1 October 2013 External T.I. 2013-0502031E5 - Health Welfare Trust/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 various plans are considered either a health and welfare trust or a private health services plan.

Position: It depends.

Reasons: It is a question of fact.

XXXXXXXXXX
Kathryn McCarthy
2013-050203

October 1, 2013

Dear XXXXXXXXXX:

Re: Health and welfare trusts and private health services plans

We are writing in response to your email dated August 22, 2013, asking several questions about health and welfare trusts and private health services plans.

Our Comments

This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Question 1

Is an arrangement where:

• no premium is paid to either an outside trustee or an insurance corporation;
• employee claimants ("Claimants") submit claims to an appointed employee ("Adjudicator"); and
• the Adjudicator prepares corporate cheques payable to the Claimants from a separate corporate health and welfare plan account;

a health and welfare trust ("HWT") as described in Archived Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees? In addition, the Adjudicator has no knowledge with respect to what would otherwise qualify for the medical expense tax credit under the Income Tax Act ("Act").

Our comments

Generally, a HWT is an employee health and welfare benefit program that is administered by an employer through a trust arrangement and is restricted to the following:

(a) a group sickness or accident insurance plan;
(b) a private health services plan;
(c) a group term life insurance policy; or
(d) any combination of (a) to (c).

The funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. In addition, the employer's contributions to the fund must not exceed the amounts required to provide these benefits. The payments by the employer cannot be made on a voluntary or gratuitous basis, and they must be enforceable by the trustees should the employer decide not to make the payments. The type of trust arrangement envisaged is one where the trustee or trustees act independently of the employer as opposed to the type of arrangement initiated unilaterally by an employer who has control over the use of the funds whether or not there are employee contributions. Employer control over the use of funds of a trust (with or without an external trustee) would occur where the beneficiaries of the trust have no claim against the trustees or the fund except by or through the employer.

It is a question of fact whether a particular employer's arrangement is considered a HWT. However, where a claim paid would not otherwise qualify for the medical expense tax credit under the Act, the plan is not considered to be a private health services plan ("PHSP") under subsection 248(1) of the Act. A plan that is not a PHSP cannot be part of a HWT. The amount paid is considered an employee benefit and included in the employee's income under paragraph 6(1)(a) of the Act. For more information, see IT-85R2 and Archived Interpretation IT-339R2, Meaning of "Private Health Services Plan", which are available on the Canada Revenue Agency ("CRA") website.

Question 2

Is a self-insured employer's plan with defined and limited benefits for each calendar year considered a PHSP?

Our comments

It is a question of fact whether a particular employer's plan is considered a PHSP. However, to be considered a PHSP, the plan must be an insurance plan. Paragraph 3 of IT-339R2 describes the following basic elements of an insurance plan:

"(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."

Further, the coverage under the plan must only be in respect of expenses that would otherwise qualify for the medical expense tax credit under the Act. Where an employer's self-insured plan has all the basic elements of an insurance plan and the coverage is limited to eligible medical expenses, it will generally be a PHSP.

Question 3

Where a sole proprietor (without any other employees) has a health care spending account ("HCSA") that covers his or her eligible medical expenses, is one of the requirements for the HCSA to be considered a PHSP, that the sole proprietor must not be entitled to receive the forfeitures at the end of the second plan year resulting from the carry forward of unused first year contributions?

Our comments

For the HCSA to be considered a PHSP, the sole proprietor must not be entitled to receive such forfeitures.

Question 4

Whether the annual dollar limit under paragraph 20.01(2)(c) of the Act for a sole proprietor to deduct a premium, contribution, or other consideration paid or payable under a PHSP, from business income, remains unchanged?

Our comments

The annual dollar limit has not changed. However, there are several limits under section 20.01 of the Act and the dollar limit is only one of them. Further, the dollar limit includes any applicable provincial sales tax and goods and services tax. For more information, see Guide T4002, Business and Professional Income, under "Private health services plan (PHSP) premiums", which is available on the CRA website.

We trust our comments will be of assistance.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch