21 February 2008 External T.I. 2007-0227881E5 - Taxable Benefits - PHSP, GSAI and Life Insurance

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. Whether a "default allocation" in a Flex Program jeopardizes the status of a health care spending account in a private health services plan. 2. Whether a plan that consists of individual insurance policies owned by the employees qualifies as a group sickness and accident insurance plan. 3. Whether a taxable employment benefit will occur if a corporate employer transfers ownership of a life insurance policy to an employee or an employee's spouse.

Position: 1. No. 2 and 3. It is always a question of fact.

Reasons: 1. The allocation is beyond the plan member's control, the flex credits are not being saved for allocation after the beginning of the plan year, not being negotiated for cash at any time and have no intrinsic value. 2. It is possible for the individual policies to combine to form a common plan and be considered a group sickness and accident insurance plan provided each employee within a particular class or group of employees is eligible to receive the same benefits under the plan and has the same ratio of employee and employer-paid premiums. 3. Yes, if the fair market value of the policy exceeds any consideration given by the employee for the transfer of the policy. However, in the case of the joint last to die policy, the policy transfer would not give rise to an employment benefit for the surviving spouse because it is not something to which he or she is entitled by virtue of employment.

							2007-022788
XXXXXXXXXX 						Kathryn McCarthy, CA
(613) 948-6106
February 21, 2008

Dear XXXXXXXXXX ,

Re: Three Taxable Benefit Questions (PHSP, GSAI and Corporate Life Insurance)

This is in response to your three letters of March 7, 2007. We apologize for the delay in our response.

Qualification as a Private Health Services Plan

In the first letter, you inquire as to whether the inclusion of a "default allocation" in a flexible employee benefit program ("Flex Program") would jeopardize the status of a Health Care Spending Account ("HCSA") in a Private Health Services Plan ("PHSP"). A PHSP is defined in subsection 248(1) of the Income Tax Act ("the Act"). For example, assume that a Flex Program includes a HCSA, group sickness and accident insurance coverage, and individual life insurance coverage. Before the beginning of the plan year, a plan member ("Member") allocates a specified amount of flex credits to each component.

The underwriting process for the life insurance cannot be completed before the beginning of the plan year. In making the allocation of flex credits before the beginning of the plan year the Member stipulates that, in the event the insurer declines the life insurance coverage, the amount of flex credits otherwise allocated to the life insurance will irrevocably revert to the HCSA. The only time such a "default allocation" would occur would be in circumstances beyond the Member's control. The flex credits are not being saved for allocation after the beginning of the plan year, not being negotiated for cash at any time and have no intrinsic value. In your opinion such a "default allocation" will neither taint the HCSA as a PHSP in and of itself, nor the Flex Program as a whole, and the taxation of each component of the Flex Program will continue to be determined separately.

Group Sickness and Accident Insurance Premiums Paid by an Employer

In the second letter, you describe an employer that provides a Group Sickness and Accident Insurance ("GSAI") plan for its employees, the terms and conditions of which are included in a plan document provided to each plan member. The employer pays the annual premiums for the insurance policies pursuant to its obligation described in the plan document. You inquire as to whether a taxable benefit must be included in employment income under paragraph 6(1)(a) of the Act where the plan consists of individual insurance policies owned by the employees.

Transfer of Corporate Life Insurance Policies

In the third letter, you describe two scenarios.

In both scenarios, an employee has received a taxable benefit under paragraph 6(1)(a) of the Act for the amount of life insurance premiums paid by the corporate employer. Further, the employee has chosen the beneficiary of the policy.

Under the first scenario, the employee's life is insured. You inquire as to whether a taxable benefit will occur if the employer transfers ownership of the life insurance policy to the employee. After the transfer, the employee will pay the policy premiums. In your opinion, no taxable benefit should apply since the employee paid tax on the amount of employer paid premiums from the inception of the policy to the date of the policy transfer.

In the second scenario, you describe an insurance policy that is a joint last to die policy on the lives of an employee and the employee's spouse ("spouse"). You inquire as to whether there would be a taxable benefit to the spouse when the employer transfers ownership of the policy to the spouse on the death of the employee. After the transfer, the spouse will pay the policy premiums. In your opinion, no taxable benefit should apply since the employee paid tax on the amount of employer paid premiums from the inception of the policy to the employee's death.

Our Comments

The situations outlined in your letter appear to relate to factual ones, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should the situations involve specific taxpayers and transactions that have already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situations, we are prepared to provide the following general comments, which may be of assistance.

Qualification as a PHSP

The value of any benefit received or enjoyed by virtue of employment is generally included in employment income pursuant to paragraph 6(1)(a) of the Act, subject to certain exceptions. Flex Programs may be designed so that both taxable benefits (e.g. employer contributions to an individual life insurance plan) and non-taxable benefits (e.g. employer contributions to a group sickness or accident insurance plan) can be provided through the same Flex Program. A Flex Program could also include a HCSA made up of individual employee accounts that provide for the reimbursement of eligible medical expenses under subsection 118.2(2) of the Act. A HCSA will qualify as a PHSP provided it fits the criteria described in Interpretation Bulletin IT-339, Meaning of "Private Health Services Plan". If the HCSA qualifies as a PHSP, the amount of any benefit received out of the HCSA will not be taxable to the employee.

In our opinion where a "default allocation" occurs in circumstances such as you describe, the allocation will generally not jeopardize the status of a HCSA that otherwise qualifies as a PHSP. Further, the taxation of each component of the Flex Program will continue to be determined separately.

GSAI Premiums Paid by an Employer

Where an employer pays, on behalf of an employee, the premium under a non-group sickness or accident insurance plan, the payment of the premium is a taxable benefit to the employee under paragraph 6(1)(a) of the Act. However, pursuant to subparagraph 6(1)(a)(i) of the Act, no taxable employment benefit occurs where an employer has paid a premium for a group (i.e., more than one employee) sickness and accident insurance plan.

It is always a question of fact whether individual employee-owned insurance contracts can be considered collectively as a GSAI plan. However, it is possible for the individual policies to combine to form a common plan and be considered a GSAI plan provided each employee within a particular class or group of employees is eligible to receive the same benefits under the plan and has the same ratio of employee and employer-paid premiums.

Transfer of Corporate Life Insurance Policies

Whether a particular transfer of a life insurance policy gives rise to a taxable employment benefit under paragraph 6(1)(a) of the Act is always a question of fact. For purposes of this reply, we will assume that the employee and the spouse are not shareholders of the employer corporation. In the first scenario, paragraph 6(1)(a) of the Act will include in the income of the employee the amount, if any, by which the fair market value of the policy exceeds any consideration given by the employee for the transfer of the policy. Factors that could affect the fair market value of a life insurance policy include the cash surrender value of the policy, the state of health of the insured and his or her life expectancy. See paragraphs 40 and 41 of Information Circular 89-3, Policy Statement on Business Equity Valuations, for more information on the valuation of corporate owned life insurance.

In the second scenario, it is our view that the policy transfer would not give rise to an employment benefit for the surviving spouse because it is not something to which he or she is entitled by virtue of employment.

We trust the above comments are of assistance.

Yours truly,

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