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: We have been provided with a specific scenario and asked for comments on a number of issues.
Position: Some general comments were provided on the basis of the limited information available. The comments relate to H & W trusts, PHSPs, and section 20.01 of the Act.
Reasons: See position.
XXXXXXXXXX 2000-005051
M. Eisner
December 8, 2000
Dear XXXXXXXXXX:
Re: Self-Funded Private Health Services Plans
We are replying to your facsimile dated October 3, 2000, concerning the above-subject.
You have indicated that you intend to incorporate a company that will offer its services to the public as an administrator of health services plans ("HSPs"). The HSP, which will cover (A) prescription drugs, (B) dental, and (C) long term care, will allow both employees and their employer (a self-employed person) to participate in a self-insured arrangement that is intended to involve a health and welfare ("H & W") trust. Funds will be disbursed with respect to (C) once the self-employed person or his spouse have reached the age of 65 or before if needed as a result of a prolonged mental or physical disability.
Claims for reimbursements of eligible expenses made by eligible individuals will be submitted to the company for settlement and reimbursement. The trustees of the trust will transfer the moneys from the trust fund to the employer to satisfy the claims liabilities.
Contributions in respect of the HSP in the first year will be funded by the "basic" annual contribution plus an additional "first-year contribution" so that the trust fund value is the equivalent of the self-insured limit. Basic plan contributions made during subsequent years will be based on actuarial or statistical calculations so they are adequate to provide the benefits covered under (A) and (B) plus administration expenses and a reasonable amount to pay for expenses eligible under (C) above once the age limit or disability conditions are met. It is expected that the percentage paid for benefits in (A) and (B) will range from 55% to 75% of the "basic" annual contributions. If the fund falls below the self-insured limit, an additional extraordinary contribution will be made by the self-employed individual.
With respect to the above situation, you have asked us to confirm that if the HSP qualifies as private health services plan ("PHSP") and employer contributions (and perhaps employee contributions) are made to a H & W trust, employment benefits will not arise as a result of the related employer contributions and the self-employed person is able to deduct amounts in respect of PHSP coverage that relates to the self-employed person under section 20.01 of the Income Tax Act (the "Act"). You have also asked us to confirm that the H & W trust would be entitled to compute its income as set out in paragraph 11 of IT-85R2.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request made pursuant to Information Circular 70-6R3. As a further comment, you have asked about issues that cannot be determined without a review of all the relevant facts and documentation. However, we are prepared to provide some general comments which are not binding on the CCRA.
Interpretation Bulletin IT-85R2 "Health and Welfare Trusts for Employees" (copy enclosed) sets out the requirements of a H & W trust and generally explains the tax implications in respect of the operation of such a trust. Paragraphs 6 and 7 set out the requirements that must be satisfied in order for a trust to qualify as a H & W trust. One of the requirements of a H & W trust is that the programs be limited to the programs described in paragraph 1 which include a PHSP.
IT-85R2 indicates that contributions to a H & W trust must be reasonable and not exceed the amounts required to provide the benefits. Consistent with these comments, contributions made for a year in respect of a self-administered PHSP are normally made in respect of expected current year's claims. Such contributions, which cannot include contingent reserves, are normally supported by the use of a professional actuary.
Our general position on PHSPs is explained in Interpretation Bulletin IT-339R2 "Meaning of Private Health Services Plan" (copy enclosed). As indicated in paragraph 4, one of the requirements is that expenses covered by a PHSP are limited to those which would otherwise have qualified as a medical expense under subsection 118.2(2) of the Act.
In the case of deductions under section 20.01 of the Act, payments must be made under a PHSP. One of the requirements of a PHSP in relation to self-employed individuals is that there must be an element of insurance. For your general information in that regard, we have enclosed a copy of a letter (9904155 (E))issued by this Directorate which deals with an aspect that may be a relevant consideration for you.
We have also enclosed copies of pages 21, 22 and 23 of our pamphlet entitled "Business and Professional Income" (the 1999 version) which explains section 20.01 of the Act and note that a revised version of those comments should be available from your local tax services office early next year in that pamphlet issued for the year 2000.
We trust that our comments are of assistance to you.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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