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: (i) Where the sole shareholder of a corporation is also an employee, would the corporation's payment of premiums for a PHSP represent a shareholder benefit under subsection 15(1)? (ii) What are the potential tax implications if the shareholder's spouse is an employee and also a member of the plan? (iii) If the benefits under the PHSP to a part time employee are based on the proportional rate of pay of that employee, what impact would that have on the determination as to whether the employee-shareholder's benefit under the PHSP is received in his or her capacity as an employee or shareholder.
Position: (i)&(ii) Questions of Fact, (iii) Yes
Reasons: (i)&(ii) Whether 15(1) or 56(2) applies depends if the benefits are conferred by virtue of shareholdings. (iii) It would generally be reasonable to compare the level of benefits provided under the PHSP to an employee-shareholder to the benefits provided to a part time employee, which are based on the rate of pay of the part time employee.
2005-015116
XXXXXXXXXX Rob Ferrari
(613) 957-2138
January 24, 2006
Re: Professional Health Services Plans
This is in reply to your letter of September 9, 2005 and our conversation of December 14, 2005 concerning the above noted subject matter. Our understanding of the facts is as follows:
You describe a situation where an individual is both an employee and the sole shareholder of a professional corporation. The corporation has entered into an agreement with an independent trustee to establish a health and welfare trust through which a private health services plan ("PHSP") will be provided. The PHSP meets the criteria described within Interpretation Bulletin IT-339R2 - Meaning of "Private Health Services Plan" and falls within the definition of a PHSP under subsection 248(1) of the Income Tax Act (the "Act"). The health and welfare trust meets the parameters described in Interpretation Bulletin IT-85R2 - Health and Welfare Trusts for Employees. The corporation will pay the premiums to the trustee for the health and welfare trust and the trustee will reimburse only qualified medical expenses that fall within subsection 118.2(2) of the Act. You ask:
- Whether the PHSP premiums paid by the corporation represent a shareholder benefit under subsection 15(1) of the Act and whether they are deductible by the corporation.
- What are the tax implications if the employee-shareholder's spouse, who is also an employee of the corporation, is named as the member under the PHSP.
- If the benefits under the PHSP to a part time employee are based on the proportional rate of pay of that employee, what impact would that have on the determination as to whether the employee-shareholder's benefit under the PHSP is received in his or her capacity as an employee or shareholder.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. 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 for their views. However, we are prepared to offer the following general comments which may be of assistance.
Shareholder Benefit and Deductibility of Premiums
The general thrust of paragraph 6(1)(a) of the Act is to include in employment income the value of all benefits received or enjoyed in respect of an employee's employment. However, the value of any benefit derived from the contributions made by an employer to or under a PHSP on behalf of an employee are excluded from the employee's income from an office or employment by virtue of subparagraph 6(1)(a)(i) of the Act.
The determination of whether a benefit is received by an employee-shareholder in his or her capacity as an employee or as a shareholder involves a finding of fact. There is a general presumption that an employee-shareholder receives a benefit by virtue of his or her shareholdings in those situations where the shareholder, or shareholders, can significantly influence business policy, except where the individual is able to establish otherwise. Exceptions to this presumption would be a situation where the benefit is available to all employees of the corporation or a situation where the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.
In examining a particular case, a negative answer to one or more of the following queries would suggest that the benefits are provided to the recipient in his or her capacity as a shareholder:
(a) When all participating employees are also shareholders, is the benefit coverage similar to coverage given to non-shareholder employee groups for similar size businesses who perform similar services and have similar responsibilities?
(b) Is participation in the plan made available to all employees, including those who are neither a shareholder nor related to a shareholder? If not, is there a logical reason to exclude some employees?
(c) Are the benefits available under the plan the same for all employees of the business, in their nature, quantum and cost-sharing ratio? We have previously opined a benefit would be considered reasonable where it is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.
In situations where the benefit is received by an employee-shareholder in his or her capacity as a shareholder, the full benefit would be taxed in the shareholder's hands pursuant to subsection 15(1) of the Act and the exceptions under subparagraph 6(1)(a)(i) of the Act would not apply. Where subsection 15(1) of the Act applies, the payment of the premiums in question by the corporation would not be deductible in computing the corporation's income since the payment is not incurred by the corporation for the purpose of gaining or producing income from a business or property as required under the exception in paragraph 18(1)(a) of the Act.
Employee-Shareholder's Spouse
You ask what the tax implications would be if the employee-shareholder's spouse, who is also an employee of the corporation, were named as the member under the PHSP. As indicated in paragraph 9 of IT-339R2, coverage under a PHSP may extend to an employee's spouse and as such, both the employee-shareholder and the employee-shareholder's spouse could benefit under the PHSP. It is a question of fact whether benefits have been granted under the PHSP to the employee-shareholder and his or her spouse by virtue of the employee-shareholder's shareholdings or by virtue of their employment. However, if a benefit were conferred on the employee-shareholder and/or the spouse by virtue of the employee-shareholder's shareholdings, such benefit may be included in the employee-shareholder's income by virtue of subsections 15(1) or 56(2) of the Act.
Part Time Employees
As indicated above, a factor to consider in the determination of whether a benefit received by an employee-shareholder is received in his or her capacity as a shareholder is whether the benefits under the plan are the same for all employees in their nature, quantum and cost-sharing ratio. As such, in our view, it would generally be reasonable to compare the level of benefits provided under the PHSP to an employee-shareholder to the benefits provided to a part time employee, which are based on the rate of pay of the part time employee.
We trust the above will be of assistance to you.
Randy Hewlett
Manager
Business and Individual Section
Income Tax Rulings Directorate
Policy and Planning Branch
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