20 June 2011 External T.I. 2011-0400311E5 - PHSP - Sole Proprietor or Corporate Employer

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 amounts paid by a sole proprietor for his or her coverage under a cost-plus plan are deductible as a business expense. 2- Whether a corporate employer may have a cost-plus plan that qualifies as a PHSP.

Position: 1- Maybe. 2- Yes.

Reasons: 1- Yes if the cost-plus plan is a PHSP and all the other conditions under subsection 20.01(1) are met. However, a cost-plus plan does not qualify as a PHSP where it provides coverage for the sole-proprietor and household members but there are no employees as it does not meet the condition of insurance. Further, the deduction is limited under subsection 20.01(2). 2- Paragraph 6 of IT-339R2

XXXXXXXXXX 				2011-040031
					Chrys Tzortzis, CA
June 20, 2011

Dear XXXXXXXXXX :

Re: "Cost-Plus" Plans for Sole Proprietorships and Corporate Employers

We are writing in reply to your fax dated March 24, 2011, wherein you ask whether amounts paid by a sole proprietor under a cost-plus plan are deductible as a business expense and whether a corporate employer may have a cost-plus plan that qualifies as a private health services plan ("PHSP").

In your fax, you describe a private health plan offered by a supplier to both sole proprietors and corporate employers wherein the supplier is paid an administration fee. You ask whether the sole proprietor can claim as a business expense the amount of medical expenses submitted to the private health plan plus the administration fee.

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 publications can be accessed on the CRA Web site at www.cra-arc.gc.ca. If your inquiry involves a specific taxpayer and a completed transaction, it should be dealt with by your local tax services office. If you wish to have the CRA review your actual situation, you should submit all of the relevant information and documentation to the particular tax services office serving your area, a list of which is available on the "Contact Us" page of the CRA Web site. However, we are prepared to provide the following general comments, which may be of assistance. Please note that the lack of comment on any particular issue should not be construed as assurance of the tax consequences relating to that issue.

Our Comments

Subject to certain conditions and limits, section 20.01 of the Income Tax Act (the "Act") allows a sole proprietor to deduct as a business expense amounts paid as a premium, contribution or other consideration under a PHSP in respect of the sole proprietor, his or her spouse or common-law partner, or members of his or her household.

One of the conditions in subsection 20.01(1) of the Act is that the amount is payable under a contract between the individual (i.e. sole proprietor) or partnership and

(i) a person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or the business of offering to the public its services as trustee,

(ii) a person or partnership engaged in the business of offering to the public its services as an administrator of private health services plans, or

(iii) a person the taxable income of which is exempt under section 149 and that is a business or professional organization of which the individual is a member or a trade union of which the individual or a majority of the individual's employees are members.

Another one of the conditions in subsection 20.01(1) of the Act is that the particular plan must qualify as a PHSP. Under subsection 248(1) of the Act, a PHSP means 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. In Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years], the Canada Revenue Agency has set out the requirements that must be met in order for a plan to be considered a PHSP. 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. Paragraph 6 of IT-339R2 provides general information regarding a cost-plus plan where an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan, and promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. Therefore, an employer (including a corporate employer) may have a cost-plus plan that qualifies as a PHSP.

However, a cost-plus plan under which the administrator agrees to reimburse the sole proprietor, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP since it does not contain the necessary elements of insurance. In such a case, the proprietor is simply paying for the personal hospital and medical expenses for himself or herself and household members. Therefore, it is our view that a cost-plus plan for a sole-proprietor does not constitute a plan in the nature of insurance unless the plan provides coverage for at least one employee as well as the sole proprietor.

Generally, an employer would be entitled to a deduction for contributions made to a PHSP on behalf of an employee provided all the requirements set out in IT-339R2 are met, the contribution is reasonable in amount, and the amount is laid out to earn business income. 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 Act. However, subparagraph 6(1)(a)(i) specifically excludes benefits derived from the contributions of a taxpayer's employer to or under a PHSP.

Please refer to IT-339R2 for further information on the other requirements that must be met in order for a plan to be considered a PHSP. In addition, Guide T4002, Business and Professional Income, and Guide T4003, Farming Income, discuss the deduction available to sole proprietors for premiums paid to a PHSP. All of these documents are posted on the CRA Web site.

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