15 September 2010 External T.I. 2010-0373091E5 - PHSP

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 plan qualifies as a PHSP

Position: Probably not.

Reasons: Conditions of PHSP are likely not met. Expenses do not appear to be restricted to eligible medical expenses pursuant to subsection 118.2(2). Element of risk may not be present where employer can terminate agreement without notice at sole discretion.

XXXXXXXXXX
									2010-037309
									C. Tzortzis, CA
September 15, 2010

Dear XXXXXXXXXX :

Re: Private Health Services Plan ("PHSP")

We are writing in reply to your letter dated June 21, 2010, wherein you ask whether a particular arrangement would qualify as a PHSP.

In your letter, you describe a self-administered arrangement with a pharmacist in which you will reimburse the cost of prescriptions, up to a specific amount, incurred by your employees (and their immediate family members). You state that the plan may reimburse amounts for "supplementary health claims such as massages, vision care etc..." and that the "medical prescription expense allowed has to be qualified as a medical expense approved by a licensed physician."

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. Since your inquiry concerns an actual situation involving questions of fact, 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

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.

Pursuant to 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. 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.

Some employers may provide health coverage through a health care spending account ("HCSA"). These plans are generally comprised of individual employee accounts that provide for a reimbursement of eligible medical and dental expenses. A HCSA may qualify as a PHSP provided it meets all the requirements of a PHSP. If a HCSA does not qualify as a PHSP, all benefits received out of the plan will be taxable to the employee. Health care spending accounts are discussed in detail in paragraphs 14 to 18 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

In our opinion, the arrangement described in your letter would probably not meet the above requirements. Specifically, the expenses covered do not appear to be limited to those which normally would otherwise have qualified as medical expenses under subsection 118.2(2) of the Act. A medical expense approved by a licensed physician does not necessarily mean that the expense is an eligible medical expense under subsection 118.2(2). For example, an employee may obtain a prescription from a physician for over-the-counter drugs such as vitamins and supplements. However, these items do not qualify as an eligible medical expense under subsection 118.2(2) and should not be covered by a PHSP. Further, the plan allows for supplementary health benefits that do not appear to be restricted to eligible medical expenses under subsection 118.2(2).

In addition, the office policy document that details the plan to the employees states that it is "a guideline and subject to changes and further discretion of the doctors and the pharmacy". In order for a plan or arrangement to qualify as a PHSP it must be a plan of insurance and thus involve a reasonable element of risk that is assumed by the employer. If the plan or arrangement is such that it can be terminated at any time by the employer, without notice, at his 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, as stated in paragraph 7 of IT-339R2, the employer must have a contractual obligation to reimburse the eligible expenses. Further, 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.

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