4 February 2000 External T.I. 1999-0014245 - PHSP-ADMINISTRATOR PLANS FOR PROP.

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 a plan which consists of a contract between a proprietor and an administrator under which the latter agrees to reimburse the proprietor and at least one full-time employee for medical expenses (in return for cost plus a fee) qualifies as a PHSP.

Position: Whether a plan qualifies as a PHSP is a question of fact. However, the plan would qualify as a plan of insurance.

Reasons: The required elements of insurance exist, i.e., (a) an undertaking by one person (the proprietor), (b) to indemnify another person( the employee), (c) for an agreed consideration, (d) from a loss or liability in respect of an event, (e) the happening of which is uncertain.

XXXXXXXXXX 					J. Gibbons
						1999-001424
Attention: XXXXXXXXXX 

February 4, 2000

Dear XXXXXXXXXX:

We are replying to your letter of December 8, 1999, in which you raised several questions concerning certain "private health services plans" ("PHSP") to be established by sole proprietors.

As requested, we have considered your questions 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. Thus, our comments are of a general nature only.

You have asked that we consider whether a plan, which is to be administered by a private corporation that acts as an administrator of PHSPs for sole proprietors (the "administrator"), will qualify as a PHSP in the following hypothetical situation:

1. A sole proprietor will at all times be actively engaged on a regular and continuous basis in carrying on a business.

2. A proprietor will adopt a plan under which each of the full-time employees who have been employed for more than 3 months will be entitled to be reimbursed, up to specified annual limits, for specified medical expenses of the employees, their spouses or any other member of their household.

3. The specified medical expenses will be limited to those defined in subsection 118.2(2) of the Income Tax Act.

4. The proprietor will make it a term of each full-time employee's employment contract that the employee will be entitled to a reimbursement under the plan as long as the employee's employment contract remains in good standing and the plan remains in force.

5. The proprietor and the administrator will be dealing with each other at arm's length and will enter into a plan administration contract under which the administrator will undertake to administer the plan on a "cost plus" basis. That is, the administrator receives the claims for reimbursement, confirms the claims are eligible for reimbursement under the plan, reimburses the claimants for eligible claims, and invoices the proprietor periodically for fees equal to the sums of claims reimbursed plus an administration charge.

6. Under the plan and the plan administration contract, the proprietor will be entitled to submit claims to, and be reimbursed by, the administrator for medical expenses incurred by the proprietor, his or her spouse, or any member of his or her household, and the administrator will periodically invoice the proprietorship for the amounts so reimbursed and an administration charge. In short, the proprietor will be entitled to the same treatment as any full-time employee of the business.

Question 1:

Assuming that at least one full-time arm's length employee is entitled to reimbursement of medical expenses under the plan, will the proprietor be entitled to deduct, in computing the income from the sole proprietorship for tax purposes, the portion of the fees paid to the administrator, which represents reimbursement to the proprietor of medical expenses incurred by him or her, his or her spouse or members of his or her household?

In your view, the proprietor will be entitled to deduct such fees under subsection 20.01(1) of the Act, subject to the limitations imposed by subsection 20.01(2).

Question 2:

Assuming the answer to question 1 is yes, would the answer be different if there were no full-time arm's length employees entitled to reimbursement under the plan but there was at least one full-time non-arm's length employee entitled to reimbursement of medical expenses under the plan?

In your view, the answer should be the same in both cases. The arm's length or non-arm's length nature of the relationship between the proprietor and a full-time employee is only relevant for purposes of the limitations imposed by subsection 20.01(2), but not for purposes of determining whether the plan is a PHSP.

Our Views

According to paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan," it is the Agency's position that a PHSP must be in the nature of insurance. In this regard, it 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.

As stated in interpretation letter #9904155, dated April 28, 1999, it is our view that a plan which consists of a contract between a proprietor and an administrator, under which the administrator agrees to reimburse the proprietor, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP since it does not contain the necessary elements of insurance. In this situation, no person has undertaken to indemnify another person. Rather, the proprietor has assumed all of the risk for the personal hospital and medical bills. Even though a proprietor enters into a contract with an administrator to pay medical and hospital expenses, it is our view that that is not, in itself, sufficient to conclude that the plan is a PHSP.

In the situation outlined in your letter, as well as providing coverage for the sole proprietor, the proposed plan would also provide coverage for employees. Thus, unlike the scenario discussed in letter #9904155, such a plan contains an undertaking by one person (i.e., the proprietor) to indemnify another person (an employee). Accordingly, it is our view that such a plan could qualify as a plan of insurance. The fact that the proprietor is also covered by the proposed plan does not affect our views.

In regard to whether the proprietor can deduct the portion of the fees paid to the administrator, which represents a reimbursement to the proprietor of medical expenses incurred by him or her, his or her spouse or members of his or her household, depends on whether the particular proposed plan qualifies as a PHSP and whether the conditions in subsection 20.01(1) are met. Whether or not an arrangement qualifies as a PHSP can only be confirmed by way of an advance income tax ruling request.

In question 2, you ask us to assume there are no full-time arm's length employees but that there is at least one full-time non-arm's length employee entitled to reimbursement of medical expenses under the plan. In our view, the fact that the full-time employee does not deal at arm's length with the proprietor would not change our answer above if the non-arm's length employee is receiving coverage under the plan as an employee and not because of his or her relationship with the employer. In this situation, the limit in paragraph 20.01(2)(c), which is subject to paragraph 20.01(2)(d), will likely apply.

We trust that these comments will be of assistance.

Yours truly,

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