16 December 1999 External T.I. 9930805 - PHSP COVERAGE

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: Tax treatment of prior years expenses paid under a PHSP.

Position: Plan must provide for carry forward to the immediately following period of expenses otherwise eligible but for the annual ceiling limit.

Reasons: Pursuant to definition of PHSP plan must be in nature of insurance.

XXXXXXXXXX 993080

Wm. P. Guglich

Attention: XXXXXXXXXX

December 16, 1999

Dear Sirs:

Re: Coverage under a Private Health Services Plan ("PHSP")

This is in reply to your letter of November 18, 1999, requesting our views regarding coverage under a PHSP.

You described a PHSP which provides coverage to an employer's employees under a Basic and an Enhanced plan. The Basic plan provides for the reimbursement of expenses related to prescription drugs, semi-private hospital charges, vision care, and other defined medical supplies and services, if incurred during the current plan year. The Enhanced plan provides for the coverage under the Basic plan plus up to $500.00 per year of other qualifying medical expenses (not covered under the Basic plan), if incurred during the current plan year or the twelve month period immediately preceding the current plan year. The employee has the option of selecting coverage, at each annual plan renewal, of either the Basic or the Enhanced plan, as well as being allowed to decline coverage in either plan.

The clarification you requested is related to the validity of reimbursement under a PHSP of expenses incurred in the 12 month period prior to the current plan year, in particular the reimbursement of expenses in each of the following circumstances. In each case, the employee has selected coverage under the Enhanced plan.

1. The employee did not participate in either plan in the prior year.

2. The employee participated in the Basic plan in the prior year.

3. The employee participated in the Enhanced plan in the prior year.

4. The employee did not participate in either plan in the prior year and was not employed by the employer for all or part of the prior year.

Our Comments

A private health services plan qualifying under paragraphs (a) or (b) of the definition in subsection 248(1) is a plan in the nature of insurance. In this respect the plan must 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 which covers expenses incurred prior to an employee's participation in a particular plan, or expenses incurred during a period in which an employee was not covered by such plan, does not contain the requisite element of insurance and thus, could not qualify as a PHSP. Such a plan can be distinguished from a plan which permits expenses which would be eligible for reimbursement under the plan, but for the annual ceiling limit imposed by the plan, to be claimed in the immediately following period. Thus, it is also our view that a plan, which permits a carry forward to the immediately following period of medical expenses which would be eligible for reimbursement under the plan subject to the annual ceiling limit imposed by the plan, would not normally be disqualified as a PHSP solely by reason of the carry forward provision. However, where a plan in effect in a prior year did not provide for the carry forward of expenses incurred which are in excess of the plan's annual ceiling limit, a reimbursement in a subsequent period of such excess expenses incurred in the prior year would generally disqualify the plan from being a PHSP.

We caution you that our comments are general in nature only and may not apply to any particular fact situation and are thus not binding on the Department. As stated in Information Circular 70-6R3 Advance Income Tax Rulings, dated December 30, 1996, assurance in respect of any particular proposed transaction is given by way of an advance income tax ruling.

We trust our comments will be of assistance.

Yours truly,

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

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