24 November 2004 External T.I. 2004-0089101E5 - Medical expenses and 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: 1) The deductibility of PHSP premiums in situations where the employer pays the premium and the employee pays the premium. 2) Are premiums paid in respect of travel coverage or additional medical coverage a qualifying medical expense?

Position: 1) Provided that the plan qualifies as a PHSP then premiums paid by the employer are not included in income of the employee and accordingly, such amounts would not be deductible as a medical expense for the employee. However, PHSP premiums paid through payroll deductions or directly by the employee would be a qualifying medical expense. 2) Premiums paid for travel coverage or supplementary medical coverage would be deductible provided that the underlying plan qualifies as a PHSP.

Reasons: The determination is a question of fact.

Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2004-008910
November 24, 2004

Dear XXXXXXXXXX:

Premiums paid to private health services plan ("PHSP")

We are writing in response to your letter dated July 30, 2004, wherein you asked for clarification on the deductibility of PHSP premiums in situations where either an employer paid the premiums on behalf of an employee, or the employee paid a certain portion of the premiums. In addition, you asked whether premiums paid by an employee to obtain 1) additional travel coverage under an employer sponsored plan or 2) additional coverage for medical expenses that may occur while a child is attending school outside of their province of residence would be qualified medical expenses.

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 advance ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Notwithstanding the foregoing, we are prepared to provide the following general comments.

Private health services plan

A PHSP is defined in subsection 248(1) of the Income Tax Act (the "Act") as a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or a medical care insurance plan or hospital care insurance plan or any combination of such plans. By definition, a PHSP excludes, among other things, a plan created by, or pursuant to a law of a province that establishes a "health care insurance plan" as defined in section 2 of the Canada Health Act. In this regard, section 2 of the Canada Health Act defines a "health care insurance plan" as a plan established by the law of the province to provide for insured health services (typically provincial medical or hospital insurance plans). Insured health services generally means hospital, physician, and surgical-dental services provided to insured persons.

Generally, a contract of insurance must contain the following basic elements:

(a) an undertaking by one person,

(b) to indemnify another person,

(c) for an agreed consideration,

(d) from a loss or liability in respect of an event,

(e) the happening of which is uncertain.

As noted in paragraph 8 of IT-339R2, medical and hospital insurance plans offered by various life insurers, for example, are considered private health services plans within the meaning of subsection 248(1).

In addition, in order to qualify as a PHSP, coverage under such a plan must be limited to medical expenses that would otherwise qualify for the medical expense tax credit pursuant to subsection 118.2(2) of the Act. It is our view that if a plan (including a plan that offers travel coverage) provides coverage for expenses that would not otherwise qualify as medical expenses as defined in subsection 118.2(2) of the Act, such plan would normally not qualify as a PHSP. Accordingly, any premiums paid in respect of the plan would not be a qualifying medical expense.

With respect to travel expenses, please note that only medically necessary travel that meets the conditions as set out in paragraphs 118.2(2)(g) and (h) of the Act would qualify as medical expenses. In this regard, please refer to paragraphs 31 to 34 of interpretation bulletin, IT-519R2 (Consolidated), Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction for more information on the types of travel expenses that would qualify as medical expenses. This bulletin is available on our web site at www.cra-arc.gc.ca.

Reimbursement of qualifying medical expenses

Paragraph 118.2(3)(a) of the Act provides that for the purpose of computing the medical expense tax credit, an individual may claim, as a medical expense, any amount included in the individual's employment income in respect of a qualifying medical expense that is paid or provided by the individual's employer. However, where an employer pays the premiums in respect of a PHSP, such premiums would not be included in computing the individual's employment income by virtue of subparagraph 6(1)(a)(i) of the Act. Accordingly, the premiums paid by the employer would not be included as a qualifying medical expense for the employee.

On the other hand, contributions or premiums qualify as medical expenses where they are paid directly by the employee, or are paid by the employer out of deductions from the employee's pay. The amounts so paid must be for one or more of:

(a) the employee,

(b) the employee's spouse, and

(c) any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption.

In addition paragraph 118.2(3)(b) of the Act provides that, any reimbursement an individual or legal representative is entitled to receive in respect of qualifying medical expenses (under a PHSP, or other private or public medical, dental or hospital plan), and that is not included in an individual's income, will reduce the amount of qualifying medical expenses that would otherwise be eligible for the medical expense tax credit.

In order to provide more definitive comments about a particular plan, we would need to consider all of the facts including the terms of the plan, the funding of the plan, and the employment contracts if the plan is part of an employer's benefit package. Such a review would normally be undertaken in the context of an advance income tax ruling request submitted in the manner set out in IC 70-6R5. If you wish to discuss the tax implications of an existing plan, you may wish to call or visit the Windsor Tax Services Office.

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