28 November 1995 External T.I. 9527915 - 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.

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:

An employer provides health care coverage for its employees. The coverage includes the payment of premiums by the employer to an insurance carrier. The coverage provided by the insurance carrier in respect of each is subject to a deductible amount of $1,500. In addition, the employer would enter into a "cost plus" arrangement with an insurance company under which health care coverage for each employee in the amount of $1,500 would be provided. To the extent that valid claims made by an employee are less than $1,500, the employer would make a payment in respect of the employee pursuant to a group retirement plan. The issue is whether a private health services plan (PHSP) can be considered to be in existence.

Position:

A PHSP does not exist.

Reasons:

The arrangement relating to health care coverage and the group retirement plan are considered to comprise one plan. A PHSP is not considered to exist as payments will be made which are not described in subsection 118.2(2) of the Income Tax Act.

		952791
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

November 28, 1995

Dear Sirs:

Re: Private Health Service Plans

This is in reply to your letter of October 25, 1995 concerning the income tax consequences of a certain type of arrangement which includes health care coverage.

The situation which has been set out in your letter relates to an actual set of circumstances and involves proposed transactions. Confirmation of the tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling following a review of the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 and the related Special Release dated September 30, 1992 which have been enclosed. We are, however, prepared to provide you with the following general comments.

Our Comments

You are concerned with the type of situation where an employer proposes to change an arrangement under which health care coverage is provided to its employees. Under the new arrangement, the employer will pay premiums to an insurance carrier for health care coverage that will be subject to a deductible amount of $1,500 in respect of each employee. In addition, the employer would enter into an arrangement with an insurance company (a cost plus arrangement) under which health care coverage for each employee in the amount of $1,500 would be provided. Claims would be submitted to the company who would review them and make payments to the employees in respect of their proper claims. The employer would reimburse the company with respect to the claims. To the extent that valid claims made by an employee during a year are less than $1,500, the employer would make a payment in respect of the employee pursuant to a group retirement plan.

Where a benefit has been provided to an employee/shareholder in his or her capacity as a shareholder, the tax consequences are different from those that would arise if the benefit were to be provided to an individual in his or her capacity as an employee. However, in our comments set out below, the assumption has been made that benefits have been provided in the above situation to an individual in his or her capacity as an employee.

The Department's general position on PHSPs is set out in Interpretation Bulletin IT-339R2. As indicated in paragraph 4 of IT-339R2, one of the requirements is 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. In relation to this requirement, it is our view that the arrangement relating to health care coverage and the "group retirement plan" are interrelated and comprise one plan in relation to the consideration of whether a PHSP can be regarded as being in existence. As that plan includes payments to the "group retirement plan", it is our view the plan would not qualify as a PHSP. Consistent with these comments, the payments made to an employee by the insurance company pursuant to the cost plus arrangement would be required to be included in the employee's income under paragraph 6(1)(a) of the Act. In addition, it is our view that the portion of each premium paid to the insurance carrier that relates to a particular employee would be required to be included in the employee's income under that provision.

In the case of the retirement fund, it would be necessary to review all the relevant facts and documentation before the tax consequences in respect of the plan could be determined. However, the consideration would be whether the plan is a "retirement compensation arrangement" or other type of arrangement described in Interpretation Bulletin IT-502 and the related special release dated May 31, 1991 which have been enclosed for your reference.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch