13 April 2004 External T.I. 2004-0061371E5 - Deductibility of PHSP premiums

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: Will an individual proprietor be denied a deduction of the

premiums paid for PHSP coverage where the proprietor is affiliated to a corporation controlled by the proprietor's spouse, that offers PHSP coverage to its employees?

Position: In the situation described, the individual would not be denied

a deduction for the premiums paid in respect of his PHSP.

Reasons: The proprietor's PHSP does not extend coverage to

employees of the corporation.

Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2004-006137
April 13, 2004

Dear XXXXXXXXXX:

Re: Private Health Service Plan Deductions

We are writing in response to your letter dated February 2, 2004, wherein you asked us for our comments on the deductibility of premiums paid to a private health services plan ("PHSP") by a sole proprietor who is affiliated to a corporation with full-time employees.

In the letter, you describe the following situation:

? A sole proprietor ("Mr. A") sets up a PHSP covering himself and two arm's length full-time employees of his business.

? Mr. A's spouse ("Mrs. A") is the sole shareholder of a corporation employing XXXXXXXXXX full-time employees, including Mrs. A, which offers a PHSP to all employees. Mrs. A is a member of the corporation's PHSP, in her capacity as an employee, and receives benefits identical to the corporation's other XXXXXXXXXX employees.

You expressed a concern that Mr. A will be denied a deduction for the premiums paid in respect of his PHSP by virtue of the interaction of paragraphs 20.01(2)(b) and 20.01(3)(b) of the Income Tax Act (the "Act"), since Mr. A has not paid for PHSP coverage in respect of the employees of the corporation.

Our Comments

Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transaction(s) 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. Notwithstanding the foregoing, we are prepared to provide the following comments.

In general terms, section 20.01 of the Act allows individual business proprietors, and individuals carrying on a business through a partnership, to deduct premiums payable by the proprietor or partnership, as the case may be, under a PHSP in respect of the individual and family members living with the individual, within the defined limits described in subsections 20.01(2) and 20.01(3) of the Act.

Where a particular business has at least one full-time arm's length employee covered under a PHSP, and such employees represent 50% or more of the persons carrying on the particular business (i.e. the proprietor) or employed in the particular business, paragraph 20.01(2)(b) of the Act applies. Specifically, this provision limits the deduction of PHSP premiums for the proprietor and the members of the proprietor's household to the lowest "cost of equivalent coverage" under the PHSP in situations where:

1) there are one or more full-time arm's length employees having at least 3 months of service in the particular business or another business carried on by the proprietor, a partnership of which the proprietor is a majority interest partner, or a corporation affiliated with the proprietor; and

2) the number of arm's length employees receiving coverage under the particular plan equals or exceeds 50% of the total of all persons carrying on the particular business or employed in a business described in 1) and to whom coverage is extended under the particular plan.

Subsection 20.01(3) of the Act generally provides that in determining the limit under subsection 20.01(2), the amount that would be the proprietor's "cost of equivalent coverage" under the PHSP is computed as if the benefits and coverage for the proprietor and the members of his household were identical to the benefits and coverage made available to the full-time arm's length employees of the proprietor, multiplied by the percentage of the cost of coverage under the PHSP in respect of the employees that is paid by the proprietor.

It is our view that, in calculating the limits set out in subsections 20.01(2) and 20.01(3) of the Act, only coverage under Mr. A's PHSP for employees of Mr.A would be taken into account since Mr. A's PHSP did not extend coverage to employees of the affiliated company. Accordingly, in the situation described in your letter, Mr. A would not be denied a deduction for the PHSP premiums paid simply because he is affiliated with a corporation which offers a separate PHSP to its employees.

We trust our comments will be of some assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate