23 January 2002 External T.I. 2001-0106815 - PHSP - REASONABLE AMOUNT

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:

PHSP for a employee/shareholder and reasonable amount

Position:

Provided general comments

Reasons:

Question of fact

XXXXXXXXXX 				2001-010681
C. Tremblay, CMA
January 23, 2002

Dear XXXXXXXXXX:

This is in reply to your letter of October 9, 2001, wherein you requested our views with respect to whether an amount may be considered a reasonable contribution to a Private Health Services Plan ("PHSP") for an employee-shareholder when there are no arms-length employees of the corporation.

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. Should you wish to request such a ruling, please refer to Information Circular 70-6R4 for the procedure to be followed. However, we have set out some general comments, which may of some assistance.

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 Income Tax Act (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.

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 premiums paid to insurance and/or health services plans are not deductible by the employer pursuant to paragraph 18(1)(a) of the Act and the exclusions in subparagraph 6(1)(a)(i) of the Act do not apply. In such a case, the premiums would be included in the income of the shareholder under subsection 15(1) of the Act. In addition, payments made in respect of a shareholder would not be deductible in computing the corporation's income. On the other hand, if coverage under a PHSP is received by an individual by virtue of his or her employment, the related benefits are not taxable and payments made by the employer pursuant to the PHSP would be deductible. It is a question of fact whether benefits are received by an individual by virtue of being a shareholder or employee. It is also a question of fact whether such coverage constitutes a reasonable amount. In this regard, the limits available to self-employed individuals that have no arm's length employees under section 20.01 of the Act could, in our view, be considered reasonable. However, such a determination can only be made upon considering all the specific facts of the particular situation.

We trust the above comments are of assistance.

Yours truly,

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