20 December 2001 External T.I. 2001-0097805 - 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: Are the plans described, plans in the nature of insurance as set out under paragraph 3 of Interpretation Bulletin IT-339R2?

Position: generally yes

Reasons: elements under paragraph 3 of Interpretation Bulletin IT-339R2 satisfied

XXXXXXXXXX 2001-009780
Shaun Harkin, CMA
December 20, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Private Health Services Plan ("PHSP")

This is in reply to your letter of August 17, 2001, wherein you asked the following questions regarding PHSP's.

1) That we confirm our position with regard to a "cost plus" plan of a sole proprietor.

2) Would an insured medical/dental reimbursement plan, that has the following general terms and conditions, qualify as a plan in the nature of insurance as set out under paragraph 3 of Interpretation Bulletin IT-339R2 ("IT-339R2")?

- an individual would enter into an insurance contract with an insurance company,

- premiums would be paid on a periodic basis as required under the terms of the contract,

- the amount of the premiums would be determined prior to the beginning of the coverage period and would be based on reasonable actuarial and underwriting principles,

- the insurance policy would cover the cost of all eligible medical and dental expenses up to an annual maximum,

- eligible medical expenses would include only those expenses that would otherwise qualify for the medical expense tax credit under subsection 118.2(2) of the Income Tax Act (the "Act"),

- any expenses incurred during the covered period in excess of the annual maximum would not be covered and would not be carried forward into a future policy year,

- no return of contributions or surpluses would be permitted (if an individual's claims in any year did not exceed the individual's annual reimbursement maximum, no amounts would be refunded to the individual),

- all claims would have to be reported to the insurer within 30 days after the end of a policy year?

3) If the above plan is acceptable, would the same plan of insurance with the changes noted below, that is provided on a group basis rather than on an individual basis, qualify as a plan in the nature of insurance as set out under paragraph 3 of IT-339R2?

- a professional association (the taxable income of which is exempt under subsection 149(1) of the Act) would act as group policyholder of a contract underwritten by a licensed insurer; and

- all participating employers would be members of the professional association?

4) If the first plan is acceptable, would the same plan of insurance with the changes stated below, that is offered by a professional organization (the taxable income of which is exempt under subsection 149(1) of the Act) under an administrative service (sometimes referred to as a "self-insured" basis), qualify as a plan in the nature of insurance as set out under paragraph 3 of IT-339R2?

- all employers would be members of the professional association; and

- all deficits and surpluses would be absorbed by the professional association and reflected in the following year's insurance premium rates. No individual employer would have any right to the surplus whatsoever.

5) Would the fact that an insured medical/dental reimbursement plan allows an individual to choose, before the beginning of the year, the annual reimbursement maximum under the policy affect the plans status as a PHSP?

6) Would the fact that an insured medical/dental reimbursement plan permits un-reimbursed claims incurred in a particular year (in excess of the annual reimbursement maximum) to be carried forward from the particular year to the following year on the renewal of the policy affect the plan's status as an PHSP?

As requested, we have considered your questions and have provided general comments below. However, whether or not an arrangement qualifies as a PHSP can only be confirmed by way of an advance income tax ruling request.

Our Comments

We will address your questions in the order they were raised.

1) As stated in technical interpretation letter #9904155, dated April 28, 1999, it continues to be 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.

2) According to paragraph 3 of IT-339R2, Meaning of "Private Health Services Plan," it is our position that a PHSP plan must be in the nature of insurance. In this regard, the plan 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.

A contract of insurance with an arm's length third party insurer normally contains the basic elements outlined above. In our view, a plan that consists of a contract between an individual and an insurance company, under which the insurance company agrees to reimburse the individual for actual medical and hospital expenses and receives, as consideration, premiums based on reasonable actuarial and underwriting principles, could qualify as a plan in the nature of insurance as set out in paragraph 3 of IT-339R2.

3) In our view, a plan that consists of a contract between an individual and a professional association (the taxable income of which is exempt under subsection 149(1) of the Act), where

- the professional association would act as a group insurance policyholder of a contract underwritten by a licensed insurer and

- all participating individuals would be members of the professional association,

under which the licensed insurer agrees to reimburse the participating individual, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, premiums based on reasonable actuarial and underwriting principles, could qualify as a plan in the nature of insurance as set out in paragraph 3 of IT-339R2.

4) In our view, a plan that consists of a contract between an individual and a professional association (the taxable income of which is exempt under subsection 149(1) of the Act), under which the professional association agrees to reimburse the individual, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, a premium that is adjusted annually to reflect the previous year's deficits and surpluses, could qualify as a plan in the nature of insurance as set out in paragraph 3 of IT-339R2.

However, it is a question of fact whether a particular arrangement meets the definition of PHSP in subsection 248(1) of the Act. In our view, a plan that consists of a contract between an individual and a professional association (the taxable income of which is exempt under subsection 149(1) of the Act), under which the professional association agrees to reimburse the individual, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, a "cost plus" amount, would not qualify as a PHSP since it does not contain the necessary elements of insurance. Our comments in # 1 above would have application to this situation.

5) Our position concerning arrangements whereby employees are able to select the type and level of coverage from a menu of available benefits (sometimes referred to as "cafeteria plans" or "flexible benefit programs") is discussed in Interpretation Bulletin IT-529, "Flexible Employee Benefit Programs". It is our view that, generally, as long as employees are required to choose benefits and the manner in which such benefits will be funded prior to the beginning of the plan year, and the selection is irrevocable (with limited exceptions throughout the duration of the plan year) the taxation of the benefits offered will not be altered by the fact that it is offered under the umbrella of such a program.

6) In order for a particular plan or arrangement to qualify as a PHSP, it must involve a reasonable element of risk that is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP. While a carry forward period undoubtedly reduces the risk of loss to the employee, it is our view that a plan which permits the carry forward of either the unused allocation or eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely by reason of the carry forward provision in the plan.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

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

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