13 June 1991 Ministerial Correspondence 910124 F - Flexible Benefit 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.

Dear Sirs:

Re:  24(1)  - Flexible Benefit Plan

This is in reply to your letter dated January 10, 1991 wherein you requested our opinion concerning the tax treatment of   24(1)  24(1)   Flexible Benefit Account.  We apologise for the delay in responding your request.

The particular circumstances outlined in your letter and the accompanying document on which you have asked for our views is a factual situation involving a specific taxpayer.  As explained in Information Circular 706R2, 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.  Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views.  We are unable to comment on this particular plan as we do not have a proper authorization notice from your client indicating that you may act of their behalf.  However, we can offer the following general comments which may be of some assistance to you.

Our Comments

As defined in subsection 248(1) of the Income Tax Act (the "Act"), a "private health services plan" ("PHSP") means a contract of insurance in respect of hospital and/or medical expenses, or a medical and/or hospital care insurance plan.  Furthermore, as discussed in Interpretation Bulletin IT-339R2, a PHSP must contain the following basic elements:

1)  an undertaking of one person,

2)  to indemnify another person,

3)  for an agreed consideration,

4)  from a loss or liability in respect of an event,

5) the happening of which is uncertain.

In order to meet the definition of a PHSP, the plan or arrangement that purports to be a PHSP must be tested to ensure that the plan involves a reasonable degree of risk which is being transferred to the insurer (i.e. usually the employer).  In our view, plans that permit the carry forward of unused amounts in the plan to the following year and the carry forward of unused medical expenses would not be considered to have a reasonable element of insurance.

Therefore, a plan of this type would not qualify as a PHSP and as such the employer's contributions to a flexible benefit account would not be excluded from an employee's income pursuant to subparagraph 6(1)(a)(i) of the Act.  The plan may be an employee benefit plan in which event the employer's contribution to the plan would only be included in the employee's income as amounts are paid out to the employees from the plan.  The employer would only be able to claim a deduction for its contributions when amounts are paid out of the plan.

It is our view that if a plan permits the employee to receive all or part of the credits under the plan in cash, subsection 5(1) of the Act would apply to tax all credits under the plan in the year they are available to be cashed out.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch