23 June 2011 External T.I. 2011-0406901E5 - 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.

Principal Issues: Whether a particular arrangement qualifies as a PHSP.

Position: Question of fact. General comments are given

XXXXXXXXXX
					2011-040690
					Linda Compton
June 23, 2011

Dear XXXXXXXXXX :

Re: Private Health Services Plan

This is in response to your letter of May 4, 2011, in which you requested our opinion on whether a particular arrangement would qualify as a private health services plan ("PHSP").

In your letter, you describe an arrangement for a small privately held corporation with four employees, including the shareholders, where each employee is eligible for reimbursement for medical expenses from the company with an annual limit determined by their position within the company.

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

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 of insurance qualifies as a PHSP is a question fact. However, the Agency has set out its views on the issue in Interpretation Bulletin IT-339R2, "Meaning of Private Health Services Plan". Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, it must represent:

(i) an undertaking by one person,
(ii) to indemnify another person,
(iii) for an agreed consideration,
(iv) from a loss or liability in respect of an event,
(v) the happening of which is uncertain.

As indicated in paragraph 7 of IT-339R2, an arrangement where an employer reimburses its employees for the cost of medical care or hospital care may be considered a PHSP where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. However, paragraph 4 of the bulletin provides that coverage must be in respect of hospital care or expenses, or medical care or expenses, which normally would otherwise have qualified as medical expenses under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

The determination of whether a benefit is received by an employee-shareholder in his or her capacity as an employee or as a shareholder involves a finding of fact. However, where an individual who is both a shareholder and an employee receives a benefit and equivalent benefits are not available to all employees, the individual is generally considered to have received a benefit by virtue of his or her shareholdings. On the other hand, when an equivalent benefit is extended to all employees, including employees who are shareholders, the benefit provided to the employee-shareholder is normally considered to be derived by virtue of employment. Similarly, a benefit will generally be considered to be received by an employee-shareholder in his or her capacity as an employee where the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size. If a shareholder is actively engaged as an employee of the company and it is reasonable to conclude that the benefit has been provided as part of a reasonable employee remuneration package, it is our general view that the benefit would be derived by virtue of the individual's employment and thus would be exempt under subparagraph 6(1)(a)(i) of the Act.

In situations where the benefit is received by an employee-shareholder in his or her capacity as a shareholder, the full benefit would be taxed in the shareholder's hands pursuant to subsection 15(1) of the Act and the exception under subparagraph 6(1)(a)(i) of the Act would not apply. Where subsection 15(1) of the Act applies, the corporation would not be entitled to a deduction for any amount paid on behalf of the shareholder.

We cannot provide any definitive comments regarding whether the plan you have described qualifies as a PHSP without reviewing all of the relevant facts contained in the plan documents. In this regard, you may submit further details about the plan to the tax services office nearest you.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch