20 May 2003 External T.I. 2001-0100025 - 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: Application of subsection 20.01(2) if an individual waives or is denied coverage under a PHSP.

Position: Limit determined under paragraph 20.01(2)(b) or (d) will be nil

Reasons: Limit is based on the cost of equivalent coverage for the individual

XXXXXXXXXX 2001-010002
J. Gibbons, CGA
May 20, 2003

Dear XXXXXXXXXX:

We are replying to your letter dated August 31, 2001, regarding the interpretation of the "individual's cost of equivalent coverage" as defined in subsection 20.01(3) of the Income Tax Act (the "Act"). In particular, you are concerned with the situation where an employee of the individual either waives or is denied coverage under a private health services plan ("PHSP") provided by the individual.

Our Comments

The following comments are of a general nature only since we cannot confirm the tax implications relating to a particular transaction or series of transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC 70-6R5.

Subsection 20.01(2) of the Act sets out the maximum deduction permitted to an individual in respect of a premium, contribution or other consideration under a PHSP in respect of the individual, the individual's spouse or common-law partner or any person who is a member of the individual's household. The three possible methods for calculating the maximum deduction are outlined in paragraphs 20.01(2)(b), (c) and (d) of the Act respectively. The provision that applies in a particular situation generally depends on the number of full-time employees who are covered by the PHSP and who deal at arm's length with the individual.

If either of paragraphs 20.01(2)(b) or (d) applies, the maximum deduction cannot exceed the individual's cost of equivalent coverage under the PHSP in respect of each employed person who deals at arm's length with the individual and who is described in paragraph 20.01(2)(b)(i) (hereinafter referred to as a "qualifying employee"). Subsection 20.01(3) provides that an amount payable in respect of an individual under a PHSP does not exceed the cost of equivalent coverage in respect of another person to the extent that the amount does not exceed the product of the amounts described in paragraphs 20.01(3)(a) and (b). The latter amount ("amount (b)") is described as "the percentage of the cost of coverage under the plan in respect of the other persons that is payable by the individual or a partnership of which the individual is a member."

In our view, if an employee of the individual either waives or is denied coverage under a PHSP provided by the individual, then the amount described in 20.01(2)(b), and, therefore, the individual's cost of equivalent coverage, in respect of that employee will be nil. If such an employee is a qualifying employee of the individual, the limit determined under paragraph 20.01(2)(b) or (d) will be nil. Thus, where either of these particular provisions apply to determine the individual's maximum deduction under section 20.01 of the Act, the individual will not be entitled to a deduction. We have advised the Department of Finance of our concerns regarding this result.

We trust that our comments will be of assistance.

Yours truly,

Daryl Boychuk, LL.B.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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