5 May 2004 External T.I. 2004-0066271E5 - 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: Whether a plan would qualify as a PHSP.

Position: General comments provided

Reasons: Proposed transactions must be subject of an ATR and must meet conditions as set out in IT-339R2.

XXXXXXXXXX 2004-006627
Shaun Harkin, CMA
May 5, 2004

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Private Health Service Plan

We are writing in reply to your recent letter, wherein you requested our comments as to whether the particular health care plan offered to your employees would be considered a private health services plan ("PHSP") under the Income Tax Act (the "Act"). You requested that we review the employment contract and description of the plan to determine if it is a PHSP.

The employment contract provides that the employer will allocate an amount equal to ten percent of an employee's salary to cover an employee's costs for prescription drugs, eyewear, dental services, and health professionals. Any amount not spent on such costs over a one-year period will be refunded to the employee as a taxable benefit. The plan may be altered or terminated at any time by the employer with one month's notice.

Our Comments

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.

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 only 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 view, your particular plan would not qualify as a PHSP for the following reasons:

First, the expenses covered under the plan 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 "health professional" costs but the term "health professional" is not defined. Therefore, the plan may cover costs for the services of health professionals, which would not otherwise qualify as eligible medical expenses under the Act.

Secondly, in order for a plan or arrangement to qualify as a PHSP, it must be a plan of insurance and thus involve a reasonable element of risk, which is assumed by the employer. If the plan or arrangement is such that it can be terminated at any time by the employer, with minimal notice, at the sole discretion of the employer, there may be some doubt as to the level of risk undertaken and whether this would, in fact, be a plan of insurance. The information submitted indicates that the particular plan can be terminated by the employer at any time with one month's notice. Therefore, it is our view that the arrangement is likely not a plan of insurance, and would not qualify as a PHSP.

Finally, the plan described above provides that the employer will pay an amount equal to ten percent of an employee's salary to the employee, either in the form of reimbursed health care costs, or as a cash payment. As noted above, a PHSP may only make payments to employees to cover eligible medical expenses. In view of the fact that the plan provides for other payments to be made to employees, it does not qualify as a PHSP.

Since the particular plan offered to your employees is not a PHSP, all payments made out of the plan to each employee must be included in the employee's income even though some payments may be in respect of eligible medical expenses. The employee may be able to claim a tax credit on his or her personal tax returns in respect of eligible medical expenses (in excess of defined limits) incurred during any twelve-month period ending in the year. Please refer to IT-519R2 (Consolidated) Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction for more information in this regard.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

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

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