8 March 2004 External T.I. 2004-0060671E5 - Counselling Services covered under HCSA

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: Discussion of tax treatment to employee and employer of amounts covered under a HCSA which may qualify as a PHSP; in particular fees paid for counselling services.

Position: Tax treatment depends upon the type of counselling undertaken and the type of plan covered under.

Reasons: Question of fact

									2004-006067
XXXXXXXXXX 				Lena Holloway,CA
613-957-2104
March 8, 2004

Dear XXXXXXXXXX:

Re: Tax treatment of Counselling expenses covered under various health plans

This is in response to your email of February 3, 2004 concerning the tax treatment of amounts paid for clinical counselling where these expenses are covered either under a Health Care Spending Account ("HCSA") and/or a private group extended healthcare type 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.

Our Comments

Paragraph 14 of Interpretation Bulletin IT-529 entitled "Flexible Employee Benefit Programs" discusses HCSA's. In order for benefits received under a HCSA to be non-taxable, the HCSA must qualify as a "private health services plan" ("PHSP"). Subparagraph 6(1)(a)(i) of the Income Tax Act (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. The requirements to qualify as a PHSP are set out in Interpretation Bulletin IT-339R2, "Meaning of Private Health Services Plan". One of these requirements is that the plan must be in respect of hospital care or expenses, or medical care or expenses, which normally would otherwise have qualified under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit. In this regard, amounts paid for counselling services may qualify as medical expenses provided that:

(a) the counsellor is working in a recognized mental health clinic, community agency or hospital,

(b) the counsellor is a member of an association governing their particular profession, and

(c) the treatment provided by the counsellor is at the request of or in association with a medical practitioner.

Where the counselling services in question meet the above criteria and the plan would otherwise qualify as a PHSP (see further requirements discussed in IT -339R2), premiums, contributions or other consideration paid for by the employer would normally be deductible business expenses of the employer in computing taxable income. Where such premiums or contributions are paid for by the employee, they would qualify as medical expenses under paragraph 118.2(2)(q) of the Act. In addition, benefits received under the plan would not be taxable to the recipient.

Where such a plan cannot be considered a PHSP, the amount of any benefit paid to the employee would be taxable to the employee. A plan that is designed to cover employee health related expenses but that does not meet the requirements of a PHSP may fall under the category of an employee benefit plan. Under such a plan, an employer's deduction is conditional upon contributions to the plan being included in the income of the employees, by virtue of paragraph 18(1)(o) and section 32.1 of the Act. In addition, the employer's contributions to the plan would not be taxable to the employee as provided by subparagraph 6(1)(a)(ii) of the Act. However all amounts received out of or under the plan by the employee would be included in the employee's income by virtue of paragraph 6(1)(g) of the Act. Please refer to Interpretation Bulletin IT-502, "Employee Benefit Plans and Employee Trusts" for more information in this regard.

The Interpretation Bulletins mentioned above can be obtained from our website at www.ccra.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