30 August 1994 External T.I. 9417115 - SELF ADMINISTERED DENTAL 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.

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:

Will employees be subject to tax on reimbursements from self-funded dental plan?

Position TAKEN:

Question of Fact. Depends on whether it meets the defintion of a PHSP and is a condition of the contract of employment i.e., an obligation of the employer.

Reasons FOR POSITION TAKEN:

Previous correspondence, IT-339R2 and 85R2

			941711
XXXXXXXXXX		D. Zion

Attention: XXXXXXXXXX

August 30, 1994

Dear XXXXXXXXXX:

Re: Self Administered Dental Plan

This is in response to your letter of June 27, 1994 in which you request a tax ruling regarding a self-administered dental plan. More specifically, you have asked whether employees will be subject to tax on a direct reimbursement plan.

As we understand it, XXXXXXXXXX has switched from a third party insurer-paid dental plan to a self-administered dental plan. The new self-administered plan provides the same benefits offered by the previous plan, the only difference being that XXXXXXXXXX will now directly reimburse the employees pursuant to the terms of the plan. This new self-administered dental plan came into effect on XXXXXXXXXX. No documentation was provided with your request.

We have enclosed for your information a copy of Information Circular 70-6R2 (IC 70-6R2) and the subsequent special release dated September 30, 1992 which sets out the guidelines under which advance income tax rulings are issued. As discussed in our recent telephone conversation (Zion/XXXXXXXXXX), we cannot confirm the tax consequences of a particular transaction without a thorough review of all relevant facts and documentation pertaining to the transaction. Furthermore, as your situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. We will however, as agreed, provide the following general comments which may be of assistance to you. 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).

Our Comments

In order for a particular direct reimbursement dental plan ("DRDP") to qualify as a Private Health Services Plan ("PHSP"), as defined in subsection 248(1) of the Act, the plan implemented by an employer on behalf of its employees must be in the nature of insurance and must contain the following elements as set out in paragraph 3 of the attached Interpretation Bulletin, Private Health Services Plans IT-339R2:

(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.

Furthermore, as indicated in paragraph 4 of the bulletin, the coverage under a PHSP 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. Paragraph 7 of the bulletin makes the general statement that an arrangement where the employer reimburses its employees for the cost of medical or hospital care "may" come within the definition of a PHSP provided the employer has a contractual obligation to make such payments. This occurs where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. Whether or not such an obligation exists would involve a finding of fact in each particular situation.

Assuming that XXXXXXXXXX DRDP is a PHSP, the benefits received by the employees would not be taxable pursuant to the exception found in subparagraph 6(1)(a)(i) of the Act. In accordance with subsection 118.2(3) of the Act, the reimbursed portion of dental expenses would be excluded from eligible medical expenses under paragraph 118.2(1)(a) of the Act in the calculation of the medical expense tax credit. It is the employer's responsibility to obtain the proper documents in support of every claim made under the dental plan. The employer must ensure that any expenses reimbursed in respect of items covered under the plans are those that would otherwise have qualified as a medical expense as discussed above.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch