26 June 1995 External T.I. 9505265 - HEALTH AND WELFARE 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:

	Whether a plan which provides health benefits to 	different groups of employees at different limits of 	reimbursement can still be considered a private health 	services plan.

Position TAKEN:

	yes, as long as each group's members are provided the 	benefit in there capacity as employees and the benefit 	coverage to each employee is the same.

Reasons FOR POSITION TAKEN:

	The fact that each group may have a different maximum 	annual benefit limit does not disqualify a plan from 	being a PHSP

		950526
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

June 26, 1995

Dear Sirs:

Re: Health and Welfare Plan

This is in reply to your letter addressed to the XXXXXXXXXX Tax Services office in which you requested our comments regarding the taxability of amounts paid to individuals under a proposed health and welfare plan. Your letter has been forwarded to this office for reply. We apologize for the delay encountered in responding to your enquiry.

In your letter you describe a decision by your company to institute a health and welfare plan, on a self-insured basis, that would provide certain groups of individuals with dental and medical expense reimbursements. We understand that the type of coverage under the plan will be the same for each of the groups but the maximum annual dollar limit of reimbursement will vary between groups. You have differentiated between the groups as follows: 1) junior employees, 2) senior employees, 3) key employees and management, and 4) shareholders who are directors and full time managers. You have asked us to confirm that the reimbursements made under such a plan would be deductible to your company in computing its income and be considered a non-taxable benefit to the recipient employees.

We regret that since we were not provided with the documents describing the plan in its detail we are not able to provide a definitive reply. Furthermore, we generally do not confirm the tax treatment of proposed transactions, such as this one appears to be, other than on an advance ruling basis. For your information and convenience we have enclosed Information Circular IC 70-6R2, dated September 28, 1990 and Special Release dated September 30, 1992 which sets out the procedures for requesting such a ruling. In the interim we are prepared to provide you with some general guidance on the elements of a private health services plan, as that term is defined in the Income Tax Act, that were discussed in your letter. In addition, we are also enclosing Interpretation Bulletin IT-339R2 which contains general information on the subject.

Since it was not specifically noted in your letter, we would emphasize that the coverage under the plan must be for medical expenses which would otherwise qualify for the medical expense tax credit under subsection 118.2(2) of the Income Tax Act. A plan which reimburses for costs other than those permitted under that provision would not qualify as a private health services plan.

A variance between groups of employees in the annual limit for reimbursement does not disqualify the plan as a private health services plan. The qualified plan is not precluded from providing different levels of coverage to different groups of employees. With respect to the fourth group mentioned in your letter there is some concern regarding groups of employees that are also shareholders in the company as to whether they receive the benefit of the plan reimbursement in their capacity as shareholders or as employees. If the coverage is provided in their capacity as shareholders then the amounts reimbursed would be considered a taxable benefit to the recipient shareholders. If the coverage is provided in their capacity as employees then the amounts reimbursed, assuming the plan otherwise qualifies as a private health services plan, would be free from tax by virtue of subparagraph 6(1)(a) of the Act. It is generally presumed that enhanced coverage for such individuals is conferred by virtue of their shareholdings. The cost of benefits conferred on a shareholder is not deductible to the corporation.

We hope our comments will provide some assistance to you.

Yours truly,

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