12 March 1986 Income Tax Severed Letter 5-0149 - [Private Health Services Plans]

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.

Head Office

XXXX

G. Kauppinen Tel. (613) 995-0051

Mar 12/86

Dear Sirs:

Re: Private Health Services Plans

This is in reply to your letter of November 22, 1985 concerning private health services plans.

You have posed the following questions for our comments.

Is it possible for an employer to establish a health and welfare trust for the benefit of an employee or employees that would "self- insure" certain medical benefits over and above the standard benefits provided by a company's group insurance plan. You have used the example of a dental plan which does not provide for dental caps. Specifically you ask if it would be possible for the health and welfare trust to pay a dentist for a dental cap for one of its members without giving rise to a benefit under paragraph 6(1)(a) of the Income Tax Act ("Act"). You have further asked if a company which is too small to obtain a dental or health group plan could set up a self-insured plan to perform the same function without prejudice to the employees right to receive such a benefit tax free.

Employers often arrange for protection of their employees against medical costs through a plan designed for this purpose either through an insurance carrier, a trusteed plan or an informal plan whereby the employer simply undertakes to reimburse the cost of medical expenses incurred by his employees. If any such plan qualifies as a "private health services plan" as defined in paragraph 110(8)(a) of the Act, benefits paid pursuant to the plan are not taxable income in the employee's hands.

Paragraph 1l0(8)(a) of the Act specifies that a "private health services plan" means

(i) a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or

(ii) a medical care insurance plan or hospital care insurance plan or any combination of such plans,

except any such contract or plan established by or pursuant to

(iii) a law of a province with which the Minister of National Health and Welfare has entered into an agreement under section 3 of the Hospital Insurance and Diagnostic Services Act that provides for the payment by Canada to the province of contributions in respect of the cost of insured services incurred by the province pursuant to that provincial law,

(iv) an enactment of the Parliament of Canada that authorizes the provision of a medical care insurance plan or hospital care insurance plan for employees of Canada and their dependants and for dependants of members of the Royal Canadian Mounted Police and the regular force where such employees or members were appointed in Canada and are serving outside Canada, or

(v) a medical care insurance plan established pursuant to a law of a province that satisfies the criteria set forth in subsection 4(1) of the Medical Care Act.

A private health services plan qualifying under subparagraph 110(8)(a)(i) or (ii) of the Act is a plan of insurance and, as such, the plan must contain terms and conditions specifying that it is an undertaking of one person to indemnify another person, for an agreed consideration, from a loss or liability in respect of an event the happening of which is uncertain. Plans involving contracts of insurance in an arm's length situation are normally assumed to contain these basic elements. Coverage under the plan must be in respect of hospital care or expense or medical care or expense which would otherwise have been deductible under paragraph 110(l)(c) of the Act read without reference to the 3% limitation. If the agreed consideration is in the form of cash premiums they usually relate closely to the coverage provided by the plan and are based on some method of computation involving actuarial or similar studies.

It is this Department's position that a "cost plus" plan might also qualify as a "private health services plan". A "cost plus" plan exists where an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks. The employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employee's contract of employment requires the employer to reimburse the plan or insurance company for proper claims (filed by the employee) paid, and a contract exists between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing. Provided that the risks to be indemnified are those described in subparagraph 110(8)(a)(i) or (ii) of the Act, such a plan qualifies as a private health services plan.

Furthermore, where an employer himself reimburses his employees for medical or hospital care or expenses, this may also come within the definition of a private health services plan. This is so where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. The consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or in the contract of service.

To specifically address your question concerning dental caps, we repeat that coverage under the plan must be in respect of hospital care or expense or medical care or expense which would otherwise have been deductible under paragraph 110(l)(c) read without reference to the 3% limitation. The deductibility of dental caps is not specifically addressed in the Act. However, generally expenses of this nature will be allowed if they are necessary to maintain the physical and/or mental health of a taxpayer, the cost is prescribed by a licensed practitioner (medical or dental) and it is not, even though prescribed by a doctor simply cosmetic surgery.

We have enclosed for your information a copy of Interpretation Bulletins IT-85R and IT-339R which discuss this Department's position with respect to health and welfare trusts and the meaning of a private health services plan.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on this Department.

We trust the above is of assistance in these matters.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch GK/lg