical expenses typically include the GST/HST paid by the employees on their purchases.
For example, an employee acquires the services of a massage therapist located in Ontario. As the supply made by a massage therapist in Ontario is generally a taxable supply that is subject to the HST at the rate of 13%, the employee pays the massage therapist a total of $100 for the service, plus $13 of HST. A claim in respect of the $113 expenditure is then submitted by the employee to the PHSP administrator.
After reviewing and approving the claim according to the particular plan’s guidelines, the administrator makes a payment to the employee, on the employer’s behalf, at the rate of coverage applicable to massage therapy services under the plan. The employer subsequently compensates the administrator for the total amount of the employee’s approved medical claim, including that part of the claim that represents the GST/HST paid by the employee to the massage therapist. The employer also pays the plan administrator a fee for its service of adjudicating and processing the claim.
INTERPRETATION REQUESTED
When a payment is made to an employee in satisfaction of a claim made under a PHSP in respect of a taxable supply of property or a service (for example, massage therapy), would the employer be eligible to claim an ITC for that part of the claim consisting of the GST/HST paid by the employee on the acquisition of the property or service?
INTERPRETATION GIVEN
Subsection 248(1) of the Income Tax Act (ITA) defines a PHSP to mean
(a) a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or
(b) a medical care insurance plan or hospital care insurance plan or any combination of such plans,
except any such contract or plan established by or pursuant to
(c) a law of a province that establishes a health care insurance plan as defined in section 2 of the Canada Health Act, or
(d) an Act of Parliament or a regulation made thereunder that authorizes the provision of a medical care insurance plan or hospital care insurance plan for employees of Canada and their dependants and for dependants of members of the Royal Canadian Mounted Police and the regular force where such employees or members were appointed in Canada and are serving outside Canada.
For GST/HST purposes, paragraph (b) of the definition of “insurance policy” in subsection 123(1) refers to a policy or contract in the nature of accident and sickness insurance, whether the policy is issued, or the contract is entered into, by an insurer. As a PHSP is defined in the ITA to include a contract of insurance in respect of hospital expenses, medical expenses, or any combination of such expenses, it is also an “insurance policy” for GST/HST purposes.
According to paragraph (f.1) of the definition of the term in subsection 123(1), a “financial service” includes “the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy.” As a plan administrator generally pays out an approved PHSP claim on behalf of the employer, when the employer subsequently compensates the plan administrator, the employer is considered to be making a payment in satisfaction of a claim arising under an insurance policy (the PHSP). Therefore, the making of the payment by the employer is a supply of a financial service for GST/HST purposes.
Section 1 of Part VII of Schedule V exempts a supply of a financial service that is not a zero-rated supply under Part IX of Schedule VI. A financial service of paying an amount to a Canadian resident employee in satisfaction of a medical or dental claim under a PHSP (an insurance policy) would not be zero-rated under Part IX of Schedule VI. Therefore, the making of such a payment by an employer would generally be an exempt supply of a financial service. Since an exempt supply is a supply that is not subject to the GST/HST, the employer would not be considered to have paid tax when settling the PHSP claim, regardless of whether the claim included any GST/HST originally paid by the employee to the supplier of the property or service.
In order for a GST/HST registrant to be eligible to claim an ITC, subsection 169(1) requires that tax in respect of the supply becomes payable by the registrant or is paid by the registrant without having become payable. As no tax would have been payable (or deemed to have been payable) by the employer when it settled the claim under the PHSP, the employer would not be eligible to claim an ITC in relation to the payment made under the claim.
Application of section 175
You indicated in your letter that some of your clients have received information that, in making payments to their employees in satisfaction of claims made under a PHSP, section 175 may apply to allow them to claim an ITC in respect of the tax paid by their employees on their taxable purchases of health care services and products.
Section 175 deems an employer to have paid the GST/HST in respect of an amount reimbursed to an employee for the acquisition of property or services by the employee for consumption or use in relation to the activities of the employer. The effect of this provision is to permit the employer to recover the GST/HST paid by the employee on expenses which, if incurred directly by the employer, would be recoverable as ITCs or GST/HST rebates.
