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: PHSP questions based on the establishment of a "cost-plus" concept.
Position: Self-employed with no employees cannot qualify
Reasons: no element of insurance
C. Tremblay, CMA
November 22, 2001
Dear XXXXXXXXXX :
We are replying to your letter of July 10, 2001, sent to the Regina Tax Services Office, in which you raised several questions concerning "private health services plans" ("PHSP"). Your letter was forwarded to us for response.
As requested, we have considered your questions and have provided our comments below. However, we cannot confirm the tax implications of particular transactions unless 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 70-6R4. Thus, our comments are of a general nature only.
You have asked that we consider your questions based on the establishment of a PHSP on a "cost plus" concept.
PHSP's for the self-employed, unincorporated business was introduced in the 1998 Federal Budget. Is it the intention of the Federal government to continue to offer this tax deduction for the self-employed business or is there a predetermined date that the PHSP tax benefit will no longer be available?
Section 20.01 of the Income Tax Act (the "Act"), applicable after 1997, introduced provisions governing deductibility of amounts paid for PHSP coverage for the self-employed. Generally, individuals are now allowed to deduct amounts paid for their PHSP coverage in computing business income provided they are actively engaged alone or as a partner in their business, and either self-employment is their primary source of income in the current year or their income from other sources does not exceed $10,000. The Department of Finance is responsible for developing and evaluating tax policy and legislation. Currently, the provision contains no time restriction to its application other than for taxation years after 1997.
Paragraph 6. How does this paragraph apply/effect a "Cost Plus" PHSP?
Paragraph 6 of Interpretation Bulletin IT- 85R2 refers mainly to a health and welfare trust and states that the payments by the employer cannot be made on a voluntary or gratuitous basis. However, a "cost-plus" plan is a plan in which the employer contracts with a trusteed plan, administrator of private health services plans or an insurance company for the provision of indemnification of employees' claims on defined risks under the plan. As in a health and welfare trust, the employer must have an obligation under the employment contract to reimburse the eligible medical expenses of its employees. Further, a PHSP normally has a ceiling in respect of amounts that may be reimbursed. In our view, a plan that has no limits may be subject to section 67 of the Act. Section 67 of the Act provides that, in order to qualify as a deduction from income, an outlay or expense must be reasonable in the circumstances.
Paragraph 7. What is the exception in a PHSP?
A PHSP is the exception to a health and welfare trust. There is no need to have two or more employees covered by the PHSP plan. Indeed, section 20.01 of the Act contemplates a self-employed individual and subsection 20.01(2) of the Act provides limits where the self-employed person is covered under a PHSP.
How does the information in this IT bulletin apply to a "Cost Plus" PHSP?
The expenses covered by any PHSP (including a PHSP administered through a health and welfare trust) must be restricted to expenses, which would normally qualify as medical expenses as defined in subsection 118.2(2) of the Act and amounts paid out must be for one or more of the employees, an employee's spouse (including a common-law spouse or a same-sex partner) or any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption. Plan documentation can take the form of a booklet or manual, which is made available to employees covered by the plan. While a PHSP may exist in various forms, including a contractual arrangement between an insurance company and an employer, an employer may choose to offer medical and hospital care benefits through a trust arrangement, as discussed in Interpretation Bulletin IT- 85R2.
A PHSP need not be part of a "health and welfare trust" as is discussed in Interpretation Bulletin IT-85R2. Interpretation Bulletin IT- 339R2 discusses PHSPs specifically, including "cost plus" plans.
Paragraph 6 implies that 3 contracts must exist, a contract between the employer and the trusteed plan or insurance company, the employee and trusteed plan or insurance company, and the employee and the employer. Is this statement correct? If so, what must be included in the contract(s)?
As explained in paragraph 6 of Interpretation Bulletin IT- 339R2, in a "cost plus" plan an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan. The employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employee's contract of employment requires the employer to reimburse the plan or insurance company for the proper claims (filed by the employee) paid, and a contract exists between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing. Provided that the risks to be indemnified are those described in paragraphs (a) and (b) of the definition of "private health services plan" in subsection 248(1) of the Act, such a plan qualifies as a PHSP.
How does the "cost plus" PHSP process work?
The employee may submit claims directly to the trusteed plan or insurance company or he or she may submit the claims receipt to the employer who then in turn submits the receipt along with the payment, including the administration fee, to the trusteed plan or insurance company. The trusteed plan or insurance company may also collect from the employer the PHSP benefit limit and hold them in trust. Any employee who has accumulated 3-months service and is employed full-time in the business can be extended service under the plan. An arrangement whereby an employer reimburses its employees for the cost of medical or hospital care may, or may not, come within the definition of a PHSP. A PHSP exists if the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. The consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or in the contract of service. When an arrangement for an employer to reimburse employees, for hospital and medical expenses incurred by the employees or their dependants, meets the definition of a PHSP, then, the employer may reimburse the employee in any of the ways queried by you. The employer could choose to pay the supplier of the hospital or medical service directly, if such terms are acceptable to the supplier, without tax repercussion to the employees.
Paragraph 3 states the elements that are necessary to qualify for a PHSP. The emphasis is placed on the requirement of "(a) undertaking by one person (b) to indemnify another person", yet the 2000 Business and Professional Income Tax Guide, page 21-23 states the amount a self-employed individual can claim if there were no employees during the term (page 22). Please explain.
A PHSP requires an undertaking by one person to indemnify another person. A Cost Plus Plan for a self-employed businessperson with no employees is not a PHSP because there is no basic insurance plan in effect. Accordingly only premium plans such as those offered by insurance companies or Blue Cross are eligible in such situations.
With consideration of the information in Q3, paragraph 8 states that medical and health insurance plans offered by Blue Cross qualify as PHSPs. Self-employed individuals can purchase a policy to cover themselves and/or their family members. How do the elements of indemnification apply in this case?
Medical and health plans offered by Blue Cross are considered to be a contract of insurance. A contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses qualifies as a PHSP as defined under subsection 248(1) of the Act.
We trust our comments are of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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