14 March 2006 External T.I. 2005-0163771E5 - PHSP for sole shareholder sole employee

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: 1. Can a corporation with a sole shareholder/employee set up a PHSP for that sole shareholder/employee? 2. What amounts are deductible by the corporation under a health spending account arrangement where the plan is a PHSP but there is no trust, only a notional account?

Position: 1. Yes. 2. Assuming that a PHSP exists, amounts would be deductible as and when paid or payable by the corporation for qualifying medical expenses.

Reasons: See previous rulings documents.

XXXXXXXXXX
								2005-016377
								Eliza Erskine
(613) 954-3199
March 14, 2006

Dear XXXXXXXXXX:

Re: Private Health Services Plan ("PHSP") for Sole Shareholder/Employee

We are writing in reply to your email letter of December 15, 2005, regarding the above-noted subject matter. You requested our comments regarding the criteria for setting up a health and dental benefits plan that qualifies as a PHSP for purposes of the Income Tax Act (the "Act"), where the sole shareholder of the corporation setting up the plan is also the only employee of the corporation. We also acknowledge our telephone conversation with you of January 11, 2006 (XXXXXXXXXX/Erskine).

Our Comments

Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are prepared to provide the following general comments.

A PHSP is defined in subsection 248(1) of the Act as 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. A plan in the nature of insurance, in this respect, 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.

An arrangement where an employer reimburses its employees for medical or hospital expenses may come within the definition of a PHSP where the employer is required by the employment contract to pay such expenses. For more information in this regard, please refer to Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan".

Although employment-related benefits are generally included in income from an office or employment pursuant to paragraph 6(1)(a) of the Act, the benefit enjoyed by an employee as a result of contributions made by the employer to or under a PHSP is excluded from the employee's income by virtue of subparagraph 6(1)(a)(i). Such contributions by the employer to or under a PHSP generally constitute business outlays or expenses of the employer for purposes of paragraph 18(1)(a) of the Act. On the other hand, there is no similar exclusion where the benefit under a PHSP is derived by virtue an individual's shareholdings, which would be included in income pursuant to subsection 15(1) of the Act, nor are the related contributions deductible by the corporation.

In the case of a PHSP established for the benefit of a corporation's sole shareholder/employee, it is a question of fact whether the resulting benefit is derived by virtue of the individual's shareholdings or by virtue of his or her employment. The presumption is that the benefit is received by the individual in his or her capacity as a shareholder. However, provided that the individual is actively engaged as an employee of the corporation and the benefits under the PHSP (including the applicable limits) are reasonable and consistent with the benefits that would be offered to an arm's length employee performing similar services, it is our general view that the benefit would be derived by virtue the individual's employment.

In our telephone conversation with you, you asked specifically about setting up a "health spending account" ("HSA") type of PHSP. Under your proposed plan, your corporation would set aside a certain amount per month, or per year, either in a notional account or in a separate bank account. Under your contract of employment with the corporation, your medical and dental expenses would be paid by the corporation, upon the submission of appropriate receipts, up to the amount in that notional account. As we discussed with you by telephone, it is possible for such an arrangement to qualify as a PHSP, although we cannot comment on your particular situation outside of an advance income tax ruling. However, as the corporation would retain control over the funds in the HSA in this situation (whether the account is purely notional or whether it is in fact a separate bank account), only reasonable amounts actually paid or payable by the corporation in respect of medical and dental expenses would be deductible by the corporation.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, these comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency.

We trust that our comments are of assistance to you.

Yours truly,

Robin Maley
Manager
Partnerships and Health Section
Business and Partnerships Division
Income Tax Rulings Directorate