24 November 2005 External T.I. 2005-0126211E5 - PHSP - Benefit Allocation

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: An employee that is a member of a flexible employee benefit program has a choice of various medical benefits. The employee allocates all available coverage in one year to, for example, dental expenses and incurs unexpected drug expenses. 1. Can the employee carry forward the drug expenses and allocate sufficient coverage in the subsequent year to use up the expenses? 2. Must the employee allocate at least 1 cent to drug expense coverage in the first year in order to be eligible to carry forward drug expenses? 3. Will such a plan retain its character as a PHSP?

Position: No, the plan would not qualify as a PHSP.

Reasons: 1. A plan will not be considered a PHSP if it allows a participating employee who has no allocation to a particular component of the plan in the prior year to carry those expenses forward or back to another year. 2. A plan that allows a participating employee to allocate a nominal amount to a particular component of a plan in a year merely to allow the carry forward of excess expenses into another plan year would not be considered a PHSP. 3. We cannot envisage how such a plan contains the requisite element of insurance since it has little or no risk.

XXXXXXXXXX 2005-012621
Kathryn McCarthy, CA
November 24, 2005

Dear XXXXXXXXXX:

Private Health Services Plan - Benefit Allocation

This is in reply to your e-mail dated April 15, 2005, further to telephone discussions between XXXXXXXXXX and Mr. Phil Jolie (of the Canada Revenue Agency) on September 25, 2005, and our technical interpretation E9930805, PHSP Coverage, concerning the above noted subject matter. We apologize for the delay in our response.

You described a situation where an employee that is a member of a flexible employee benefit program has a choice of various medical benefits. The employee allocates all available coverage in one year to, for example, dental expenses and incurs unexpected drug expenses. You enquired as to whether the employee can carry forward the drug expenses and allocate sufficient coverage in the subsequent year to use up the expenses under the Income Tax Act (the Act). Alternatively, must the employee allocate at least 1 cent to drug expense coverage in the first year in order to be eligible to carry forward drug expenses? Will such a plan retain its character as a private health services plan (PHSP) under the Act?

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following comments.

To qualify as a PHSP under paragraphs (a) or (b) of the definition in subsection 248(1) of the Act, the plan must be in the nature of insurance. In this respect, the plan 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.

In our view, in and by itself, a plan that permits the carry forward of either the unused allocation of flex credits or eligible medical expenses (but not both) for up to a maximum of 12 months will not be disqualified as a PHSP. However, a plan will not be considered a PHSP if it allows participating employees:

1) who have no allocation to a particular component of the plan in the prior year to carry those expenses forward or back to another year; or

2) to allocate a nominal amount to a particular component of a plan in a year merely to allow the carry forward of excess expenses into another plan year.

We cannot envisage how such a plan contains the requisite element of insurance since it has little or no risk.

For more information, see Interpretation Bulletins IT-339R2, Meaning of private health services plan, at and IT-529, Flexible Employee Benefit Programs, at http://www.cra-arc.gc.ca/E/pub/tp/it529/README.html.

We trust these comments are helpful.

Yours truly,

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