23 July 2004 External T.I. 2004-0075821E5 - Health Care benefits to former employees

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 terminated employees are subject to tax on benefits derived from extended health care plan

Position: Not generally subject to tax if benefits from a PHSP-

Reasons: Treated the same as current employees- similar position previously taken

2004-007582
XXXXXXXXXX Lena Holloway, CA
613-957-2104
July 23, 2004

Dear XXXXXXXXXX:

Re: Taxation of Health and Dental Benefits received by Terminated Employee

This is in response to your email of May 11, 2004 concerning the tax treatment of amounts paid to a former employee for health and dental benefits that extend beyond the time period covered by a salary continuance arrangement. Specifically, your memorandum explained that upon termination, a senior employee received a settlement consisting of a salary continuance for 6 months, and extended health and dental benefits coverage for an additional one or two years beyond the termination date. You have asked for our opinion on the tax treatment of these health benefits.

Our Comments

The situation described in your email appears to relate to transactions that have already occurred. In situations involving specific taxpayers and completed transactions, all relevant facts and documentation should be submitted your Tax Services Office for their views. However, we offer the following general comments which may be of assistance.

If the health and dental benefits are provided from a private health services plan ("PHSP"), subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act") would exclude from income the value of benefits derived from an employer's contributions to such an arrangement. This position would also apply to a former employee, and any benefits derived from a former employer's contribution to a PHSP would not be taxable. Interpretation Bulletin IT-339R2, "Meaning of Private Health Services Plan" describes the types of plans that meet the definition of PHSP in subsection 248(1) of the Act, and should be consulted in order to determine whether a particular plan is a PHSP.

Where the arrangement is not a PHSP, we would need to review all of the documents and circumstances relevant to a particular situation, including the employment contract, the settlement agreement, and the terms of the health and dental coverage in order to provide definitive comments on the tax consequences of any benefit, including health and dental benefits, received by a former employee under the terms of a settlement agreement,. For more information on the tax treatment of amounts paid to a terminated employee under a settlement agreement, please refer to paragraphs 9 to 14 of Interpretation IT-337R4, "Retiring Allowances".

If you need further assistance on this issue, you may contact Valerie Dionne of the Burnaby-Fraser Tax Services Office at (604) 587-2047.

All publications referred to herein can be accessed on the CRA website at the following address: www.cra-arc.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