12 February 2004 External T.I. 2003-0053211E5 - Cost-plus private health services plans

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: What are the guidelines in establishing a cost-plus PHSP.

Position: General comments only.

Reasons: IT-339R2

XXXXXXXXXX 2003-005321
J. Gibbons, CGA
February 12, 2004

Dear XXXXXXXXXX:

This is in response to your letter dated December 10, 2003, wherein you requested that we review the standard agreement (the "Agreement") to be used by XXXXXXXXXX (the "Company") in its business as an administrator of cost-plus private health services plans ("PHSPs"). In particular, you wish us to confirm that the Agreement complies with the requirements of the Canada Revenue Agency ("CRA").

The Agreement appears to be typical of most cost-plus PHSP arrangements. That is, under the agreement, the employer submits for the Company's review (as administrator) claims by employees on defined risks under the plan. The employer also submits, concurrently with employees' claims, the necessary funds to reimburse such claims and an administration fee, equal to a pre-established percentage of the claim amounts. As long as the employment contracts are in good standing and the claims are for defined risks, the Company will indemnify the particular employees' claims.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Nonetheless, we have provided some general comments below, which we hope will be of some assistance to you.

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. Also, section 20.01 of the Act allows, subject to certain conditions, individuals to deduct, in computing income from business carried on by them, premiums paid to a PHSP on behalf of themselves, their spouses and members of their households.

In general terms, a PHSP is a plan of insurance in respect of medical and/or hospital expenses. Our views on the meaning of a PHSP are set out in Interpretation Bulletin IT-339R2, Meaning of "private health services plan." As stated in paragraph 6 of the Bulletin, a cost-plan plan generally qualifies as a PHSP if the risks to be indemnified under the plan are those described in paragraphs (a) and (b) of the definition of PHSP, i.e., medical or hospital expenses. Paragraph 4 of the Bulletin indicates that eligible medical or hospital expenses are those that normally would otherwise have qualified as medical expenses under subsection 118.2(2) of the Act.

It is important to note that 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 employees 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.

With respect to the Agreement submitted, we note that the "Enrollment Form" included with the Agreement defines "Dependents of an Eligible Employee" to include an individual who is publicly represented as the individual's spouse or partner. As indicated above, medical or hospital expenses are those that normally would otherwise have qualified as a medical expense under subsection 118.2(2) of the Act. Under this subsection, medical expenses must be for the individual, the individual's spouse or common-law partner or a dependant of the individual. The term "common-law partner" in respect of a taxpayer is defined in subsection 248(1) and generally includes at a particular time, a person who, at that time, cohabits in a conjugal relationship with the taxpayer and either has cohabited with the taxpayer for a continuous period of at least one year or is the natural or adoptive parent of a child of the taxpayer. Therefore, the Agreement's definition of "common-law partner" may not necessarily meet the definition of a "common-law partner" in the Act.

We cannot provide more definitive comments without reviewing all of the facts and documentation associated with a particular cost-plus arrangement including the types of expenses covered, the relevant employment contracts, and, where applicable, the arrangement made to cover sole proprietors and partners who are actively engaged in carrying on a business. Such a review would only be undertaken in the context of an advance income tax ruling submitted in the manner outlined in Information Circular IC-70-6R5.

We trust that these comments will be of assistance.

Yours truly,

Wayne Antle, CGA.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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