24 October 2001 External T.I. 2001-0085455 - PHSP-COST PLUS PLANS

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: Does a plan that covers both the proprietor and his employees and is administered by a third party who agrees to reimburse for actual medical expenses , plus an administration fee, a PHSP

Position: YES

Reasons: The required elements of insurance exists however whether the plan qualifies as a PHSP is a question of fact.

XXXXXXXXXX 				2001-008545
C. Tremblay, CMA
October 24, 2001

Dear XXXXXXXXXX:

Re: Private Health Services Plan ("PHSP")

This is in reply to your letter of May 24, 2001, wherein you included information on a plan being offered and administered by a third party who for a fee agrees to reimburse the client for their health and dental expenses. Generally, you question whether the plan, which is to be administered by a third party that acts as an administrator of PHSPs for sole proprietors (the "administrator"), will qualify as a PHSP.

Our Comments:

While we cannot comment on the plan you referred to because of the provisions of subsection 241(1) of the Income Tax Act (the "Act") which prohibits the Canada Customs and Revenue Agency (the "CCRA") from discussing specific taxpayer information without written authorization from the taxpayer, we can offer the following general comments with respect to the following hypothetical situation:

• A sole proprietor will at all times be actively engaged on a regular and continuous basis in carrying on a business.
• The specified medical expenses will be limited to those defined in subsection 118.2(2) of the Income Tax Act.
• 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.
• Under the plan, the proprietor and all full-time employees of the proprietor will be entitled to submit claims to, and be reimbursed by, the administrator for medical expenses incurred by themselves, their spouses, or any member of their household, and the administrator will periodically invoice the proprietorship for the amounts so reimbursed plus an administration charge. In short, the proprietor will be entitled to the same treatment as any full-time employee of the business.

As described in paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan," it is the CCRA'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 technical interpretation letter #9904155, dated April 28, 1999, and referred to in our letter to you on August 3, 1999 (#9916035), 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. In our view, even though a proprietor enters into a contract with an administrator to pay medical and hospital expenses, this is not sufficient to conclude that the plan is a PHSP.

As described in our hypothetical situation, as well as providing coverage for the sole proprietor, the plan may also provide coverage for employees. Thus, unlike the scenario discussed in technical interpretation 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 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) of the Act are met. If such a plan qualifies as a PHSP, 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) of the Act. Whether or not an arrangement qualifies as a PHSP can only be confirmed by way of an advance income tax ruling request.

We trust that these comments will be of assistance.

Yours truly,

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