2006 Ruling 2005-0139631R3 - 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: Whether (1) a health care expense account offered to employees would qualify as a "private health services plan"; and (2) the allocation of credits linked to a bonus that employees may be entitled to receive in circumstances as described would result in employment income to the employees.

Position: (1) Yes; (2) No.

Reasons: (1) The conditions in the definition of "private health services plan" will be met; (2) the employees are not entitled to a bonus at the time the irrevocable election is made regarding the allocation of credits to the health care expense account.

XXXXXXXXXX                                                        2005-013963

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, subsequent correspondence and telephone conversation (XXXXXXXXXX ) in which you asked for an advance income tax ruling on behalf of the above taxpayer.

Unless otherwise stated, the "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof and all statutory references herein are to provisions of the Act unless otherwise specified.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Definitions

(a) "Bonus Allocation" means an irrevocable election by an employee pertaining to an annual bonus to which he/she may become entitled, to pay for premiums in the following order: first, a specified amount, if any, towards the New Plan; thereafter, specified amount(s), if any, towards the HCEA and/or group registered retirement savings plan;

(b) "CRA" is the Canada Revenue Agency;

(c) "Dental Insurance Plan" means the dental insurance plan offered under the New Plan which is a continuation of the dental insurance plan as described in paragraph 5 of the Facts below;

(d) "Flex Credits" is a notional amount allocated by Employer to each employee in reference to the Plan that represents Employer's contribution to benefits under the Plan. Flex Credits have no redemptive value and nothing of value is forfeited by an employee in exchange for Flex Credits;

(e) "HCEA" is a health care expense account that Employer will establish as a secondary health care plan for its employees;

(f) "Employer" is the XXXXXXXXXX

(g) "Life Event" includes any of the following events: becoming a parent, gaining or losing coverage under another plan, or a changing marital status;

(h) "Medical Insurance Plan" means the medical insurance plan offered under the New Plan which is a continuation of the dental insurance plan as described in paragraph 4 of the Facts below;

(i) "New Plan" the newly designed flexible benefit plan as described in paragraph 9 of the Proposed Transactions below;

(j) "Plan" is the existing flexible benefits plans provided by Employer to its employees in reference to insurance benefits including medical and dental insurance, disability insurance, group life insurance, and group sickness and accident insurance;

(k) "Plan Year" is XXXXXXXXXX.

Facts

1. Employer is a XXXXXXXXXX. Employer's fiscal year ends XXXXXXXXXX.

2. Employer's business number is XXXXXXXXXX. It files its information returns with the XXXXXXXXXX Centre and deals with the XXXXXXXXXX Tax Services Office.

3. Employer currently provides its employees with insurance benefits including medical and dental insurance, disability insurance, group life insurance, and group sickness and accident insurance. All of these benefits are offered through the Plan under which employees choose from a menu of benefits providing various levels of benefits coverage. Employees are entitled to re-enroll in the Plan each year or to make irrevocable changes to their benefits coverage each year prior to the start of the Plan Year for the duration of that Plan Year. Any changes to the benefits elected by an employee become effective on XXXXXXXXXX of each year. If the employee does not make changes to the benefits coverage that applied in the previous Plan year, the same level of coverage will apply in the current Plan year. An employee is only entitled to make changes to his or her benefits during the Plan Year if an employee's needs change as a result of the occurrence of a Life Event. Employees must apply to Employer's Human Resources Office within XXXXXXXXXX days after the Life Event in order to effect a change, and any such change will become effective on the first day of the month following receipt of the application. No change will be made on a retroactive basis and no employee will be permitted or entitled to withdraw funds previously credited to a particular benefit option before the change.

4. The medical insurance plan offered under the Plan is an optional health care benefit plan intended to supplement the coverage provided by each employee's respective provincial health care plan. The medical insurance under the Plan is provided by XXXXXXXXXX under a contract of insurance that is separate from any other insurance plan. Contributions to and distributions from the insurance plan are separately identified and accounted for. For tax purposes, Employer's Medical Insurance Plan will be a "private health services plan" as defined in the Act.

5. The dental insurance plan offered under the Plan allows employees to choose insurance coverage for various dental care services. The dental insurance under the Plan is provided by XXXXXXXXXX under a contract of insurance that is separate from any other insurance plan. Contributions to and distributions from the insurance plan are separately identified and accounted for. For tax purposes, Employer's Dental Insurance Plan will be a "private health services plan" as defined in the Act.

6. Under the Plan, Employer applies the Flex Credits against the cost of premiums for health, dental, life, accident and disability insurance. Depending on the choice each employee makes from the menu of benefits providing various levels of benefits coverage under the Plan, an employee may make contributions in addition to the Flex Credits.

7. Employer compensates its employees in the form of a base salary and annual bonuses. The amount of bonuses are determined and declared following a determination of Employer's financial performance for the fiscal year. This generally occurs in the month of XXXXXXXXXX following the end of the fiscal year. The bonuses are generally paid out in XXXXXXXXXX to non-management employees and in XXXXXXXXXX for management employees. The amount of the bonus is dependant on Employer's performance and the individual employee's achievement of personal business goals and objectives. No employee is guaranteed an annual bonus.

8. All employees are eligible participants in the bonus program, provided they are permanent employees of Employer, and employed with XXXXXXXXXX for at least XXXXXXXXXX months in the fiscal year. To be entitled to the bonus, an employee must be employed by Employer on the date the bonus is paid. Prior to such date, employees are not entitled to a bonus payment. An employee who terminates employment with XXXXXXXXXX prior to such date is not entitled to a bonus payment, subject to employment standards and labor laws.

Proposed Transactions

9. Employer proposes to introduce the newly designed flexible benefits program ("New Plan") for its employees, effective XXXXXXXXXX. Under the terms of the New Plan, each employee's Flex Credits will be increased from $XXXXXXXXXX per Plan Year to $XXXXXXXXXX per Plan Year plus XXXXXXXXXX% of the employee's salary. In addition, employees will be eligible for up to $XXXXXXXXXX in additional Flex Credits per Plan Year ("Wellness Credits"). Wellness Credits are additional Flex Credits granted to employees for keeping health or wellness related pledges during the year (e.g., not smoking, having an annual health assessment, etc.). Wellness Credits will be granted on the honour system. Flex Credits will be allocated to the different insurance plans and used in the following order: (a) accident insurance; (b) critical illness insurance (a newly added benefit plan); (c) disability insurance; (d) dental care insurance; (e) medical care insurance; and (f) life insurance. The Plan Year remains the same under the New Plan. One exception to this ordering is provided to employees who wish to pay the disability insurance premiums entirely with their own funds rather than using Flex Credits. In such cases, an employee may elect not to allocate any Flex Credits to the disability insurance plan. In addition, Employer will establish a health care expense account ("HCEA") that is intended to qualify as a "private health services plan", as defined in subsection 248(1) of the Act. The HCEA is a secondary health care plan that will provide for the reimbursement of eligible medical and dental expenses as defined by the terms of the HCEA. All of the expenses reimbursed through the HCEA will be qualified medical expenses under subsection 118.2(2) of the Act and will be an expense of an employee or of the employee's "dependants", as that term is defined in subsection 118(6) of the Act.

10. Employees will be entitled to enroll in the HCEA each Plan Year within the same timeframe as described in paragraph 3 above. An employee enrolled in the HCEA is required to make an allocation to the HCEA before the beginning of the Plan Year. The election to participate and the amount allocated will be irrevocable.

11. Unused balances in the HCEA at the end of the Plan Year in respect of an employee may be rolled over to the next Plan Year for that employee and can be used to reimburse eligible medical expenses incurred in the subsequent Plan Year. The maximum rollover of unused balances will be one year. Unused balances will not be payable in cash.

12. Employer proposes to allow employees to allocate all or a portion of their annual bonus to which they may become entitled to pay for their benefits premiums that are not covered by Flex Credits. Each employee's Bonus Allocation for the Plan Year will first be applied against the remaining benefits premiums that are in excess of the employee's Flex Credits in the same order that applies to the Flex Credits. Employees will complete the Bonus Allocation prior to the bonus entitlement amount being disclosed to them. The Bonus Allocation would be made in XXXXXXXXXX. The election to participate and the amount allocated will be irrevocable. Under the New Plan, an employee may make his/her first Bonus Allocation in XXXXXXXXXX in respect of the annual bonus determined and declared on or about XXXXXXXXXX in respect of the Plan Year commencing XXXXXXXXXX. The maximum Bonus Allocation that each employee may elect is $XXXXXXXXXX per Plan Year.

13. The amount of the bonus payable to an employee in XXXXXXXXXX or XXXXXXXXXX is reduced by the Bonus Allocation of that XXXXXXXXXX. The bonus would be determined and made known to the employee in XXXXXXXXXX and paid in XXXXXXXXXX or XXXXXXXXXX as described in paragraph 7 above. An employee will not be paid any bonus in a year where his or her bonus is calculated to be less than the Bonus Allocation.

Purpose of the Proposed Transactions

14. The purpose of the proposed transactions is to enhance the Company's employee benefit program while minimizing administrative burdens on employees.

Other Information

15. To the best of your knowledge, none of the issues involved in this advance income tax ruling is:

a. in an earlier return of a taxpayer or a related person;

b. being considered by a tax services office or taxation centre in connection with
a previously filed tax return of a taxpayer or a related person;

c. under objection by a taxpayer or a related person;

d. before the courts or, if a judgment has been issued, the time limit for appeal to
a higher court has not expired; and

e. the subject of a ruling previously issued by the Directorate.

Rulings Given

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. The HCEA will be considered a "private health services plan" as that term is defined in subsection 248(1) of the Act.

B. When a bonus is declared, that part of the Bonus Allocation credited to the Medical Insurance Plan, Dental Insurance Plan and the HCEA in respect of the Plan Year commencing XXXXXXXXXX of the same calendar year, will not, in and of itself, be considered income from employment pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act.

C. Any payments from the HCEA to an employee to reimburse the employee for medical expenses within the terms of the HCEA will not be included in income, by virtue of the exception provided for by subparagraph 6(1)(a)(i) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that participation in the proposed HCEA will be offered to the Company's employees on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch