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: Specific questions relating to the acceptability of certain transactions relating to a "cost plus" PHSP of a limited liability partnership.
Position: General comments provided.
Reasons: Comments would only be provided in the context of an advance income tax ruling submitted in the manner outlined in Information Circular IC 70-6R5.
2005-013333
XXXXXXXXXX Darlene Green
(613) 957-2082
October 3, 2005
Dear XXXXXXXXXX:
Re: Private Health Services Plan ("PHSP") operated by a limited liability partnership
This is in response to your letter of May 26, 2005 wherein you asked for our comments on several specific questions regarding a "cost-plus" PHSP as described in paragraph 6 of Interpretation Bulletin IT 339R, Meaning of Private Health Services Plan, which is provided for partners and employees of a limited liability partnership.
We are unable to provide definitive comments on the types of questions raised in your letter without reviewing all of the facts and documentation in respect of a particular cost-plus arrangement, including the types of expenses covered, the relevant employment contracts, any contracts or agreements with the plan administrator, the terms of the plan, whether the plan is offered as part of a flexible employee benefit plan, and where applicable, the arrangement made to cover sole proprietors and partners who are actively engaged in carrying on a business. Such a review would only be undertaken in the context of an advance income tax ruling submitted in the manner outlined in Information Circular IC 70-6R5. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. However, we are prepared to provide the following general comments, which are not binding on the Canada Revenue Agency ("CRA").
PHSP is defined in subsection 248(1) of the Income Tax Act (the "Act") and generally includes 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. IT-339R2, dated August 8, 1989, sets out the requirements that must be met in order for a plan to be considered a PHSP. Generally, the employer would be entitled to a deduction for contributions made to a PHSP in determining its income provided these requirements are met, the contribution is reasonable in amount, and the amount is laid out to earn business income. Benefits received by employees in respect of employer contributions made to a PHSP are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Act.
Paragraph 6 of IT-339R2 provides general information regarding a "cost plus" type plan where an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan, and promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company.
One of your questions concerns the co-mingling of employee and partner contributions and claims. As outlined above, and subject to restrictions under the Act, an employer may deduct amounts paid in respect of employees as a normal business expense. It is worthwhile noting that amounts paid by the partnership in respect of partners would not be deductible but for section 20.01. Further, section 20.01 has a number of conditions, including a requirement that the partner be actively engaged on a regular and continuous basis in the business. Given these requirements, such expenses should be accounted for separately.
We trust that our comments will be of some assistance to you.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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