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: The taxability of PHSP premiums paid on behalf of an employee-shareholder and related persons.
Position: Question of fact.
Reasons: See response.
January 11, 2017
Re: Medical insurance premiums paid by an employer
We are writing in response to your correspondence of March 2, 2016, in which you asked about the tax implications which may arise when a corporate employer pays medical insurance premiums on behalf of two employees. The first employee is also the sole shareholder of the corporation (employee-shareholder), and the second employee is related to the sole employee-shareholder.
This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Employment benefits, whether provided in cash or in-kind, are generally included in an employee’s income under paragraph 6(1)(a) of the Act. However, there are a number of exceptions in the Act, such as where the employer provides health benefits to its employees through a private health services plan (PHSP). Specifically, subparagraph 6(1)(a)(i) of the Act provides that benefits, “derived from the contributions of the taxpayer’s employer to or under . . . a private health services plan” are excluded from an employee’s income.
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. While it is a question of fact whether a particular arrangement would satisfy the definition of a PHSP, the Canada Revenue Agency (CRA) generally accepts that medical and hospital insurance plans offered by Blue Cross are considered PHSPs within the meaning of subsection 248(1) of the Act.
In the situation you describe, an employer is proposing to pay PHSP (e.g., Blue Cross) premiums on behalf of an employee-shareholder, and an employee who is related to the employee-shareholder. It is our understanding that these are the only two employees of the corporation, and that the PHSPs would be individual policies registered in the names of these individuals (i.e., employee owned).
When an employee-shareholder, or an employee who is related to an employee-shareholder, receives benefits or allowances from a corporate employer, it is necessary to establish whether such amounts have been received by virtue of employment or shareholdings, in order to determine the appropriate tax treatment of the benefits or allowances. This is a question of fact that can only be determined on a case-by-case basis.
Paragraph 2.3 of Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment, clarifies that:
“Unless the particular facts establish otherwise, there is a general presumption that an employee-shareholder receives a benefit or an allowance in their capacity as a shareholder when the individual can significantly influence business policy. This presumption may not apply if:
- the benefit or allowance is available to all employees of the corporation; or
- all of the employees are shareholders or individuals related to a shareholder, and the benefit or allowance is comparable (in nature and amount) to benefits and allowances generally offered to non-shareholder employees of similar-sized businesses, who perform similar services and have similar responsibilities.”
Benefits received by virtue of employment
Where PHSP benefits (e.g., premiums paid by the employer) are received by virtue of employment, such amounts are excluded from employment income by subparagraph 6(1)(a)(i) of the Act. However, when an employer makes a payment to an employee for PHSP premiums, the amount is only excluded from the employee’s income if the payment is a reimbursement. As discussed in paragraph 2.16 of Income Tax Folio S2-F3-C2, “A reimbursement is a payment made to repay an amount an employee spent on a specific expense and for which detailed receipts are provided.”
Benefits received by virtue of shareholdings
Where PHSP benefits (e.g., premiums paid by the employer) are received by an employee-shareholder by virtue of his or her shareholdings, such benefits are included in the shareholder’s income under subsection 15(1) of the Act.
When PHSP benefits are received by an employee who is related to a shareholder, and the benefits are received by virtue of that shareholder’s shareholdings, such amounts are also included in the shareholder’s income under subsection 15(1) of the Act (by virtue of subsection 56(2) of the Act).
We trust these comments will be helpful.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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