2004 Ruling 2003-0051591R3 - 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.

Principal Issues: Qualification of a medical dental spending account (MDSA) as a private health services plan. Under the terms of the MDSA agreement, the employer pays a fixed monthly amount, plus an administration fee to a third party administrator. Employees submit medical claims to the administrator, who reviews the claims and reimburses the employee up to a pre-determined maximum level of coverage. Medical claims in excess of the maximum level of coverage will not be reimbursed. Unused amounts in the MDSA will be paid back to the employer. The main issues in the ruling are as follows: 1) the qualification of the plan as a PHSP; 2) the deductibility of monthly payment to the MDSA; 3) the deductibility of the administration fee; and 4) whether the reimbursement of medical expenses to an employee is a taxable benefit to the employee.

Position: 1) the plan qualifies as a private health services plan; 2) the monthly payment to the MDSA will be deductible by the employer to the extent of the amount of medical expenses approved by the Administrator for reimbursement; 3) the administration fee will be deductible; and 4) the monthly payments to the administrator will not constitute a taxable benefit to the employees.

Reasons: Satisfies the requirements of IT-339R2.

XXXXXXXXXX 2003-005159

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer")

We are writing in response to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted Taxpayer.

To the best of your knowledge, and that of the Taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the Taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayer or a related person;

(iii) under objection by the Taxpayer or a related person; or

(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired;

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this application for an advance income tax ruling and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

In this letter, the following terms have the meanings specified:

"Administrator" means XXXXXXXXXX, a not-for-profit corporation engaged in the business of offering to the public its services as an administrator of private health services plans;

"Eligible employees" mean management employees of the Taxpayer with at least XXXXXXXXXX of employment;

"Eligible dependents" mean the eligible employees' spouse, or any member of such employee's household with whom the employee is connected by blood relationship, marriage or adoption;

"Eligible medical expenses" mean medical expenses as defined in subsection 118.2(2) of the Act;

"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

FACTS

1. The Taxpayer is a taxable Canadian corporation operating as a XXXXXXXXXX.

PROPOSED TRANSACTIONS

2. The Taxpayer proposes to implement a health benefit plan for its eligible employees in XXXXXXXXXX as part of an employee benefit program. The health benefit plan will be known as a Medical and Dental Spending Account ("MDSA").

3. The MDSA will be underwritten and administered by the Administrator pursuant to a MDSA Agreement to be entered into between the Taxpayer and the Administrator.

4. Details of the MDSA will be outlined in an announcement letter to all existing eligible employees, and will be clearly outlined in the MDSA program booklets to be distributed to the eligible employees. Each eligible employee will have his or her own MDSA.

5. The MDSA will have a plan year that runs from XXXXXXXXXX to XXXXXXXXXX.

6. The Taxpayer's responsibilities, under the terms of the MDSA Agreement, will include:

(a) Enrolling eligible employees, reporting to the Administrator additions or terminations of employees, or changes of employee status (e.g. a single employee becoming married, or an employee adding eligible dependents).

(b) Distributing MDSA program booklets and claim forms to all eligible employees enrolled in the benefit program.

(c) Establishing the annual maximum level of coverage for each eligible employee. In this regard, the Taxpayer has established an annual maximum level of coverage of $XXXXXXXXXX per eligible employee and $XXXXXXXXXX for the principal shareholder in his capacity as an employee of the Taxpayer.

(d) Ensuring that the Taxpayer's bank account contains sufficient funds to allow the Administrator to withdraw the MDSA amounts, up to the annual maximum level of coverage for each eligible employee, plus the administration fee, as described in paragraph 8 below.

7. The Administrator's responsibilities, under the terms of the MDSA Agreement, will include:

(a) Receiving the Taxpayer's monthly payments, up to the maximum level of coverage extended to the eligible employees, and depositing such payments into a trust account at one of Canada's principal banking institutions.

(b) Establishing individual accounts for the eligible employees indicating the balance in their MDSA.

(c) Receiving and reviewing all claims submitted by the eligible employees to ensure expenses in such claims are in respect of eligible medical expenses.

(d) Paying eligible claims to the eligible employees up to the amount in that employee's MDSA.

(e) Holding on file any eligible claim where there are insufficient funds in the eligible employee's MDSA until further employer payments have been received.

(f) Advising the Taxpayer, at the end of the calendar year, of the carry forward amounts in each eligible employee's MDSA.

8. For each plan year, the Taxpayer will pay, to the Administrator, $XXXXXXXXXX in respect of each eligible employee's MDSA and $XXXXXXXXXX in respect of the principal shareholder's MDSA in the shareholder's capacity as an employee of the Taxpayer. Such amounts will be paid monthly to the Administrator, plus an administration fee of $XXXXXXXXXX for each eligible employee and $XXXXXXXXXX for the principal shareholder, pursuant to the MDSA Agreement.

9. Eligible employees will be required to submit original receipts for eligible medical expenses incurred by the employee or the employee's eligible dependents with a completed MDSA claim form to the Administrator. Where applicable, MDSA claims may be submitted electronically at the time the employee incurs the eligible medical expenses.

10. The Administrator will verify the MDSA claim to ensure that the expenses claimed therein are eligible medical expenses and pay the claim directly to the employee up to the annual maximum level of coverage available in the employee's MDSA account. In this regard, if a claim exceeds the balance in an employee's MDSA but is less than the annual maximum level of coverage available in the employee's MDSA, the Administrator will hold payment of the claim until sufficient amounts have been received from the Taxpayer.

11. For a particular plan year, eligible medical expenses in excess of the annual maximum level of coverage available to a particular employee's MDSA will not be reimbursed. In addition, such excess amounts cannot be carried forward and claimed in a subsequent plan year.

12. The medical expenses that will be reimbursed under the MDSA will be limited to those medical expenses as defined under subsection 118.2(2) of the Act.

13. Claims for a plan year must be submitted no later than XXXXXXXXXX days after the end of the plan year. Any unused balance in an eligible employee's account at the end of a particular plan year will be carried forward to the following plan year, to be used first in the following plan year to pay new claims incurred in that year. Unused balances for a particular plan year that are not used by XXXXXXXXXX of the second plan year following the particular plan year are forfeited and paid back to the Taxpayer.

14. In addition to the MDSA, the Taxpayer will also allow eligible employees to obtain the following optional coverage, which will be fully funded by the eligible employees:

(a) A supplemental extended health care ("EHC") plan underwritten by XXXXXXXXXX for their subsidiary, XXXXXXXXXX, which provides eligible employees with extended health coverage for eligible medical expenses of up to an annual maximum of $XXXXXXXXXX, subject to a deductible ($XXXXXXXXXX per applicant or $XXXXXXXXXX per couple or family as applicable).

(b) An optional supplemental dental benefit ("SDB") plan underwritten by XXXXXXXXXX for their subsidiary, XXXXXXXXXX, which provides eligible employees with coverage for eligible dental services up to an annual maximum of $XXXXXXXXXX per plan year, subject to a deductible ($XXXXXXXXXX per applicant, or $XXXXXXXXXX per couple or family as applicable).

(c) Optional insurance benefits for accidental death and dismemberment, critical illness, and disability.

15. Each eligible employee may obtain any or all of the coverage as described in paragraphs 14(a), (b) and (c) above. However coverage under the SDB can only be obtained in conjunction with the EHC plan.

PURPOSE OF PROPOSED TRANSACTIONS

16. The purpose of the proposed transactions is to provide eligible employees with a benefits program that includes the MDSA as an aid in retaining the Taxpayer's current employees at a net cost that, in the view of the Taxpayer, will be less than that offered by traditional insurers.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The proposed MDSA will qualify as a "private health services plan" as that term is defined in subsection 248(1) of the Act.

B. To the extent that the Administrator has approved the reimbursement, to the eligible employees, of eligible medical expenses for a particular plan year, the amount will be deductible in computing the Taxpayer's income for the year from a business for purposes of subsection 9(1) of the Act.

C. For a particular plan year, the administration fees described in paragraph 8 above, which are paid by the Taxpayer to the Administrator will be deductible in computing the Taxpayer's income from a business, in accordance with subsection 9(1) of the Act.

D. The monthly payments by the Taxpayer to the MDSA, as described in paragraph 8 above will not constitute a taxable benefit to the eligible employees, pursuant to subparagraph 6(1)(a)(i) of the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency ("CRA") provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate