2 October 2003 External T.I. 2003-0012665 - 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: 1. Whether proposed arrangement established for a sole shareholder/employee would qualify as a private health services plan.

2. If so, whether benefit is derived by virtue of employment or shareholdings.

Position: 1. Question of fact but it is possible.

2. Question of fact but generally would be employment-related where actively engaged as employee and plan benefits are reasonable under the circumstances.

Reasons: 1. Paragraph 7 of Interpretation Bulletin IT-339R2

2. The factors noted suggest benefits probably received in capacity as employee rather than shareholder.

2003-001266
XXXXXXXXXX B.G. Dodd
(613) 957-8953
October 2, 2003

Dear XXXXXXXXXX:

Re: Private Health Services Plan

We are writing in reply to your letter dated April 8, 2003 concerning the meaning of the term "private health services plan" ("PHSP") as defined in subsection 248(1) of the Income Tax Act (the "Act").

You describe a possible arrangement intended to provide health care coverage to an employee of a corporation (as well as his family) where the employee is the sole employee and shareholder of the corporation. You enquire whether it would be possible for such an arrangement to qualify as a PHSP for purposes of the Act and if so, whether the reimbursement of medical and dental expenses by the corporation would: (a) be deductible by the corporation and (b) not be a taxable benefit to the employee.

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 submitted in the manner set out in Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency with respect to any particular situation.

While a determination would necessitate a review of the facts in any particular situation, including the contracts and other documentation, it is possible that an arrangement such as you describe might qualify as a PHSP in the manner contemplated in paragraph 7 of Interpretation Bulletin IT-339R2. Although employment-related benefits are generally included in income from an office or employment pursuant to paragraph 6(1)(a) of the Act, the benefit enjoyed by an employee as a result of contributions made by the employer to or under a PHSP is excluded from the employee's income by virtue of subparagraph 6(1)(a)(i). Such contributions by the employer to or under a PHSP constitute business outlays or expenses of the employer for purposes of paragraph 18(1)(a) of the Act. On the other hand, there is no similar exclusion where the benefit under a PHSP is derived by virtue an individual's shareholdings, which would be included in income pursuant to subsection 15(1) of the Act, nor would the related contributions be deductible by the corporation.

In the case of a PHSP established for the benefit of a corporation's sole shareholder/employee, it is a question of fact whether the resulting benefit is derived by virtue of the individual's shareholdings or by virtue of his or her employment. However, provided that the individual is actively engaged as an employee of the corporation and the benefits under the PHSP (including the applicable limits) are reasonable having regard to all the circumstances, it is our general view that the benefit would be derived by virtue the individual's employment.

We hope this will be of assistance to you.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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