16 February 2012 External T.I. 2011-0427431E5 - 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: 1) Whether a particular vision care plan qualifies as a PHSP. 2) Whether amounts reimbursed by the employer to its employees through payroll for vision care-related expenses they incurred should be non taxable.

Position: 1) Question of fact. 2) Yes, provided the plan in question is a PHSP.

XXXXXXXXXX
2011-042743

February 16, 2012

Dear XXXXXXXXXX :

Re: Private Health Services Plan

We are writing in response to your letter of July 28, 2011.

You are asking whether a particular vision care plan (the "Plan") would qualify as a private health services plan (PHSP) and whether amounts reimbursed by an employer to its employees via payroll for vision-related expenses would be non-taxable.

Further to the telephone conversation of February 10, 2012 (El-Kadi/XXXXXXXXXX ), you indicated that the Plan had been set-up as a separate plan that was self-administered by the employer without any insurance company or other third-party involvement. You also indicated that the arrangement required employees to submit receipts for vision care-related expenses, and that coverage under the Plan was strictly limited to those items listed in the Collective Agreement between the Employer and the employees' union, up to a maximum dollar amount, toward the cost of prescription eyeglasses or contact lenses, eye examinations, and eye correction surgery for employees and their dependants.

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. Since the particular transactions that you referred to in your correspondence are complete, we cannot comment on your specific situation. However, we are prepared to provide the following comments which are of a general nature only, and which are not binding on the CRA.

Our comments

Benefits that an employee receives or enjoys in respect of, in the course of, or by virtue of an office or employment are generally taxable as income from that office or employment pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). However, subparagraph 6(1)(a)(i) specifically excludes benefits derived from the contributions of a taxpayer's employer to or under a 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 of insurance qualifies as a PHSP is a question of 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. 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. While a cap on benefits undoubtedly reduces the risk to the employer, it is our view that an otherwise qualifying plan would not automatically be disqualified as a PHSP solely by reason of the inclusion of such a feature. Where the employer is uncertain as to the amount of claims an employee will submit, the employer is at risk for the amount up to the cap. However, if the plan or arrangement is such that it can be terminated at any time by the employer, without notice, at its sole discretion, there may be some doubt as to the level of risk undertaken and whether this would be in fact a plan of insurance.

In addition to the above-mentioned requirements, it is our view that medical expenses covered under a PHSP must normally qualify for the medical expense tax credit (METC) under subsection 118.2(2) of the Act, as indicated in paragraph 4 of IT-339R2.

Based on 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. The consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or in the contract of service. In all cases, however, a particular arrangement or plan must contain all the elements, as described above, to qualify as a PHSP.

We trust that the above 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