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: Qualification of a specific arrangement as a PHSP
Position: Based on letter, plan does not appear to qualify however definitive answer would require a ruling.
Reasons: Requirements described in IT-339R2 do not appear to have been met.
L. Holloway, CA
XXXXXXXXXX (613) 957-2104
2003-003197
February 4, 2004
Dear XXXXXXXXXX:
Re: Private Health Services Plan ("PHSP")
This is in reply to your letter of June 8, 2003, wherein you requested a "ruling" on whether a particular arrangement would qualify as a PHSP under subsection 248(1) of the Income Tax Act (the "Act").
Your letter included a sample copy of an employer/employee agreement, which is required to be signed by all employees of XXXXXXXXXX ("Xco"). You also noted that Xco has established a separate bank account to which all healthcare premiums are deposited and from which any medical/dental claims are paid. This account cannot be used by Xco for any other purposes. Prior to payment, Xco scrutinizes all medical/dental claims to ensure they qualify for reimbursement under the employee/employer agreement. The Appendix to the employment contract lists what exactly would be covered under the plan.
As noted in Information Circular IC 70-6R5, an advance income tax ruling will only be considered when it is in respect of a specific proposed transaction, and submitted in the manner set out in this circular. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are not binding on the Canada Revenue Agency.
Subparagraph 6(1)(a)(i) of the Act excludes from an employee's income the value of benefits derived from an employer's contributions to specific employer-sponsored arrangements, including benefits arising from an employer's contributions to a PHSP. A PHSP is defined in subsection 248(1) of the Act 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.
Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, it must represent (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. As indicated in paragraph 7 of IT-339R2, an arrangement where an employer reimburses its employees for the cost of medical care or hospital care may be considered a PHSP, where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. However, paragraph 4 of the bulletin provides that 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.
In our opinion, the arrangement described in your letter would probably not meet the requirements provided in paragraph 4 of IT-339R2. Specifically, the expenses covered do not appear to be limited to those which normally would otherwise have qualified as a medical expense under subsection 118.2(2) of the Act.
For example, the Appendix to the employment contract indicates coverage for "All Materials and Apparatus which are Prescribed by a Recognized Medical Practitioner as well as many other Medically necessitated Expenditures." Under paragraph 118.2(2)(m) of the Act, a payment in respect of prescribed medical devices and equipment may only qualify as a medical expense if certain conditions are met. Generally, to qualify, the device or equipment must be:
a. prescribed by a medical practitioner;
b. included in the list of qualifying medical devices or equipment described in section 5700 of the Income Tax Regulations (the "Regulations");and
c. meet such conditions as are applicable to its use or as to the reason for its acquisition.
The list of devices and equipment that qualify as medical expenses under the Act and Regulations is quite specific. The plan appears to cover expenditures for devices and equipment that may not necessarily qualify as medical expenses for the purpose of the medical expense tax credit.
Similarly, some of the items listed in the Appendix as "Prescribed medical treatments" do not automatically qualify as medical expenses under the Act. For example the cost of hydrotherapy and whirlpool bath treatments would not normally qualify as medical expenses under subsection 118.2(2) unless paid to a public or licensed private hospital. Since the plan described in your letter appears to reimburse all expenditures for materials and apparatus prescribed by a medical practitioner, as well as the cost of certain medical treatments, regardless of whether they are qualified medical expenses under the Act, it is our view that the plan would not likely qualify as a PHSP.
Please refer to Interpretation Bulletin IT 519R2 Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction for a list of what is considered to be medical expenses for purposes of the Act. We have enclosed a copy of IT-519R2 for your reference.
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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