5 July 1989 Ruling 58073 F - Private Health Service 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.

July 5, 1989

Dear Sirs:

Re:  Private Health Service Plan

This is in reply to your letter of May 8, 1989 and enclosures wherein you seek our opinion as to whether employer contributions to an Employee Health and Welfare Benefit Trust (the "Trust") on behalf of the employees will not be included in the employee's taxable income as a benefit under paragraph 6(1)(a) of the Income Tax Act (the "Act").

The particular circumstances outlined in your letter and the accompanying documents on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R, it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents.  We are therefore not in a position to give you a definitive answer to your question. However, we can offer you the following general comments which may be of assistance to you.

The documents you submitted indicate that the Trust is only to provide benefits under a private health services plan ("PHSP") as defined in subsection 248(1) of the Act. Subparagraph 6(1)(a)(i) of the Act exempts from employment income the benefits derived from an employer's contributions to or under a PHSP. Under the definition in subsection 248(1) of the Act, a PHSP must be a contract or plan of insurance in respect of hospital and medical expenses.

As stated in Interpretation Bulletin IT-339R, a PHSP must be in the nature of insurance and must contain the following elements:

(i)     an undertaking of 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.

The coverage under the plan must be in respect of those expenses which would qualify as medical expenses under subsection 118.2(2) of the Act for the purposes of the medical expense tax credit.

The agreed consideration may take the form of cash premiums computed on an actuarial basis. However, premium-based funding is not necessary. Cost plus administrative services only plans are acceptable. In these types of arrangements, the employer's contributions are based on a reimbursement of claims cost basis, plus an administrative fee to cover non-claims expenses.

Another funding option that may be available is where the employer himself reimburses his employees for the medical expense covered under the plan. Such an arrangement is acceptable when the employer is obligated under the employment contract to do so. In these cases, the consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or contract of service.

Benefits received under a PHSP are not taxable in the hands of the employee and the particular expense reimbursed is not considered to be a medical expense of the employee by virtue of paragraph 118.2(3)(b) of the Act. However, employee contributions to a PHSP are considered to be eligible medical expenses under paragraph 118.2(2)(q) of the Act for the purposes of calculating the medical expense tax credit.

We trust the above is of assistance to you. Should you wish to have us consider a particular plan being proposed, we suggest you request an advance income tax ruling.

Yours truly,

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch