3 October 2001 External T.I. 2001-0091995 - phsp

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: Can a corporation reduce the employee wages by the corresponding amount the employee would be reimbursed for expenses under a PHSP?

Position: NO

Reasons: The requirement is that the PHSP be a plan of insurance requires an element of risk. Also, a legal obligation to pay a salary cannot be reduced by a reimbursement of qualifying medical expenses.

XXXXXXXXXX 						 	2001-009199
C. Tremblay, CMA
October 3, 2001

Dear XXXXXXXXXX:

Re: Private Health Services Plan ("PHSP")

This is in reply to your letter of July 5, 2001, wherein you request an opinion on the following transaction.

Company "A" wants to implement a PHSP. It is proposed that a plan will be implemented which will require that the employees submit their qualifying medical receipts for reimbursement and the company in turn would reduce their wages by a corresponding amount. You question whether or not the above transaction is acceptable since under such an arrangement the company may not be considered to be at risk for purposes of a PHSP.

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 Income Tax Act (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, an 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. 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. Amounts legally due as salaries to employees cannot be recharacterized as employee medical expenses reimbursements when the amount of the reimbursement reduces 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 to qualify as a plan of insurance where an employer reimburses its employees for expenses, 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 cannot be reduced by the amounts "reimbursed" by the employer.

We trust our comments are of assistance.

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