4 May 1994 Administrative Letter 9403982 - PHSP-WHO CAN SET UP, FOR WHOM GENERAL QUESTIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Private Health Services Plans: Can a self employed person set up plan for self; Does a Co. have to be incorporated? Can a co. start up a plan for a select group of employees only and can a PHSP be set up for a shareholder (if yes, does a taxable benefit result)?

Position TAKEN:

Proprietor can set up for self but no ded'n for contribution to plan and benefits not taxable. Legal status of employer not relevant. Select group of employees is ok. PHSP can be set up for shareholder but no ded'n to corp for contributions to the plan, a taxable benefit results to the shareholder.

Reasons FOR POSITION TAKEN:

Reflects previous opinions. See 931168

									940398

XXXXXXXXXX							Sandra Short

Attention: XXXXXXXXXX

May 4, 1994

Dear Sirs:

Re: Private Health Services Plans

This is in reply to your correspondence of February 16, 1994 wherein you have asked a number of questions relating to Private Health Plans. In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act"). We have assumed, for the purposes of our reply, that references to "Private Health Plans" are references to "Private Health Services Plans" as defined in subsection 248(1) of the Act. Our reply to the questions, in the order presented in your letter, is set out below:

1.Can a self employed person set up a plan for himself or herself? If no, why not, since a person may set up a plan through an insurance company and deduct the cost for tax purposes?

While a proprietor may set up a Private Health Services Plan for personal coverage, it is the Department's position that contributions to the plan are not deductible but that in the event that any benefits become payable, the benefits would not be taxable in the hands of the recipient. We believe that where a proprietor pays a premium to an insurance company for his or her personal health insurance protection or coverage the cost of the premium is not a deductible expense for tax purposes. The premium is considered a personal expense of the individual.

2.Does a company have to be incorporated to set up a plan for other employees?

No. The legal status (corporation, partnership or sole proprietorship) of the employer is not relevant in determining whether the employer may set up a Private Health Services Plan for its employees.

3.Is there a relationship between the number of hours worked (part-time versus full-time) and the amount that an employee can be given as a private health plan contribution?

Further to our telephone conversation of April 20 (XXXXXXXXXX/Short), we understand that you are querying whether there is a limit on the amount that an employer may contribute to a Private Health Services Plan in respect of employees and, if so, whether this limitation is based on hours worked by the individual employees and also whether coverage or benefits provided to employees is to be limited or prorated based on individual hours worked.

It is the employer's decision to determine which employees or groups of employees are to be entitled to coverage under a Private Health Services plan (for example, the employer may decide to make the plan available only to full-time employees, to all employees or only executive employees). From a taxation perspective, the hours worked by individual employees are not relevant. An employer is permitted a deduction from income in respect of contributions to the plan on behalf of employees to the extent that the contributions are reasonable in the circumstances (section 67 of the Act). Amounts are considered reasonable if they do not exceed amounts that are actuarially determined as being in respect of the coverage provided by the plan for the group of employees being covered. You may wish to note that subsection 18(9) of the Act may operate to deny any portion of a contribution, as a deduction in computing the employer's income, which is in respect of a future period. Also, where funds are simply "set aside" as a reserve for a contingent obligation to pay benefits without a legal obligation to do so, it is likely that paragraph 18(1)(e) of the Act would deny a deduction for tax purposes in respect of these amounts until such time as the benefits are actually paid to employees.

Similarly, while hours worked by employees may be a factor used by employers in determining the level of benefits to be provided to a defined group of employees, hours worked are not a factor in determining whether the benefits provided are permissible from a taxation perspective. As discussed in paragraph 4 of Interpretation Bulletin IT-339R2, coverage under a plan must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

Coverage may only extend to one or more of: the employee, the employee's spouse, and any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption.

4.Can a company start a Private Health Plan for a select group of employees (such as upper management only)?

Yes. Where the upper management group is made of up of employees, as in your example, contributions made by the employer to or under the plan on behalf of the employees are excluded from employee income by virtue of subparagraph 6(1)(a)(i) of the Act (see paragraph 1 of Interpretation Bulletin IT-339R2). The employer is permitted a deduction from income in respect of reasonable contributions to the plan. Where the upper management group is comprised of partners, the comments under question 1 apply. You may also wish to read the comments in paragraph 7 of Interpretation Bulletin IT-85R2 in this regard. Where the upper management group is comprised of shareholders, the remarks under question 5 below should be considered.

5.Can a Private Health Plan be set up for a shareholder of a company? If yes, is it a taxable benefit, and if so why is it a taxable benefit when belonging to a benefits package through an insurance company is not a taxable benefit?

While a Private Health Services plan may be set up for a shareholder of a corporation, the corporation is not permitted a deduction from income in respect of any contributions to the plan since the payment is not incurred by the corporation for the purposes of gaining or producing income from a business or property as required under paragraph 18(1)(a) of the Act. Where the corporation makes a contribution to the plan, a taxable benefit is conferred on the shareholder pursuant to subsection 15(1) of the Act. There is no provision, similar to that found in subparagraph 6(1)(a)(i) of the Act (applicable to employees), to exempt this benefit from being included in the shareholder's income. Where a corporation pays an insurance premium to an insurance company on behalf of a shareholder for the personal benefit of one of its shareholders, a taxable benefit is conferred on the shareholder under subsection 15(1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch