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 phsp benefit for employee-sh is granted by reason of employment & deductible to corp or by reason of shareholdings & taxable to s/h and no deductible to corp
Position: question of fact but if the hoding of shares is a requirement in order for the corp to pay for coverage, then it is probable that the benefit has been granted by reason of the individual's shareholdings - whether the plan is insured by an insurance co or self-administered is no relevant to this determination - on the issue of whether this position places principal s/h- employees at a disadvantage to self-employed persoons who would be entitled to a business deduction under the 98 budget proposals, it should be noted that the proposed deduction is to be limited to the amounts paid on behalf of the employees of the business
Reasons: 6(1)(a) exempts phsp coverage but 15(1) doesn't
XXXXXXXXXX 981564
A. Humenuk
Attention: XXXXXXXXXX
July 27, 1998
Dear Sir:
Re: Private Health Service Plan benefits for Employee-Shareholders
This is in reply to your letter of June 8, 1998, in which you ask for the criteria to be used in determining whether the benefit from private health services plan coverage is provided to an employee-shareholder by reason of the individual's employment or because of the individual's shareholdings.
You asked whether the exclusion of shareholders who are not employees from a private health services plan would be a valid basis for considering the benefit to have been received by employee-shareholders as an employment benefit. You asked whether the determination would be affected by whether a private health services plan is insured by an insurance company or is self-administered by the employer. Finally, you noted that the 1998 federal budget proposes to provide a self-employed individual with a business deduction for private health services plan premiums paid on behalf of that individual in certain circumstances and asked why a corporation would be denied a deduction for premiums paid in similar circumstances.
Our position with respect to private health services plan benefits provided to employee-shareholders was set out at the 1981 Corporate Management Tax Conference. While a plan which only provides benefits for shareholders may meet the definition of a private health services plan, there is no provision in the Act which would exclude such benefits from the shareholder's income. It is always a question as to whether an employee-shareholder receives a particular benefit as a shareholder or as an employee.
When a health care plan is established for the benefit of the employee-shareholders of a corporation and excludes employees who are not shareholders, there is a general presumption that the benefit is received because of the individual's shareholdings rather than by reason of his or her employment. The fact that such a plan may also exclude shareholders who are not employees would not be sufficient, in our view, to conclude that subsection 15(1) of the Act should not apply. If it is in fact necessary to be a shareholder in order for the corporation to pay for coverage under the plan, and employees who are not shareholders are not provided with similar coverage, it will normally be reasonable to conclude that the employee-shareholder has obtained the benefit by reason of his or her shareholdings and not by reason of employment. As a consequence, the exclusion for benefits derived from contributions by an employer to a private health services plan contained in subparagraph 6(1)(a)(i) of the Act would not apply, and the individual would be considered to be in receipt of a benefit taxable under subsection 15(1) of the Act. It follows that the contributions made on the shareholder's behalf would not be deductible to the corporation.
On the other hand, when equivalent coverage under a private health services plan is extended to all employees, including the employees who are shareholders, the benefit provided to the employee-shareholders from such coverage is normally considered to be an employment benefit rather than a shareholder benefit. Similarly, when all employees of a corporation are shareholders and it is reasonable to conclude, based on the particular facts of the situation, that the private health services plan coverage has been provided as part of a reasonable remuneration package, the benefit from such coverage is also considered to be an employment benefit rather than a shareholder benefit. In such a case, the benefit is not included in the employee-shareholders' income by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act, and the corporate employer is entitled to a deduction in respect of the contributions made for such coverage, subject to any limitations imposed under the Act.
With respect to your third and fourth comments, we agree that the determination of whether the benefit is provided by reason of an individual's shareholdings rather than the individual's employment is not dependent upon whether the coverage is provided through an insurance company or a self-administered plan.
In regard to your last question concerning the 1998 federal budget, please note that the budget proposal limits the deduction of private health services plan premiums for a self-employed individual to that which he or she pays on behalf of his or her employees. The limitation of $1,500 for each of an individual and the individual's spouse, and $750 for each minor child in his or her household, only applies when there are no other employees employed, directly or indirectly, in the individual's business.
Accordingly, if the legislation is passed in substantially the same form as proposed in the Ways and Means motion released with the 1998 federal budget on February 24, 1998, the circumstances under which a $1,500 deduction would be available to a self-employed individual for his or her private health services plan coverage are comparable to that in which all the employees of a corporation are also shareholders of that corporation. As noted above, the corporate employer would normally get a deduction for such coverage, provided that such coverage was reasonable in the circumstances. Questions concerning the tax policy related to the provisions of the Act should be directed to the Department of Finance.
We trust that these comments will be of assistance.
Yours truly,
J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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