28 April 1999 External T.I. 9904155 - PHSP FOR A PROPRIETOR - SELF ADMINISTERED

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 contract between an employer and an administrator in which the administrator agrees to pay the employer's and his family's medical bills (plus a 10% fee) qualifies as a PHSP.

Position: No.

Reasons: In our view, a plan that consists of a contract between a proprietor and an administrator under which the administrator agrees to reimburse the proprietor, his spouse and members of his household, for actual medical and hospital expenses (plus an administrative fee), does not qualify as a PHSP, as it does not contain the necessary elements of insurance.

XXXXXXXXXX 5-990415
J. Gibbons

Attention: XXXXXXXXXX

April 28, 1999

Dear XXXXXXXXXX:

We are replying to your letter of February 9, 1999, in which you requested our views on whether a contract with an administrator will qualify as a "private health services plan" (PHSP) under proposed section 20.01 of the Income Tax Act, in the following circumstances:

1. A sole proprietor will enter into a contract with a corporation engaged in the business of offering its services to the public as an administrator of private health services plans.

2. Under the contract, the administrator agrees to reimburse the proprietor, his spouse and members of his household for medical and hospital expenses to the extent permitted under proposed section 20.01 ("medical and hospital expenses").

3. As consideration under the contract, the proprietor agrees to pay the administrator an amount equal to the amount reimbursed plus 10% of such amount.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

Proposed paragraph 20.01(1)(b) describes those persons or partnerships with whom a proprietor may enter into a contract to provide or administer PHSPs. In this regard, proposed subparagraph 20.01(1)(b)(ii) describes a person or partnership engaged in the business of offering to the public its services as an administrator of PHSPs. In determining whether or not a sole proprietor's arrangement with an administrator will constitute a "private health services plan," it must fall within the definition in subsection 248(1). According to paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan," it is the Department's position that the plan must be in the nature of insurance and contain the following basic elements:

(a) an undertaking by one person,

(b) to indemnify another person,

(c) for an agreed consideration,

(d) from a loss or liability in respect of an event,

(e) the happening of which is uncertain.

In our view, a plan that consists of a contract between a proprietor and an administrator, under which the administrator agrees to reimburse the proprietor, his spouse and members of his household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP, since it does not contain the necessary elements of insurance. In this situation, no person has undertaken to indemnify another person. Rather, the proprietor has assumed all of the risk for the personal hospital and medical bills. Even though a proprietor enters into a contract with an administrator to pay medical and hospital expenses, it is our view that that is not, in itself, sufficient to conclude that the plan is a PHSP.

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

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