26 June 2012 External T.I. 2012-0447041E5 - Private Health Services Plan

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 plan qualifies as a private health services plan.

Position: Probably not.

Reasons: Element of risk may not be present where employer can terminate agreement without notice at sole discretion.

XXXXXXXXXX
				2012-044704
				André Gallant, J.D.
June 26, 2012

Dear Mr. XXXXXXXXXX:

Re: Private Health Services Plan

We are writing in reply to your letter dated May 8, 2012, wherein you inquire whether a self-administered plan would qualify as a private health services plan (“PHSP”).

Based on your letter, it is our understanding that the employer will reimburse each of their employees for medical and dental expenses, upon the submission of receipts, up to a maximum of $XXXXXXXXXX per year. However, it would appear, based on your letter, that the employer can terminate this agreement with its employees without notice at its sole discretion.

Our Comments

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 pursuant to paragraph 6(1)(a) of the Income Tax Act (the “Act”). However, subparagraph 6(1)(a)(i) of the Act specifically excludes benefits derived from the contributions of a taxpayer’s employer to or under a PHSP.

Pursuant to the Act, a PHSP means a contract of insurance in respect of hospital expenses, medical expenses, or any combination of such expenses or a medical care insurance plan, a hospital care insurance plan, or any combination of such plans. In Interpretation Bulletin IT-339R2, Meaning of Private Health Services Plan, the Canada Revenue Agency (the “CRA”) has set out the requirements that must be met in order for a plan to be considered a PHSP.

Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, it must represent (i) an undertaking by one person, (ii) to indemnify another person, (iii) for an agreed consideration, (iv) from a loss or liability in respect of an event, (v) the happening of which is uncertain. As indicated in paragraph 7 of IT-339R2, an arrangement where an employer reimburses its employees for the cost of medical care or hospital care may be considered a PHSP where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. While a cap on benefits undoubtedly reduces the risk to the employer, it is our view that an otherwise qualifying plan would not automatically be disqualified as a PHSP solely by reason of the inclusion of such a feature. Where the employer is uncertain as to the amount of claims an employee will submit, the employer is at risk for the amount up to the cap. However, if the plan or arrangement is such that it can be terminated at any time by the employer, without notice, at its sole discretion, there may be some doubt as to the level of risk undertaken and whether this would be in fact a plan of insurance. This appears to be the case in the present instance.

In addition, as provided in paragraph 4 of the bulletin, coverage under a PHSP must be in respect of hospital care or expenses, or medical care or expenses, which normally would otherwise have qualified as medical expenses under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit. A description of eligible medical expenses can be found in Interpretation Bulletin IT-519R2, Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction.

The interpretation bulletins mentioned herein are available on the CRA’s Web site at www.cra.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

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