28 August 2001 External T.I. 2001-0091405 - 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) Whether an arrangement whereby a resolution is passed by the board of directors of a company to reimburse employees for medical expenses would qualify as a PHSP under the Act, where the gross salary entitlements of the employee are reduced by the amount of the reimbursement.

(2) Whether the reimbursement of the medical expenses to an employee who is also a shareholder constitutes a subsection 15(1) benefit.

(3) Whether the reimbursement of the medical expenses is deductible by the employer.

Position:

(1) No.

(2) Question of fact.

(3) If paid to an employee the amount is deductible. However, if the amount is paid to a shareholder, it is not deductible.

Reasons:

(1) Definition of PHSP subsection 248(1) and IT-339R2

(2) Paragraph 6(1)(a) and subsection 15(1).

(3) Paragraph 18(1)(a).

XXXXXXXXXX 				2001-009140
					Randy Hewlett, B. Comm.
August 28, 2001

Dear XXXXXXXXXX:

Re: Private Health Services Plan

We are writing in response to your letter dated July 5, 2001, wherein you requested our opinion on the following arrangement:

• Mr. X is the sole shareholder of a Xco, as well as the president and sole director,
• He is currently the only employee of Xco, which may hire other employees at some point in the future,
• Xco passes a resolution that has been recorded in the corporate minute book, establishing a plan that would meet the definition of a private health services plan (PHSP) defined in subsection 248(1) of the Income Tax Act (the Act),
• The plan will reimburse eligible employees for their qualifying medical expenses. An eligible employee would include full-time and part-time employees who work an average of 15 hours per week with a minimum of 750 hours per calendar year,
• The amount of reimbursement would correspondingly reduce the employee's gross pay,
• Mr. X is to be paid a management fee by Xco, to be determined at the end of the corporation's fiscal year,
• Mr. X plans on utilizing the plan by submitting his receipts to Xco at that time for reimbursement in lieu of a portion of has management fee in the same amount.

You inquire whether:

1. The reimbursement in lieu of management fees results in Mr. X's income being reduced under sections 5 and 6 of the Act?

2. Would subsection 15(1) apply?

3. Would the reimbursement be a deductible expense by Xco in computing taxable income?

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Subparagraph 6(1)(a)(i) of the Act excludes from an employee's income the value of benefits derived from an employer's contributions to specific employer-sponsored arrangements. Exclusions from an employee's income under subparagraph 6(1)(a)(i) of the Act include benefits arising from an employer's contributions to a PHSP.

A PHSP is defined in subsection 248(1) of the Act as a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or a medical care insurance plan or hospital care insurance plan or any combination of such plans. Interpretation Bulletin IT-339R2, Meaning of Private Health Services Plan, dated August 8, 1989, provides information on such plans. Generally, the employer would be entitled to a deduction for contributions made to a PHSP in determining its income.

Paragraph 3 of IT-339R2 specifies that a PHSP qualifying under the definition in subsection 248(1) of the Act must contain (i) an undertaking by one person, (ii) to indemnify another person, (iii) for an agreed consideration, (iv) from a loss or liability in respect of an event, (v) the happening of which is uncertain. Paragraph 4 of IT-339R2 indicates that coverage must be in respect of hospital care or expense or medical care or expense, which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

As noted in paragraph 7 of IT-339R2 an arrangement where an employer reimburses its employees for expenses that normally would have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act may be considered a PHSP. This occurs where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. On the surface, your arrangement may appear to qualify as a PHSP given this position in paragraph 7 of IT-339R2. However, it is our view that the arrangement you describe would not meet this requirement.

Under your arrangement the employee's gross salary entitlements are reduced by the amount of any reimbursement the employer would make with respect to the employee's medical expenses. The argument cannot be made that the employer is obligated under the contract of employment to reimburse the expenses when the amount of the reimbursement reduces other contract entitlements such as salary. Moreover, one of the criteria for a PHSP is that it must be a plan of insurance. In order for an arrangement where an employer reimburses its employees for expenses to qualify as a plan of insurance, there must be a reasonable element of risk. If the plan or arrangement is such that there is little risk to the employer in terms of the total amount it will have to pay employees, then the arrangement is not a plan of insurance and therefore, not a PHSP. Consequently, the employee's employment income under sections 5 and 6 of the Act will not be reduced by the amounts "reimbursed" by the employer.

Where an amount is paid to an individual who is both an employee and shareholder, it is a question of fact in which capacity the amount is received. Where a particular benefit is made available only to shareholders, there is a presumption that the benefit is made to the individual in his or her capacity as a shareholder. In such a case, the reimbursement of the medical expenses would not be deductible by the company pursuant to paragraph 18(1)(a) of the Act. However, the amount is included in income of the shareholder under subsection 15(1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch