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.
Principal Issues: general discussion of attributes of PHSP
Position: general responses given
Reasons: more specific responses are question of fact
Lena Holloway,CA
XXXXXXXXXX 613-957-2104
2003-001235
April 23, 2004
Dear XXXXXXXXXX:
Re: Private Health Services Plans ("PHSP's")
This is in response to your email of April 7, 2003 concerning the tax treatment of PHSP's. Your letter presented several hypothetical scenarios and posed many questions concerning the set up and structure of PHSP's. We apologize for the delay in this response.
As noted in Information Circular IC 70-6R5, written confirmation of the tax consequences that apply to a particular fact situation is given by this directorate only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the local Tax Services Office. However, we are prepared to provide the following general comments, which are not binding on the Canada Revenue Agency ("CRA").
As several of your questions concern the qualification of a particular plan as a PHSP and the related income tax consequences to the employer and employee in a number of different circumstances, we are only able to offer a general discussion of the tax treatment of PHSP's.
In order for employer-paid health care insurance premiums to be excluded from employment income under subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act"), the particular plan must qualify as a PHSP as defined in subsection 248(1) of the Act. Subsection 248(1) of the Act defines a PHSP as:
a) a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or
b) 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, sets out the requirements that must be met in order for a plan to be considered a PHSP. Generally, the employer would be entitled to a deduction for contributions made to a PHSP in determining its income provided these requirements are met, the contribution is reasonable in amount, and the amount is laid out to earn business or property income. Benefits received by employees in respect of employer contributions made to a PHSP are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Act.
Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, where the plan represents (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, it will be considered to be in the nature of insurance. In addition, coverage must be in respect of hospital care or expenses, or medical care or expenses, which normally would otherwise have qualified as medical expenses under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.
Please refer to IT-339R2 for further information on the various arrangements that may qualify as a PHSP, such as cost-plus plans, and direct reimbursement of medical expenses by an employer.
PHSP's offered through a Flexible Employee Benefit Plan
An employer may offer a PHSP (usually in the form of a health care spending account) to its employees as part of a flexible employee benefit plan ("flex plan") where each employee can select from a range of taxable and non-taxable benefits. In order for an employer to be entitled to segregate the taxable and non-taxable benefits offered under the umbrella of a flex plan, employees are required to choose which benefits will be provided under the flex plan and how the benefits will be funded prior to the beginning of the plan year. In addition, the selection must be irrevocable unless employment circumstances change, or a life event occurs. Please refer to Interpretation Bulletin
IT-529 Flexible Employee Benefit Plans for more information on these plans. In particular, paragraphs 14 to 18 of this bulletin provide detailed information on health spending accounts.
PHSP's offered by Proprietorships and Partnerships
Until 1998, amounts paid by self-employed individuals for their own health, medical and dental insurance coverage and for that of their families were not deductible in computing business income. Alternatively, businesses operated in the corporate form had been allowed deductions for insurance coverage for shareholders who were also employees. Section 20.01 was introduced in 1998 in order to give self-employed individuals (which includes individuals carrying on a business through a partnership) similar tax treatment to those corporate-run businesses. Section 20.01 of the Act allows, subject to certain conditions, individuals to deduct, in computing income from businesses carried on by them, premiums paid to a PHSP on behalf of themselves, their spouses and members of their households.
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 paid under a PHSP in respect of the individual, the individual's spouse or common-law partner or any other person who is a member of the individual's household. The limits are set out 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.
Limit under Paragraph 20.01(2)(b)-More than 50% Arm's Length Employees
Paragraph 20.01(2)(b) provides a limit to the deduction of PHSP premiums for the individual and the members of the individual's household that is the lowest "cost of equivalent coverage" under the PHSP in respect of any full-time arm's length employee. Specifically, the limit applies to premiums payable to a PHSP for a period in which:
1. there are one or more full-time employees having at least 3 months of service in the particular business or another business carried on by the proprietor, a partnership of which the proprietor is a majority interest partner, or a corporation affiliated with the proprietor (hereinafter referred to as "full-time employees"); and
2. the number of arm's length employees receiving coverage under the particular plan equals or exceeds 50% of the total of all persons carrying on the particular business or employed in a business described in 1) and to whom coverage is extended under the particular plan.
In computing the above limit, subsection 20.01(3) of the Act essentially determines the lowest cost of equivalent coverage in respect of a proprietor or partner (the "individual") in relation to another person as the amount that would be the individual's cost of coverage under the PHSP, if the benefits and coverage for the individual and the members of his or her household were identical to the benefits and coverage made available to the other person, multiplied by the percentage of the cost of coverage under the PHSP in respect of the other person that is paid by the individual or the partnership of which the individual is a member .
Limit under Paragraphs 20.01(2)(c) and (d) - Less than 50% Arm's Length Employees
Paragraphs 20.01(2)(c) provide that, for a period in which the limit under paragraph 20.01(2)(b) does not apply, the deduction is restricted by a dollar maximum. This limit is equal to $1,500 for each of the individual, the individual's spouse and members of the individual's household who are 18 years of age or over and $750 for members of the individual's household who are under the age of 18, pro-rated based on the number of days in the period which are in the year.
Furthermore, if the business employs any arm's-length full-time employees, in a period throughout which the paragraph 20.01(2)(b) limit does not apply, paragraph 20.01(2)(d) provides that the individual's deduction cannot exceed the lesser of the individual's lowest cost of equivalent coverage in respect of the arm's length full-time employee(s) (as determined under subsection 20.01(3) of the Act), and the dollar limit set out in paragraph 20.01(2)(c). Accordingly, where an individual's business (proprietorship or partnership) employs arm's-length full-time employees and coverage is not extended to all of these employees, no deduction would be allowed to the individual in respect of coverage for himself, or members of his household.
Cost-Plus PHSP's and Sole Proprietorships with no Employees
In a cost-plus arrangement, it is the employer, and not the administrator, who insures the employees. Accordingly, it is our view that a cost-plus plan for a sole-proprietor does not constitute insurance unless the plan provides coverage for at least one employee as well as the sole proprietor. Obviously, this is not possible if the sole-proprietorship has no employees. In such a case, the sole proprietor is simply paying his or her own medical or hospital expenses, and thus the plan will not qualify as a PHSP. The Department of Finance is currently reviewing this issue to determine if a legislative amendment is advisable.
Specific Questions
In your letter, you asked for our comments on several specific questions involving PHSP's. We cannot provide any definitive comments without reviewing all of the facts and documentation in respect of a particular PHSP, including any contracts or agreements with the plan administrator, the employment contract, the terms of the plan, and whether the plan is offered as part of a flexible employees benefit plan. Such a review would only be undertaken in the context of a request for an advance income tax ruling submitted in the manner set out in IC 70-6R5.
Finally, you asked for our comments on whether professional tooth whitening performed at a dental office would qualify for coverage under a PHSP. As noted above, a PHSP must only cover those medical expenses described in subsection 118.2(2) of the Act. Paragraph 118.2(2)(a) of the Act allows an individual to include, as a qualifying medical expense, an amount paid to a medical practitioner, dentist or nurse or a public or licensed private hospital for medical or dental services provided to the patient. As professional tooth whitening performed by a medical practitioner or dentist in a dental office would qualify as a medical expense under paragraph 118.2(2)(a) of the Act, it would also be a qualified expense for PHSP purposes.
The Interpretation Bulletins mentioned above can be obtained from our website at www.cra.gc.ca.
We trust our comments will be of assistance to you.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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