18 January 1990 External T.I. 59135 F - Reimbursement of Employee's Medical Expenses by Employer

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.

January 18, 1990

Dear Sirs:

Re:  Subparagraph 6(1)(a)(i) and Subsection 15(1) of the Income Tax Act (the "Act")

This is in reply to your letter of November 23, 1989, wherein you requested our views on the application of subparagraph 6(1)(a)(i) and subsection 15(1) of the Act as they apply to each of the following four hypothetical situations.  Each situation involves the reimbursement of an employee's medical and hospital care expenses by his employer.  In all cases, we are assuming that the criteria for a "private health services plan" as outlined in paragraphs 3 and 7 of IT-339R2 are met.  In addition, the expenses covered by the reimbursement plan are limited to only those expenses listed in subsection 118.2(2) of the Act. Finally, the term owner-manager in the following hypothetical situations means a shareholder of a company who is also an employee of the same company.

It is our understanding that the four hypothetical situations may be summarized as follows.

Situation 1

An owner-manager of a company, with no other employees, is reimbursed for hospital care and medical expenses.  You have asked if the reimbursement would be a "private health services plan" and therefore be excluded from the taxation of employee benefits by virtue of subparagraph 6(1)(a)(i) of the Act.  You have also asked if there would be a shareholder benefit by virtue of subsection 15(1) of the Act.

Situation 2

An owner-manager is reimbursed for his medical and hospital care expenses as in situation #1.  In this case, the corporation has employees in addition to the owner-manager but the owner-manager is the only employee entitled to the reimbursement of medical and hospital care expenses.  You have asked if the reimbursement would be non-taxable under paragraph 6(1)(a) and subsection 15(1) of the Act.

Situation 3

The owner-manager and some other key employees are eligible for the hospital care and medical expenses reimbursement.  You have asked if the reimbursements will be non-taxable by virtue of subparagraph 6(1)(a)(i) and subsection 15(1) of the Act.

Situation 4

An operating company with several employees is wholly-owned by a holding company which in turn is owned by an individual owner-manager.  There are no employees of the holding Company other than the owner-manager.  The medical and hospital care expenses of the owner-manager and of the other employees will be reimbursed by the holding company and the operating company respectively.  You have asked if the reimbursements to the employees and the owner-manager would be non-taxable under subparagraph 6(1)(a)(i) and subsection 15(1) of the Act.

Our Comments

Situation 1

Paragraph 7 of IT-339R2 makes the general statement that payments of the type described "may" come within the definition of a "private health services plan" provided the employer has a contractual obligation to make such a payment.  Whether or not such an obligation exists would involve a finding of fact in each particular situation.  As a consequence we are reluctant to express an opinion about a contractual arrangement without having access to specific contracts and other documentation concerning the arrangement.  However, it would appear from the limited information submitted, that the arrangement may qualify as a "private health services plan" in accordance with paragraph 7 of IT-339R2.

Although there is no limit on the number or types of employees that may be covered by a plan, we would generally consider that in the case of an employee/shareholder, coverage would be received by virtue of the individual's shareholdings rather than by virtue of his employment.  As a consequence, subparagraph 6(1)(a)(i) of the Act would not apply and the employee/shareholder would be considered to be in receipt of a benefit taxable under subsection 15(1) of the Act.

It follows therefrom, that the payment made on the shareholder's behalf, by the corporation, would not be deductible in computing the income of the corporation.

Situation 2

Same answer as in situation 1.

Situation 3

In this situation, it is our view the reimbursements of the hospital care and medical expenses would be non-taxable to the employees' and the owner-manager by virtue of subparagraph 6(1)(a)(i) of the Act provided the other key employees are not also shareholders of the company.

Situation 4

In this situation, it is our view that the reimbursements to the employees of the operating company would be non-taxable by virtue of subparagraph 6(1)(a)(i) of the Act.  It is also our view that the reimbursements to the owner-manager would be received by virtue of the individual's shareholdings and our comments as contained in situation 1 would be applicable.

The foregoing represents a general interpretation of the law and, as such, may not be applicable in every situation.  Should you have a factual situation, you may wish to apply for a binding advance income tax ruling if a transaction is proposed, or consult the local District Taxation Office if the transaction has been completed.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch