11 January 2011 External T.I. 2010-0380551E5 - Self-administered 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: 1- Whether a self-administered health care plan qualifies as a PHSP. 2- Whether benefits received by employee-shareholder qua shareholder or qua employee.

Position: 1- Yes, if requirements of a PHSP are met. 2- Question of fact. General comments are given.

Reasons: 1- Paragraph 7, IT-339R2. 2- Question of fact. If the benefit is received as part of a reasonable remuneration package paid to the individual as an employee, it may be considered to be received qua employee.

XXXXXXXXXX
									2010-038055
									Chrys Tzortzis, CA

January 11, 2011

Dear XXXXXXXXXX :

Re: Private Health Services Plan

We are writing in reply to your email dated September 9, 2010, wherein you inquire whether a self-administered plan would qualify as a private health services plan ("PHSP"). In our telephone conversation of January 4, 2011 (Tzortzis/XXXXXXXXXX), you clarified that employee-shareholders may be provided with a higher level of health care coverage than other employees who would be covered up to an annual maximum of $1,000.

It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to 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. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Our Comments

Benefits received or enjoyed by an employee 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) of the Act 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, 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. 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, as provided in paragraph 4 of the bulletin, coverage under a PHSP 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 addition, paragraph 26 of that bulletin provides the Canada Revenue Agency's position when flex credits are allocated to an individual who is both an employee and a shareholder and discusses the tax consequences where a benefit is granted by virtue of an individual's shareholdings and not his or her employment.

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).

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 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