14 June 2011 Ministerial Correspondence 2011-0406101M4 - Private Health Service Plan (PHSP) premiums

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: Document number 2008-027377 answered the question on whether a cost-plus plan qualifies as a PHSP where it provides coverage for a sole proprietor and household members, but no employees. We stated in this document that a cost-plus plan does not constitute insurance unless the plan provides coverage for at least one employee. The same individual is questioning why another taxpayer is advertising XXXXXXXXXX that CRA allows sole proprietors with no employees to use pay as you go PHSPs, when we previously advised him this was not allowed.

Position: (1) A sole proprietor’s cost-plus plan will not qualify if there are no employees. (2) CRA cannot comment on the other taxpayer.

Reasons: (1) Paragraphs 20.01(2)(b) and (d) provide that effectively the deduction is only available if equivalent coverage is offered to arm's length employees. (2) Subsection 241(1) prevents a CRA official from discussing another taxpayer.

June 14, 2011

XXXXXXXXXX

Dear XXXXXXXXXX :

Mrs. Lyse Ricard, Deputy Commissioner of the Canada Revenue Agency (CRA), has asked me to reply to your correspondence received on May 3, 2011. You request clarification on coverage under a private health services plan (PHSP) for sole proprietors with no employees. In particular, you want to know why XXXXXXXXXX advertises that the CRA allows a sole proprietor with no employees to deduct payments for a cost-plus PHSP when the CRA advised you in a letter dated July 8, 2008, that this deduction would not be allowed.

Section 20.01 of the Income Tax Act permits a self-employed individual to deduct amounts payable under a PHSP for the benefit of the individual, his or her spouse or common-law partner, or any person who is a member of the individual's household, provided certain conditions are met. As required by paragraphs 20.01(2)(b) and (d) of the Act, one of these conditions essentially requires an equivalent coverage to be offered to arm's length employees. Therefore, a sole proprietorship with no employees would not be allowed a deduction from income for PHSP premiums. Please refer to the letter of July 8, 2008, for additional information concerning PHSPs.

The CRA is responsible for administering Canada's tax laws to ensure that taxpayers receive the benefits to which they are entitled and that taxpayers pay their proper share of taxes under the Act. The confidentiality provisions of the Act prevent CRA officials from discussing a taxpayer's affairs with a third party without the taxpayer's written authorization. Therefore, I cannot comment on the other taxpayer you mention in your letter. However, as part of its enforcement activities, the CRA regularly audits taxpayers carrying on a business to ensure that their tax returns are prepared properly and that they comply with the provisions of the Act.

Thank you for bringing your concerns to the CRA's attention.

Yours sincerely,

Brian McCauley
Assistant Commissioner
Legislative Policy and
Regulatory Affairs Branch