17 February 2010 External T.I. 2009-0351581E5 - PHSP

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: Tax consequences where non-qualifying medical services covered under a health and wellness plan.

Position: General comments provided.

Reasons: IT-339 & definition of PHSP under subsection 248(1)

XXXXXXXXXX 							2009-035158
								Rob Ferrari
February 17, 2010

Dear XXXXXXXXXX :

Re: Taxable Benefits - Private Health Services Plan

We are writing in response to your fax of October 14, 2009 regarding an employer's health and wellness plan (the "Plan").

The submission indicates that some items and services covered under the Plan are qualifying medical expenses as described in subsection 118.2(2) of the Income Tax Act (the "Act") for the purposes of the medical expense tax credit. The Plan will also cover expenses that do not qualify as medical expenses under the Act; for example, gym memberships, ski club memberships, yoga classes. You have asked whether the coverage for expenses that are of the types described in subsection 118.2(2) of the Act would be considered to be non-taxable benefits to the employees.

Our Comments:

The situation outlined in your letter appear to involve 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 CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the transactions are completed and involve specific taxpayers you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSO's is available on the "Contact Us" page of the Canada Revenue Agency's ("CRA") website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Pursuant to paragraph 6(1)(a) of the Act, benefits received or enjoyed by an employee in respect of, in the course of, or by virtue of an office or employment are generally taxable as income from that office or employment. Subparagraph 6(1)(a)(i) of the Act, however, specifically excludes benefits derived from the contributions of a taxpayer's employer to or under a Private Health Services Plan ("PHSP") as defined under subsection 248(1) of the Act.

The CRA's position on what constitutes a PHSP is outlined in the Interpretation Bulletin IT-339R2 "Meaning of 'Private Health Services Plan'". As noted in paragraph 4 of IT-339R2, coverage under a PHSP must be in respect of medical expenses which normally would otherwise have qualified under subsection 118.2(2) of the Act for purposes of the medical expense tax credit. If a particular plan does not qualify as a PHSP, the amount of any benefit received out of the plan will be taxable to the employee.

As indicated in your submission, many of the expenses that will be covered under the employer's Plan would not qualify as medical expenses and it would therefore appear that the Plan would not qualify as a PHSP. However, when an employer wishes to provide non-qualifying benefits, in addition to those that do qualify, we will allow the employer to establish a separate plan, thereby preserving the more favourable income tax treatment for reimbursements of qualifying medical expenses. Where it is not feasible to set up two separate plans, we are prepared to treat the plan as two separate plans, provided that the plan administrator accounts separately for the non-taxable and the taxable portions.

For additional information on medical expenses, see IT-519R2 (Consolidated), "Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction" and the CRA's webpage entitled "Authorized medical practitioners by province or territory for the purposes of claiming medical expenses", which may be found on the CRA's website at www.cra.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch