6 September 1995 Ministerial Letter 9519238 - NEGATIVE PERCEPTION OF HEALTH SPENDING ACCT BY EMPLOYEE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

MINISTER/DM'S OFFICE				Y.S.  95-05156M
ADM'S OFFICE
RETURN TO 15TH FLOOR, ALBION TOWERS

XXXXXXXXXX September 6, 1995

Dear XXXXXXXXXX:

The Honourable David Anderson, Minister of National Revenue, has asked me to respond to your letter addressed to the Honourable Paul Martin, Minister of Finance, concerning health care spending accounts. A copy of your letter was sent to Mr. Anderson by XXXXXXXXXX on June 27, 1995. I apologize for the delay in replying.

The terms "flexible benefit plan" and "health care spending account" are used to describe a particular type of arrangement between an employer and its employees and former employees who are covered by the arrangement. While the rules and regulations pertaining to a particular plan are not governed by Revenue Canada guidelines, the income tax consequences to the employees and former employees may vary depending on the terms of the plan. I do not have sufficient details of your former employer's plan to provide you with an analysis of the tax consequences pertaining to that particular plan; however, the following comments may assist in clarifying the income tax issues involved.

Benefits received by an individual under a private health services plan as defined in the Income Tax Act are not taxable. Based on the letters you received from

XXXXXXXXXX

it would appear that the company's health care spending account was modified to restrict the carry-forward of credits allocated in a previous year. Such a restriction is important if the plan is to qualify as a private health services plan since a plan which permits a carry-forward of credits in excess of 12 months will not be considered a plan of insurance and will therefore not be a private health services plan. The enclosed Interpretation Bulletin IT-339R, "Meaning of Private Health Services Plan", provides further details on the meaning of that term. If a health care spending account does not qualify as a private health services plan, the amounts paid to employees and former employees as a reimbursement of medical or dental expenses will be included in their income as employment or pension income.

With respect to your comment concerning the adequacy of the level of contributions to the plan, I can assure you that Revenue Canada imposes no limit on how much an employer can allocate to each employee in a particular year. Often, however, health care spending accounts are used to supplement an employer's regular medical and dental plans and are not intended to fully fund an individual's medical and dental expenses.

If you would like further information concerning the taxation of flexible benefit plans and health care spending accounts, please contact Mr. Paul Fuoco, Section Chief, Personal and General Section of the Income Tax Rulings and Interpretations Directorate. He is aware of your concerns and can be reached by writing to 15th Floor, Albion Executive Towers, 25 Nicholas Street, Ottawa, Ontario K1A 0L8 or by calling collect at 0-613-957-2141.

I trust that the information provided has addressed your concerns.

		Yours sincerely,

		Pierre Gravelle, Q.C.

Attachment
A. Humenuk
957-2131
August 14, 1995