For purposes of section 175, in order for the consumption or use of the property or service by the employee to be considered to relate to the activities of the employer, there must be a direct connection between the consumption or use of the property or service and the activities engaged in by the employer. In this regard, it is important to clarify that under section 175, it is the consumption or use of the property and services that must relate to the activities of the employer, not the reimbursement itself. This distinction is significant - although it may be the case that the paying of the reimbursement relates to the activities of the employer (as it is part of its employees’ compensation package), the same must also be said about the property or services to which the reimbursements relate.
An example in which section 175 would typically apply is when an employee rents a car for purposes of taking a business trip. There is a clear connection between the property acquired (the rental car) and the activities of the employer, since the car is only being utilized in order for the employee to travel on business.
However, in the scenario described in your letter, since a medical or dental service is acquired by an employee in relation to his or her personal health and well-being, there would not be a direct connection between the service and the activities of the employer. Therefore, while the making of a payment in satisfaction of a PHSP claim may itself relate to the activities of the employer, the employee’s acquisition of a service such as massage therapy does not. As a result, section 175 would generally not apply to the reimbursement of medical or dental expenses claimed by an employee under a PHSP.
Section 185
Your letter referred to the possibility that because PHSPs are generally recognized as plans in the nature of insurance, the payment of PHSP benefits by an employer could be considered a supply of a financial service. As a result, in providing these benefits, you indicated that some people may take the position that section 185 would, under this approach, deem any inputs acquired by an employer (other than a financial institution) in relation to a PHSP claim to be for consumption, use, or supply in undertaking its commercial activities.
However, one of the conditions that must be met for section 185 to apply is that tax must be payable by the registrant on the acquisition, importation, or bringing into a participating province of property or a service. Since the payment made by the employer in satisfaction of a PHSP claim does not include an amount as GST/HST, tax would not have been payable by the employer. Consequently, this condition will not be met and section 185 will not apply to allow the employer to claim an ITC in relation to the payment.
Supplies made by a PHSP administrator
A PHSP administrator acts as an intermediary in facilitating payments in satisfaction of insurance claims on behalf of an employer. Such a service, when provided on its own, may be considered to be an exempt supply of a financial service (that is, the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy, or the arranging for such a payment). However, the facilitating of payments is only one component of an administrator’s supply made to an employer. The predominant element of the administrator’s supply is typically the provision of comprehensive administration services in regard to the PHSP and, as such, the supply is generally viewed as a single supply of an administrative service.
Where the administrator is not a “person at risk” under subsection 4(1) of the Financial Services and Financial Institutions (GST/HST) Regulations, its supply of an administrative service would be excluded from the definition of financial service found in subsection 123(1) by paragraph (t) of the definition, in conjunction with paragraph 4(2)(b) of those Regulations. Consequently, the administrator’s service would not be considered an exempt financial service and would be subject to the GST/HST at the appropriate rate determined in accordance with the provincial place of supply rules.
Where tax is payable on the administrator’s supply of services made to the employer and the employer is a registrant engaged exclusively in commercial activities, the tax payable to the administrator for those administrative services may be considered to have been incurred in the course of making supplies of financial services that relate to commercial activities of the employer. In that case, section 185 may permit the employer to claim an ITC in respect of the tax paid or payable to the administrator.
Alternatively, when a plan administrator provides stop-loss coverage in respect of one or more benefits contained in a PHSP, the administrator may be considered to be a person at risk in respect of the plan. In that case, the supply of all the administrative services provided by the administrator with respect to the plan is generally viewed as a single supply of a financial service that is not excluded from that definition by paragraph (t) and is therefore an exempt supply under section 1 of Part VII of Schedule V.
Consequently, if a plan administrator has collected tax from an employer on its exempt supplies of financial services made in respect of a PHSP with stop-loss coverage, the employer would be considered to have paid that tax in error. In that case, the employer may be able to obtain a refund from the administrator or claim a rebate under section 261 for the tax paid in error where all of the conditions for obtaining a refund or claiming a rebate have been satisfied.
For more information on the tax status of supplies of administrative services made by an insurer in respect of employee health claims, please refer to GST/HST Policy Statement P-136R, Administrative Services Only with Stop-Loss. If you require assistance in determining whether a particular employer would be eligible to claim an ITC for the tax paid or payable on an administrator’s supply of services in relation to a PHSP, please contact our office.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call Graham Leflar, Rulings Officer, directly at 306-975-4733. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Catherine Séguin-Ouimet
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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