8 July 2008 External T.I. 2008-0273771E5 - PHSP - Proprietorships and 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 a cost-plus plan qualifies as a PHSP where it provides coverage for the sole proprietor and household members, but there are no employees. 2) Whether a corporate employer may have a self-administered plan that qualifies as a PHSP.

Position: 1) No 2) Yes

Reasons: 1) It does not meet the condition of insurance. 2) Paragraph 7, IT-339R2

2008-027377
XXXXXXXXXX Rob Ferrari
(613) 957-2138
July 8, 2008

Dear XXXXXXXXXX :

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

We are replying to your e-mail of March 6, 2008, regarding the income tax rules for a private health services plan ("PHSP"). In particular, you have asked for our views as to whether a cost-plus plan qualifies as a PHSP where the plan provides coverage for the sole proprietor and household members, but there are no employees. Additionally, you ask whether a corporate employer may self-administer a plan and still qualify as a PHSP under the Income Tax Act (the "Act").

Our Comments

Our comments are of a general nature only since we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC 70-6R5.

In order for employer-paid health care insurance premiums to be excluded from employment income under subparagraph 6(1)(a)(i) of the Act, the particular plan must qualify as a PHSP as defined in subsection 248(1) of the Act. A key requirement of a PHSP is that the plan must be in the nature of insurance. Paragraph 3 of IT-339R2, Meaning of "private health services plan", explains what is required for a health services arrangement to satisfy this requirement. When the plan represents (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, it will be considered to be in the nature of insurance. IT-339R2 may be found on the CRA website at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it339r2.

A cost-plus plan under which the administrator agrees to reimburse the 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. The CRA is therefore of the view that a cost-plus plan for a sole-proprietor does not constitute insurance unless the plan provides coverage for at least one employee as well as the sole proprietor.

The 1998 budget introduced the legislation that allows for self-employed individuals to deduct amounts paid for PHSP, which is intended only to be recognized if purchased from a third party normally in the business of selling insurance, or it operated by a trustee that is in the business of operating such plans. Paragraph 20.01(1)(b) of the Act stipulates that to be deductible, amounts must be payable under a contract between the individual 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.

In respect of whether a corporate employer may self-administer a cost-plus PHSP, the CRA's position is outlined in paragraph 7 of IT-339R2, which states:

An arrangement where an employer reimburses its employees for the cost of medical or hospital care may come within the definition of private health services plan. This occurs where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. The consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or in the contract of service.

As you have requested, we have sent some prior technical interpretations prepared by the CRA on the above subject matter, under separate cover. We trust this will be of assistance.

Gwen Moore
for Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch