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: One time change from expense carryforward to credit carryforward and whether the unused medical expenses from Plan Year 1 could be used against new credits allocated in Plan Year 2.
Position: One time change may be acceptable.
Reasons: Consistent with prior interpretation
XXXXXXXXXX
2010-035518
C. Tzortzis
June 23, 2010
Dear XXXXXXXXXX :
Re: Modification of flex plan from expense carryforward to credit carryforward
This is in response to your letter dated January 20, 2010, inquiring whether a one time change in a flex plan from expense carryforward to credit carryforward (or vice versa) would disqualify the plan from being considered a private health services plan.
Specifically, your question is whether the unused medical expenses from Plan Year 1 could be used against new credits allocated in Plan Year 2 in a hypothetical situation in which Plan Year 1 is administered as an expense carry-forward year and there is a change to a credit carry-forward year for Plan Year 2. Only unused credits (and not expenses) would be carried forward from Plan Year 2 to Plan Year 3 and the credits would only be carried forward for one year. For subsequent years, only unused credits would be carried forward and only for a maximum of one year.
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 internet at http://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 website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
As noted in your correspondence, paragraph 16 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs, states that a plan which permits the carryforward of either unused credits or eligible medical expenses, but not both, up to a maximum of 12 months will not be disqualified as a private health services plan solely by reason of the carry-forward provision. It is also our view that a one-time change in a plan from credit carryforward to medical expense carryforward or vice versa will not generally disqualify the plan. On the other hand, a plan that permits such changes on an annual basis would likely be disqualified as a private health services plan because it would not have the necessary element of risk to be considered a plan of insurance.
Given that a one-time change from an expense carryforward to a credit carryforward will not generally disqualify a plan, it is our view that the unused medical expenses from Plan Year 1 could be carried forward to Plan Year 2 and used against new credits allocated in Plan Year 2 even though Plan Year 2 would be administered as a credit carry-forward year with only unused credits (and not expenses) from Plan Year 2 being carried forward to Plan Year 3. For subsequent years, only unused credits would be carried forward and only for a maximum of one year.
Please note that our comments above have not taken into account the new tax proposals on employee life and health trusts which were announced by the Minister of Finance on February 26, 2010 and are proposed to apply to trusts established after 2009. Information on the new tax proposals is available on the Department of Finance website at www.fin.gc.ca.
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
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