10 May 2001 External T.I. 2000-0051505 - PRIVATE HEALTH SERVICES PLAN

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:

(1) For the purposes of subsection 20.01(1) of the Act, what percentage of employees/partners must be covered under a private health services plan ("PHSP") to enable an individual to deduct the premiums in respect of the individual, the individual's spouse or any person that is a member of the individual's household.

(2) Does "extend coverage" under a PHSP mean that coverage is offered to employees or does there also have to be acceptance by the employees.

Position: (1)50% of the person employed on a full-time basis

(2)Coverage has to be offered.

Reasons: (1)Subparagraph 20.01(2)(b)(ii) has a "not less than 50%" test.

(2) Extending coverage is not dependent upon the response.

				2000-005150
XXXXXXXXXX 			A. Seidel, CMA
(613) 957-2058
May 10, 2001

Dear XXXXXXXXXX:

Re: Private Health Services Plan

The Toronto West Tax Services Office has forwarded for our reply your October 11, 2000 facsimile concerning the deductibility of premiums in respect of a private health services plan ("PHSP") pursuant to subsection 20.01(1) of the Income Tax Act (the "Act"). We apologize for the delay of our reply.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Subject to the limitations in subsections 20.01(2) and (3) of the Act, subsection 20.01(1) of the Act provides for the deduction of premiums payable in respect of a PHSP by a proprietor in respect of himself/herself, his/her spouse or common-law partner and members of his/her household.

The limit in paragraph 20.01(2)(b) of the Act would apply where a business employs one or more persons on a full-time basis, each of whom has accumulated not less than three months of service and deals at arm's length with the proprietor, and "not less than 50%" of the total number of persons to whom coverage is extended under a PHSP are persons that are described in subparagraph 20.01(2)(b)(i), are satisfied. There is no further requirement in paragraph 20.01(2)(b) of the Act concerning the employees that must be covered by the PHSP.

In the situation where the limit in paragraph 20.01(2)(b) of the Act does not apply, the limitations in paragraphs 20.01(2)(c) or (d) of the Act may apply to the amount of PHSP premiums that are deductible by a proprietor. The limitation in paragraph 20.01(2)(c) is "subject to paragraph (d)". The limit in paragraph 20.01(2)(d) of the Act applies at any time where a business employs arm's length employees and the provisions of paragraph 20.01(2)(b) of the Act do not apply. The maximum amount that is deductible pursuant to paragraph 20.01(2)(d) of the Act is the amount which "shall not exceed the lesser of the amount determined under the formula set out in paragraph (c) and the individual's cost of equivalent coverage in respect of any such person in relation to the particular period".

Subsection 20.01(3) of the Act determines whether or not an amount payable in respect of an individual under a PHSP exceeds, in relation to a particular period, the individual's cost of coverage under the PHSP in respect of another person. Since the "cost of equivalent coverage" for a person not covered by the PHSP is nil, paragraph 20.01(2)(d) of the Act effectively requires that, in the situation where paragraph 20.01(2)(b) of the Act does not apply, all arm's length employees must be extended coverage under the PHSP.

In analysing which of the limits in subsection 20.01(2) of the Act may apply in a given situation, the meaning of the expression "to whom coverage is extended under the plan" is a determining factor. Whether or not coverage under a PHSP has been "extended" to an employee in any given situation is a question of fact. We would generally consider that coverage under a PHSP has been "extended" to a particular employee in those situations where the coverage is offered to the employee and regardless of whether or not, for whatever reason, the employee chooses not to accept coverage under the PHSP.

The publications referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch