27 July 2012 External T.I. 2011-0422661E5 - Extended health care plan payments

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.

Principal Issues: 1. Does an Extended Health Plan (“EHP”) qualify as a Private Health Services Plan (“PHSP”)? 2. Is a payment made by a union to a member under an EHP taxable if the member’s employer made the contributions into the EHP? 3. Is a T4A required to be issued when a payment under an EHP is less than $500?

Position: 1. Question of Fact. 2. Yes. 3. No.

Reasons: 1. The definition of a PHSP in subsection 248(1) of the Act requires the plan to be a plan in the nature of insurance and reimbursements have to be in respect of expenses that would otherwise qualify for the medical expense tax credit under 118.2(2).
2. Payments made by a union to a member under an EHP where contributions were made into the plan by the member’s employer are subject to income tax under paragraph 6(1)(a) of the Act if the plan is not a PHSP. 3. CRA Guide RC4157 notes that no T4A is required on a payment if the amount paid to an individual is less than $500 and no income tax has been.

XXXXXXXXXX 2011-042266
P. Waugh
July 27, 2012

Dear XXXXXXXXXX:

Re: Extended Health Plan

We are writing in response to your email dated September 27, 2011, concerning payments made by a union to its members. More specifically, you have enquired whether amounts paid by a union to its members under an extended health plan (“EHP”) are taxable for income tax purposes and whether a T4A slip needs to be issued. You have also enquired whether the EHP would be considered a private health services plan (“PHSP”).

In the situation you described, a union has negotiated for their members’ employer to annually contribute a set amount of money per member to the union towards the cost of the union’s EHP. There is no contract of insurance with either the employer or union. The union offers an EHP to all union members and their dependants which has the following features:

• Union members are automatically eligible for the EHP and do not have to buy-into or pay for the plan.
• Members are not employees of the union, but dues-paying members.
• The EHP is wholly funded by the employer.
• The EHP works as a double-reimbursement plan. First, members must submit their health claims through the XXXXXXXXXX, if eligible, and through any primary insurance policy they hold. The EHP then reimburses expenses not covered by the primary insurance policies.
• The EHP covers all medical expenses that are covered through a member’s primary insurance, and it also covers XXXXXXXXXX% dental, XXXXXXXXXX% optical care, and some alternative medical treatments.
• The EHP works on a first-come-first-served basis: though members are eligible for a certain amount, they are not guaranteed that amount of reimbursement.
• The maximum reimbursement a member is eligible to receive is $XXXXXXXXXX for the EHP claim year (XXXXXXXXXX).

Our Comments

Benefits that an employee receives or enjoys in respect of, in the course of, or by virtue of an office or employment, even if received from a third party, are generally taxable as income from that office or employment in accordance with paragraph 6(1)(a) of the Income Tax Act (the “Act”). However, subparagraph 6(1)(a)(i) of the Act specifically excludes benefits derived from the contributions by an employer to or under a PHSP.

PHSP

A PHSP is defined under subsection 248(1) of the Act as a contract of insurance in respect of hospital expenses, medical expenses, or any combination of such expenses or a medical care insurance plan, a hospital care insurance plan, or any combination of such plans.

The determination of whether a plan qualifies as a PHSP is a question of fact. While we do not have enough information to make a determination on whether the EHP qualifies as a PHSP, the following general information should be of assistance to allow you to make such a determination.

The position of the Canada Revenue Agency (“CRA”) on what constitutes a PHSP is outlined in Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years], which can be found on the CRA Web page www.cra.gc.ca/E/pub/tp/it339r2. Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, it must represent 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. In other words, a particular plan or arrangement would not qualify as a PHSP unless it involves a reasonable element of risk that is assumed by the insurer, whether that insurer is the employer or a third party. Further, paragraph 4 of IT-339R2 notes that coverage under a PHSP must be in respect of medical expenses which would otherwise qualify for purposes of the medical expense tax credit (“METC”).

Medical expenses which qualify for the METC are limited to those described in subsection 118.2(2) of the Act. If a particular expense is not described in subsection 118.2(2) of the Act, or if the conditions under which the expense would qualify are not met, the expense does not qualify for purposes of the METC. For more information on qualifying medical expenses for the METC go to http://www.cra-arc.gc.ca/medical.

If a particular plan does not qualify as a PHSP, the amount of any benefit received out of the plan will be taxable to the employee.

Reporting Requirements

Generally, paragraph 200(2)(g) of the Income Tax Regulations states that every person who makes a payment or who confers a benefit the value of which is required by paragraph 6(1)(a) of the Act to be included in computing a taxpayer’s income from an office or employment must make an information return in prescribed form (e.g. T4A and T4A Summary Form) even if no amount of income tax has been withheld at source. However if the amount of the payment is $500 or less, CRA generally waives the T4A reporting requirement unless income tax was withheld at source, in which case, a T4A must be issued. If the payment is more than $500, a T4A must be issued to the recipient of the payment.

For more information on T4A reporting requirements please refer to Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary, which can be viewed at http://www.cra-arc.gc.ca/E/pub/tg/rc4157/rc4157-e.html.

Finally, should you require future assistance in determining whether a T4A is required in respect of any particular payment or series of payments (past or future), please contact the Trust Accounts Division of your local tax services office which can be found on our Web page at http://www.cra-arc.gc.ca/cntct/prv/on-eng.html.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch