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: Tax implications relating to a specific fact pattern where benefits provided only to executives and senior managers who are shareholders, to the exclusion of all other employees.
Position: General comments given
Reasons: Question of fact; specific 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.
XXXXXXXXXX Darlene Green
October 6, 2005
Re: Private Health Services Plan ("PHSP")
This is in response to your letter of June 28, 2005 wherein you asked for our comments regarding the tax treatment of health benefits arising under a private health services plan ("PHSP") provided solely to executives and senior managers who are also shareholders.
In your letter, you have outlined what appears to be an actual fact situation that may relate to proposed or ongoing transactions and, as noted in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002 confirmation of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. In considering such a request we would require a complete description of all the relevant facts, information and proposed transactions. 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").
A 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. 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.
An employer may contract with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan, wherein the employer promises to reimburse the cost of such claims plus pay an administration fee to the plan or insurance company. Where such an arrangement is part of an employment contract, the plan may qualify as a PHSP. Please refer to Interpretation Bulletin, IT-339R2, Meaning of private health services plan, for more information about PHSPs.
Where an individual, who is both a shareholder and an employee, receives a benefit under a PHSP and equivalent benefits are not available to all employees, the individual is generally considered to be in receipt of a shareholder benefit taxable under subsection 15(1) of the Act. Contributions made by the corporate employer to such a PHSP on behalf of the shareholder would not be deductible by the corporate employer.
On the other hand, when equivalent coverage under a PHSP is extended to all employees, including employees who are shareholders, the benefit provided to the employee/shareholders from such coverage is normally considered to be an employment benefit rather than a shareholder benefit. Similarly, when all employees of a corporation are shareholders and it is reasonable to conclude, based on the particular facts of the situation, that the PHSP coverage has been provided as part of a reasonable remuneration package, the benefit from such coverage is also considered to be an employment benefit rather than a shareholder benefit. In such cases, the benefit is not included in the employee/shareholders' income by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act, and the corporate employer is entitled to a deduction in respect of the contributions made for such coverage, subject to any limitations imposed under the Act.
It should also be noted that, in and of itself, where employees of a corporation who are shareholders and receive benefits under a PHSP that are not available to all employees, this does not necessarily mean that the benefits are shareholder benefits. Such a determination is always a question of fact and would have to be determined with reference to, among other facts, reasonableness of the coverage provided, whether the corporation is closely held by the shareholders, the relationship between the shareholders, and the degree of corporate control they have.
We trust that our comments will be of some assistance to you.
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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