4 December 2001 External T.I. 2001-0078305 - 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether employees are acting as agents of the employer where the employees directly pay the premiums to the insurer under a private health services plan and are reimbursed by the employer.

Position: Uncertain.

Reasons: Advance ruling should be requested so that all relevant facts and proposed terms of reimbursement arrangement can be considered.

2001-007830
XXXXXXXXXX B.G. Dodd
(613) 957-8953
December 4, 2001

Dear XXXXXXXXXX:

Re: Subsection 20.01(3) of the Income Tax Act (the "Act")

We are writing in reply to your letter dated March 29, 2001 requesting our opinion on the application of subsection 20.01(3) of the Act.

Your concern is with paragraph 20.01(3)(b) of the Act, dealing with the "cost of equivalent coverage" criteria, which contemplates that the self-employed owner manager of a business and the arm's length employees are members of the same private health services plan ("PHSP"). You refer to small business situations in which premiums may be collected by the insurer directly from the employees through pre-authorized automatic bank account withdrawals from each covered employee. In these cases, the employer may not be responsible for directly paying premiums on behalf of employees but may promise to reimburse employees for monthly premiums paid. You indicate that the employer and the employees would be members of the same PHSP, but that such reimbursement of employees' premiums would be through a separate PHSP which is self-insured by the employer. You suggest that this may not be in accordance with paragraph 20.01(3)(b) of the Act and request our comments on the possibility of entering into a further contract in which the employer would take the position that employees paying the premiums directly would do so as agent for the employer and under which the employer would reimburse the employees.

Written confirmation of the income tax implications inherent in particular proposed transactions is given by this Directorate only in the context of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R4 dated January 29, 2001. Among other things, this would involve the provision for review of a complete description of the specific factual situation of the particular taxpayer(s) as it presently exists and of the proposed revised or new arrangements, including all relevant documentation (e.g. terms and conditions of the existing PHSP's and the proposed new terms or contracts). We would be pleased to review and comment on your proposal on this basis.

Should you decide to proceed in this manner, we note for your consideration that we are somewhat unclear on the basis for your concern. As you note, paragraph 20.01(3)(b) of the Act contemplates the employer and the arm's length employees being covered by the same PHSP, with the implication that this would not be the case in the situations with which you are concerned. However, your letter states, in part, that "the owner-manager participates directly in an insured plan. Employees also participate in this plan ...", which leads to some ambiguity in this area. In considering a ruling request on this matter, it would be important to have a full appreciation of all of the facts. We also note that it is uncertain whether a statement in a document indicating that an employee is acting as agent for the employer in certain circumstances would be effective in and of itself. This would have to be considered in the context of the surrounding arrangements, including the existing and proposed contractual obligations of the various parties.

We hope this will be of assistance.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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