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 contributions to a PHSP can be made by way of a reduction in salary?
Position: Provided that the underlying plan qualifies as a PHSP, contributions by an employer would not be a taxable benefit to the employees under subparagraph 6(1)(a)(i). Moreover, employee contributions to a qualifying PHSP are a medical expense pursuant to paragraph 118.2(2)(q).
Reasons: Previously stated positions.
Bob Naufal, CMA
XXXXXXXXXX (613) 952-1506
2004-009021
February 10, 2005
Dear XXXXXXXXXX:
Private health services plans and wage adjustments
We are writing in response to your letter dated August 4, 2004, wherein you asked us if contributions to a private health services plan ("PHSP") can be effected by a salary or wage adjustment. In the letter, you outlined certain scenarios involving the payment of PHSP premiums by employees and employers with a corresponding reduction in the salary paid to the employee. We apologize for the delay in our response.
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. In this regard, our comments only discuss the income tax consequences of a particular plan as the CRA does not administer the Employment Standards Act cited in your letter.
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. The determination of whether a particular arrangement qualifies as a PHSP can only be made after a review of all the underlying documents including the terms of the plan, the funding of the plan, and the employment contracts in situations where 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. Further information regarding PHSP's can be found in Interpretation Bulletin, IT-339R2, Meaning of "private health services plan".
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.
Where a contract of employment is renegotiated upon the expiry of a former employment contract to incorporate a decrease in the level of salary or wages to be paid to an employee over the term of the new contract, and the new contract also provides for additional PHSP premiums to be paid by the employer, the additional premiums would probably not be required to be included in the employee's income as part of salary and wages. However, if an employment contract is renegotiated during the term of the employment contract to decrease salary and increase PHSP premiums, the additional premiums would likely be included in the employee's income as salary, and be considered an employee contribution to the PHSP. In order to conclusively determine whether contributions to a PHSP are made by an employer or employee, it is necessary to consider all of the facts including the terms of the plan and the employment contract.
The publications cited above are available on our website at www.ccra-adrc.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
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