10 August 1995 External T.I. 9501765 - PRIVATE HEALTH SERVICE 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.

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:

The issue is whether health services plan that includes a self-funded segment and a cost plus segment qualifies as a private health services plan (PHSP) as defined in subsection 248(1) of the Income Tax Act.

Position TAKEN:

Provided all the necessary requirements are satisfied, the plan would be regarded as being a PHSP.

Reasons FOR POSITION TAKEN:

Such an arrangement is consistent with comments in IT-339R2.

			950176
XXXXXXXXXX		M. Eisner

Attention: XXXXXXXXXX

August 10, 1995

Dear Sirs:

Re: Private Health Services Plan

This is in reply to your letter of January 13, 1995 in which you asked us whether a particular health services plan would qualify as a "private health services plan" (PHSP). We also acknowledge our telephone conversation (Eisner/XXXXXXXXXX) on August 2, 1995. We apologize for the delay in replying.

It appears that the matter raised in your correspondence involves proposed transactions. Where a taxpayer wishes to know the income 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 which have been enclosed. Where such a ruling is requested, copies of all relevant documents in addition to a complete statement of the facts and issues should be submitted along with a deposit of $481.50. While such a formal request has not been submitted, we are, pursuant to our telephone conversation on August 2, 1995, providing you with the following general comments.

At the outset, we wish to mention that it is no longer possible to claim medical expenses as a deduction in computing taxable income under paragraph 110(1)(c) of the Income Tax Act (the Act). Rather, qualifying medical expenses are subject to the provisions of section 118.2 of the Act which involves a tax credit. Information in this regard is set out in Interpretation Bulletin IT-519R which has been enclosed. In addition, we have enclosed a copy of Interpretation Bulletin IT-339R2 which sets out the Department's general position on PHSPs and note that paragraph 110(8)(a) has been repealed and that the definition of a PHSP is set out in subsection 248(1) of the Act.

As you are aware, subparagraph 6(1)(a)(i) of the Act excludes employment benefits received by employees in respect of contributions made by an employer to a PHSP.

In determining whether this exception is applicable, a consideration is whether an individual receives a benefit under a PHSP in his or capacity as an employee or as a shareholder. In circumstances where coverage in respect of a 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 since the payments are not incurred by the employer for the purposes of gaining or producing income from a business or property as required under paragraph 18(1)(a) of the Act. On the other hand, if coverage under a PHSP is received by an individual by virtue of his employment, the related benefits would not be taxable and payments made by the employer pursuant to the PHSP would be deductible. It is a question of fact whether benefits are received by an individual by virtue of being a shareholder or employee. In relation to the circumstances of your situation, it is our understanding that many of the approximately XXXXXXXXXX health services plan are also shareholders. While the acquisition of shares by the employees occurred subsequent to the time that the health services plan was established, you should contact your local tax services office (Thunder Bay) if you have a concern in this regard since the review of past transactions falls within the responsibility of that office.

Two 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 with whom the employee is 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 paragraph 118.2(2) of the Income Tax Act. Terms with respect to these requirements should be included in the plan.

You describe an arrangement where, pursuant to a term in a collective agreement, an employer establishes a health services plan for its employees and dependants which involves an insurance company. The plan provides for the reimbursement of 100% of qualifying expenses. Claims are submitted to an insurance company which reviews them and makes payments to the employees in respect of proper claims. In the alternative, the insurance company may pay a proper claim directly to a third party (e.g., a druggist) which provided the service. The employer reimburses the insurance company with respect to proper claims and pays an administration fee (a cost plus arrangement). The quantum of indemnification in respect of each employee would be reasonable. However, in order to reduce administration fees paid to the insurance company, the company is proposing to pay some of the claims (self-funding) to the employees or third parties. Indemnification would occur when proof of the expense and the provision of the service has been provided to the employer. Payments related to the self-funding segment would be made by the employer from the employer's bank account. These payments would not involve a trust and there would be no segregation of funds.

Provided the cost plus segment of the health services plan satisfies the requirements of a PHSP, it is our general view that the payments related to the self-funding segment of the plan may come within the definition of a PHSP where the employer has a contractual obligation to make such payments. Whether or not such an obligation would exist would involve a finding of fact in each particular situation. However, where the existence of such a plan is specified in a union contract and the details of the plan are provided to the employees, it is our general view that this requirement has been satisfied. We also note that these comments are consistent with comments set out in paragraph 7 of IT-339R2.

Similar comments are set out in paragraph 6 of IT-339R2 . While those comments have been made in relation to a cost plus plan, we also consider them to be relevant to a cost plus segment of a plan.

A further requirement is 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 to be indemnified with respect to 100% of certain expenses, it is our view that a health services plan would be in the nature of insurance notwithstanding that the plan involves a cost plus segment and a self-funding segment.

It would follow that a health services plan that involves a cost plus segment and a self-funding segment can qualify as a PHSP and that where such is the case, the related expenses would be deductible by the employer and the benefits received by the employees would be non-taxable. However, these comments are, of course, subject to the comments set out above.

We trust our comments will be of assistance to you.

Yours truly,

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

cc: Thunder Bay Tax Services office