7 July 2005 External T.I. 2005-0120351E5 - 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: 1) Where an owner/shareholder of a Professional Corporation is paid only a dividend, can the owner/shareholder qualify for reimbursement of medical and dental expenses through a Private Health Services Plan?

2) Would the answer in question 1 change if the owner/shareholder were paid a fee for management or other services?

3) Would an adult child of an owner of an unincorporated business who is not living at home but is an employee of the unincorporated business qualify for medical reimbursement under a Private Health Services Plan? Are there any limitations?

Position: 1) Question of Fact. 2) Question of Fact. 3) Yes. No.

Reasons: 1) It is a question of fact whether the benefit, from an employer's contribution to a PHSP is derived by virtue of an individual's shareholding or by virtue of the individual's office or employment. Generally, benefits received by employees are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act. However, there is no similar exclusion where the benefit is derived by virtue of an individual's shareholdings. The benefit received by the shareholder would be included in the shareholder's income pursuant to subsection 15(1) of the Income Tax Act.

2) It is also a question of fact whether a fee for management and other services is received as income from a business or income from an office or employment.

3) Where the adult child of an owner of an unincorporated business receives a benefit by virtue of his/her employment derived from the contributions of his/her employer to a private health services plan, the benefits will not be included in income by virtue of subparagraph 6(1)(a)(i). The limitations in section 20.01 of the Income Tax Act do not apply in this case.

XXXXXXXXXX 								2005-012035
	Luisa A. Majerus, CA
(613) 832-3488
July 7, 2005

Dear XXXXXXXXXX:

Re: Private Health Services Plan ("PHSP")

This is in reply to your letter dated March 4, 2005 wherein you have asked a number of questions relating to PHSPs.

Our Comments

Generally, an individual may qualify for reimbursement of medical and dental expenses under a PHSP. However, reimbursements or benefits received by employees in respect of employer contributions made to a employer-paid health care insurance plan are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act"). In order for the benefits to be excluded from employment income the particular plan must qualify as a PHSP as defined in subsection 248(1) of the Act. Subsection 248(1) of the Act defines a PHSP 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.

Further information on the requirements that must be met in order for a plan to be considered a PHSP can be found in our Interpretation Bulletin IT-339R2, Meaning of Private Health Services Plan, which can be found on our website at www.cra-arc.gc.ca.

The employer or corporation would be entitled to a deduction in determining its income for contributions made to a PHSP for its employees provided the contributions are reasonable and the amounts are laid out to earn business or property income.

However, contributions would not be deductible by the corporation where contributions are made to a PHSP for a shareholder of the corporation who is not an officer or an employee. The benefit from the corporation's contribution to a PHSP for the shareholder will be included in the shareholder's income under subsection 15(1) of the Act.

It is a question of fact whether a benefit, from a corporation's contribution to a PHSP, is derived by virtue of an individual's shareholdings or by virtue of the individual's office or employment. It is also a question of fact whether amounts paid for management and other services constitute income from a business or income from an office or employment.

However, in reply to your last question, where an adult child, of an individual operating a unincorporated business ("proprietorship"), is an employee of the proprietorship but is not a member of the individual's household section 20.01of the Act and the limits therein will not apply. The benefit received by the adult child by virtue of his/her employment in respect of contributions made to a PHSP by his/her employer are not subject to tax and the employer would be entitled to a deduction for contributions made to a PHSP in determining its income provided the contributions are reasonable and the amounts are laid out to earn business or property income.

We trust this information meets your needs at the current time.

Yours truly,

Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch