26 November 1999 External T.I. 9927395 - PRIVATE HEALTH SERVICES 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 contributions to a particular plan qualify as contributions to a private health services plan as defined in subsection 248(1) of the Income Tax Act.

Whether the gross salary on an employee's T4 slip can be reduced where the employee's claim from the plan is turned over to the employer.

Position: Likely would qualify.

No

Reasons: See paragraph 6 of IT-339R2 and opinion E9531315 issued on February 7, 1996.

There is effectively no payment made by the employer into a private health services plan since the amount paid is being reimbursed by the employee.

XXXXXXXXXX 992739
J. E. Grisé
Attention: XXXXXXXXXX

November 26, 1999

Dear Sirs:

Re: Private Health Services Plan

This is in reply to your letter of October 1, 1999, requesting our review of a particular health plan for income tax purposes.

You attached a pamphlet regarding self-insured group benefits for self-employed individuals and corporations, where particular medical or dental costs can be turned into a premium for cost plus. You were informed that an employer corporation could register with an administrator for an annual fee and pay the administrator a premium equal to the cost of a medical dental bill plus a $2.00 administration fee for each claim. The employee would be reimbursed directly for the cost and the corporation would expense the premium or the employees' T4 could be reduced if the claim was turned over to the corporation by the employees.

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.

Contributions made by an employer to or under a private health services plan on behalf of an employee are excluded from the employee's income from an office or employment by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act (the Act). Such contributions are, generally, considered business outlays or expenses of the employer for purposes of paragraph 18(1)(a) of the Act.

As indicated in Interpretation Bulletin IT-339R2, Meaning of "private health services plan", a private health services plan (PHSP) qualifying under paragraphs (a) or (b) of the definition of that term in subsection 248(1) of the Act is a plan in the nature of insurance. In this respect the plan must contain the following basic elements:

• an undertaking by one person,
• to indemnify another person,
• for an agreed consideration,
• from a loss or liability in respect of an event,
• the happening of which is uncertain.

Paragraph 6 of IT-339R2 describes an acceptable "cost plus" plan where the employees and an employer contract with a trusteed plan or insurance company. While it is our understanding that third party administration services for PHSPs are offered primarily by insurance companies, it is possible that such services could be purchased from a person in the business of offering its services as an administrator of PHSPs. In such a plan, the employer would contract with an administrator for the provision of indemnification of employees' claims on defined risks under the plan. The employer would promise to reimburse the cost of such claims plus an administration fee to the administrator. The employee's contract of employment would require the employer to reimburse the administrator for property claims (filed by the employee) paid, and a contract would exist between the employee and the administrator in which the latter would agree to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing. Provided that the risks to be indemnified are those described in paragraphs (a) and (b) of the definition of "private health services plan" in subsection 248(1), such a plan would qualify as a PHSP.

Where the above plan provides for the additional step of having the employees turn over their claim to the employer, there would be no basis for reducing an employee's T4 by the claim turned over to the employer. Such a plan, in our view, would not be in the nature of insurance and, thus, would not qualify as a PHSP.

We hope our comments are helpful.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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