28 April 1993 Internal T.I. 9303757 F - 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.

April 28, 1993

Self-Funded Private Health Services Plans

This is in reply to the facsimile which we received on February 9, 1993 in which you requested us to consider the correspondence you enclosed which was submitted to your office by XXXXXXXXXX and concerns whether a particular arrangement will qualify as a "private health services plan" as defined in subsection 248(1) of the Income Tax Act (the Act).

The correspondence you enclosed involves proposed transactions. Where a taxpayer wishes to know the tax consequences of proposed transactions, an advance income tax ruling may be requested pursuant to Information Circular 70-6R2 dated September 28, 1990 and the related Special Release dated September 30. 1992. Where such a ruling is requested, copies of all relevant documents and a complete statement of the facts and issues should be submitted along with a deposit of $481.50 (See paragraph 18 of Information Circular 70-6R2). We also wish to note that paragraph 21 of Information Circular indicates that it is the Department's practice not to comment on proposed on proposed transactions other than in the form of an advance income tax ruling.

While an advance income tax ruling request has not been submitted and all the relevant facts and information are not available, we are, pursuant to our telephone conversation on March 31 (Eisner/Hein), providing you with the following general comments to assist you in responding to XXXXXXXXXX.

Our Comments:

Subject to some exceptions, paragraph 6(1)(a) of the Income Tax Act (the Act) requires employment benefits received by employees to be included in income. One of the exceptions are contributions made by an employer under a "private health services plan" which is defined in subsection 248(1) of the Act. As you are aware, the Department's general position in this regard is set out in Interpretation Bulletin IT-339R2 "Private Health Services Plans".

In determining whether the above exception is applicable, a consideration is whether an individual receives a benefit under a private health services plan in his or her capacity as an employee or as a shareholder. In circumstances where coverage in respect of a private health services plan (PHSP) is received by an individual by virtue of his or her shareholding, the exception would not apply and the individual would be considered to be in receipt of benefits that are taxable under subsection 15(1) of the Act. In addition, payments made in respect of a shareholder would not be deductible in computing the corporation's income. On the other hand, if coverage under a PHSP is received an individual by virtue of his or her employment, the related benefits are not taxable and payments made by the employer pursuant to the PHSP would be deductible under paragraph 18(1)(a) of the Act. It is a question of fact whether benefits are received by an individual by virtue of being a shareholder or employee.

Two other requirements of PHSPs are set out in paragraphs 1 and 4 of IT-339R2. Paragraph 1 indicates that coverage must be for one or more of the employee, the employee's spouse, and any member of the employee's household connected by blood relationship, marriage or adoption. Paragraph 4 indicates that expenses covered by a PHSP are limited to those which would otherwise have qualified as a medical expense under subsection 118.2(2) of the Act. Where an arrangement is being established on the basis that it qualify as a PHSP, terms with respect to these requirements should be included in the plan.

In a typical unfunded health services plan, the employer undertakes to indemnify employees an agreed amount concerning the employees' health care expenses. The quantum of reimbursement in respect of each employee would be reasonable. Indemnification occurs only when the service has actually been provided and proof of entitlement to indemnification has been provided to the employer by the employee. The plan would not be a trusteed plan and no segregation of funds to the plan occurs. Any payments required to be made by the employer would be disbursed from the employer's normal operating bank account.

With respect to the above type of arrangement, paragraph 7 of IT-339R2 makes the general statement that payments of the type described in the preceding paragraph "may" come within the definition of a PHSP and that this occurs where the employer has a contractual obligation to make such a payment. Whether or not such an obligation would exist would involve a finding of fact in each particular situation. However, where an employer provides its employees with details of the health services plan and indicates to them that reimbursement will be provided to the extent provided therein, it is our general view that this requirement has been satisfied.

In connection with the comments in the above paragraph, we are also mentioning that a PHSP must be in the nature of insurance and, in that regard, must contain the basic elements set out in paragraph 3 of IT- 339R2. We also note that where each eligible individual is allocated a certain dollar amount in respect of a specific period of time such that the employer's indemnification for the time period could be anywhere between $0 and the dollar amount allocated, it is our view that a health services plan would be in the nature of insurance.

Subject to the above comments, it is our view that a health services plan, which is established by an employer in respect of vision care, can qualify as a PHSP.

Should further technical assistance be required, we would be pleased to provide our views.

P.D. FuocoChief Personal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch