24 August 2006 External T.I. 2006-0186741E5 - Health Care Expense Account

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 a particular health care expense spending arrangement would be viewed as a PHSP if there is added to the plan, a right to compensation for the loss realized on forfeiture of the unused health care expense account credits of an employee on termination.

Position: Question of fact. The proposed change to the arrangement is inconsistent with the plan being a PHSP.

Reasons: The right to compensation, on termination, for the loss of "bonus otherwise payable" (the forfeited credits), guarantees that the employee will be reimbursed for the full amount allocated to that employee for the year of termination and the previous year.

								D Tiu
XXXXXXXXXX 							(613) 957-8961
								2006-018674
August 24, 2006

Dear XXXXXXXXXX:

Re: Health Care Spending Account

We are writing in response to your May 16, 2006 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX/Tiu). In your letter, your refer to the health care expense account (HCEA) described in Advance Tax ruling 2004-009121 and ask whether, in our view, an otherwise similar plan that entitles employees, on termination, to compensation for their unused HCEA credits would be a private health services plan (PHSP).

As explained in paragraph 9 of Information Circular 70-6R5, dated May 17, 2002, an advance income tax ruling applies only to the taxpayer(s) identified in the ruling and to the transactions proposed. 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. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Notwithstanding the foregoing, we are prepared to provide the following general comments.

A PHSP qualifying under the definition in subsection 248(1) is a plan in the nature of insurance. In this respect the plan 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.

Coverage under the PHSP must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit.

The incremental information you have provided is very limited. In order for a plan or arrangement to qualify as a PHSP it must be a plan of insurance and thus involve a reasonable element of risk that is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee would not eventually be reimbursed for the full amount allocated to that employee annually, then the plan or arrangement is not a plan of insurance and therefore, not a PHSP. Although it is a question of fact, it is our view that a right, on termination, to compensation for the loss of the "bonus otherwise payable" as described in your query would effectively eliminate the risk that the employee would not be reimbursed for the full amount allocated to that employee's HCEA for that year and the previous year.

In addition, it should be noted that a flex program that provides for a conversion of flex credits to cash would jeopardize the taxable status of other benefit entitlements under the program, or result in the flex credits themselves being taxable when allocated.

Yours truly,

Robin Maley
Section Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch