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• Premiums and contributions to a private health services plan (PHSP)

Generally, if you pay directly or reimburse your employee for medical examinations or medical expenses, the payment is a taxable benefit. However, medical expenses paid under the terms of a private health services plan (PHSP) will not be taxable.

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• Steps
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Steps

1. Determine if any exceptions apply to the benefit

   The benefit may not be taxable if the benefit is provided in one of the following situations:

   • Your employee has a severe or prolonged impairment
   • The benefit is for counselling services expenses

   • If the benefit is provided in one of the above situations, do not continue to the next step.

     Learn more on the above exceptions using the links.

   • If the benefit is not provided in one of the above situations, continue to Step 2 - Determine if a benefit is taxable.

2. Determine if a benefit is taxable

   Generally, if you pay directly or reimburse your employee for medical examinations and medical expenses, these amounts are taxable. Depending on your situation, the benefit may not be taxable.

   Non-taxable situation

   The benefit is not taxable if one of the following applies:

   • Medical examination

     You pay directly or reimburse your employee for a medical examination that was required for your employee to meet a condition of employment. The medical examination is considered to be primarily for your benefit.

     Example

     An employer reimburses an employee for a medical examination required as a condition of employment. As the exam is primarily for the benefit of the employer, the amount reimbursed by the employer would not be a taxable benefit to the employee.

   • Medical expenses

     Your employee’s medical expenses were paid under a private health services plan (PHSP).

     A plan is considered a PHSP where all of the following conditions are met:

     • All of the expenses covered under the plan are:

       • Medical and hospital expenses (medical expenses)
       • Expenses incurred in connection with a medical expense and within a reasonable time period following the medical expenses (connected expenses)
       • Combination of medical expenses and connected expenses

       Example - Connected expenses

       The employee group medical insurance plan for Company ABC covers the cost of transporting an employee and their vehicle home if that employee becomes ill while out of Canada. That employee must return to Canada for medical treatment but cannot drive because of their illness.

       In this situation, the cost of transporting the vehicle to the employee’s home is not a medical expense. However, as long as it is incurred within a reasonable time after the medical expense, it is considered a connected expense because the employee could not drive back to Canada to get medical treatment (which is a medical expense).

     • “All or substantially all” (90% or more) of the premiums paid relate to medical expenses that are eligible for the medical expense tax credit (METC)

       How to determine if a plan meets the “all or substantially all” (90% or more)
       

       Insured plan (plan is backed by a contract of insurance)

       An insured plan meets the "all or substantially all" (generally 90% or more) requirement if “all or substantially all” of the premiums paid in the calendar year relate to medical expenses that are eligible for the METC.

       The benefits paid to employees in the calendar year are not considered in determining whether the plan meets the “all or substantially all” requirement.

       The following example explains when the “all or substantially all” requirement will be met for an insured plan.

       Example - Insured plan

       The group employee insurance plan for Company XYZ covers the following four types of expenses:

       Table of Insured plan meeting the Private Health Services Plan requirements

       Insured plan meeting the Private Health Services Plan requirements
       Type of expense	Eligible for the METC	Percentage of premiums paid in the calendar year that relates to the expense	Benefits paid in the calendar year
       Prescription drugs	Yes	70%	69%
       Dental expenses	Yes	10%	11%
       Hospital expenses	Yes	12%	7%
       Medical expenses that are not eligible for the METC	No	8%	13%

       This plan meets the “all or substantially all” requirement because 92% (70% + 10% + 12%) of the premiums paid relate to medical expenses that are eligible for the METC, while 8% of the premiums relate to other medical expenses. The fact that only 87% (69% + 11% + 7%) of the total benefits paid relate to medical expenses that are eligible for the METC is not relevant in determining whether the plan qualifies as a PHSP.

       
       

       Self-insured plan (plan is not backed by a contract of insurance)

       When a plan is not backed by a contract of insurance, the CRA considers it to be a self-insured plan.

       A self-insured plan meets the “all or substantially all” (generally 90% or more) requirement for a calendar year if “all or substantially all” of the benefits paid to all employees that year are for medical expenses that are eligible for the METC.

       The following example explains when the “all or substantially all” requirement will be met for a self-insured plan.

       Example - Self-insured plan

       Company AAA pays the following benefits to its employees in a calendar year under its self-insured group employee insurance plan.

       Table of Self-insured plan meeting the Private Health Services Plan requirements

       Self-insured plan meeting the Private Health Services Plan requirements
       -	Prescription drugs eligible for METC	Dental expenses eligible for the METC	Hospital expenses eligible for the METC	Medical expenses not eligible for the METC	Total benefits paid per employee
       Kim	$3,000	$1,000	Nil	$500	$4,500
       Mohammed	$2,000	$1,500	$800	Nil	$4,300
       Simon	$4,000	$500	Nil	$500	$5,000
       Total medical expenses	$9,000	$3,000	$800	$1,000	$13,800

       This plan meets the “all or substantially all” requirement because the benefits paid to all employees in the year for medical expenses that are eligible for the METC represent 93% ($9,000 + $3,000 + $800) of the total benefits ($13,800) paid.

       If you provide benefits through a self-insured plan that consists of health care spending accounts (HCSAs), the method for determining whether the plan satisfies the “all or substantially all” requirement for a particular calendar year is the same as for self-insured plans that do not consist of a HCSA. The employees' allocation of the ceiling amount to the various types of expense in an HCSA is not considered.

       Most employers that offer HCSAs do so under one group plan. However, in rare circumstances, each HCSA can be considered a separate insurance plan. The determination of whether one group plan or several individual plans exist must be based on the law and the facts of the case. For more information on HCSAs, see paragraphs 14 to 18 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

       The following example explains when self-insured HCSAs would meet the “all or substantially all” requirement.

       Example - Health care spending accounts

       Company BBB provides one self-insured group plan that consists of three HCSAs, each with a $5,000 ceiling amount. At the start of the calendar year, each employee allocates the $5,000 ceiling, as shown in the table below.

       Table of Health care spending accounts

       Health care spending accounts
       -	Allocation of ceiling amount to medical expenses			Benefits paid in the calendar year
       	Eligible for the METC	Not eligible for the METC	Total ceiling per employee	Expenses eligible for the METC	Expenses not eligible for the METC	Total benefits paid per employee
       Ann	$4,000	$1,000	$5,000	$4,000	$200	$4,200
       Sue	$3,500	$1,500	$5,000	$3,250	$650	$3,900
       Jim	$4,500	$500	$5,000	$4,250	$175	$4,425
       Total ceiling	$12,000	$3,000	$15,000	-	-	-
       Total benefits	-	-	-	$11,500	$1,025	$12,525

       The plan shown above meets the “all or substantially all” requirement. The total benefits paid to all employees that year for expenses that are eligible for the METC are 92% ($11,500) of the total benefits paid ($12,525). The fact that the total ceiling amounts allocated for expenses that are eligible for the METC ($12,000) are only 80% of the total ceiling amount, eligible and non-eligible ($15,000), is not relevant in determining whether the plan meets the “all or substantially all” requirement.

       However, if each HCSA is determined to be a separate plan:

       • Ann's plan satisfies the “all or substantially all” requirement because the benefits she received for expenses that are eligible for the METC are 95% ($4,000) of the total benefits ($4,200) that she received in the year.
       • Sue's plan does not satisfy the “all or substantially all” requirement because the benefits she received for expenses that are eligible for the METC are only 83% ($3,250) of the total benefits ($3,900) she received in the year.
       • Jim's plan satisfies the “all or substantially all” requirement because the benefits he received for expenses that are eligible for the METC are 96% ($4,250) of the total benefits ($4,425) he received in the year.

       
       

       Multiple plans

       Whether one or multiple plans exist is a question of fact and law. Multiple plans cannot be combined in determining if the “all or substantially all” requirement has been satisfied.

     • The plan is in the nature of insurance and contains all of the following elements:

       • An undertaking by one person
       • To indemnify another person
       • For an agreed consideration
       • From a loss or liability in respect of an event
       • The happening of which is uncertain
     • The plan provides coverage only to your employee, your employee’s spouse or common law partner, or any member of your employee’s household with whom your employee is connected by blood relationship, marriage or adoption

   Taxable situation

   If the benefit does not meet one of the conditions above, the benefit is taxable.

   • If the benefit is not taxable, you do not need to do any calculations.

     Do not continue to the next step.

   • If the benefit is taxable, continue to: Step 3 - Calculate the value of the benefit.

3. Calculate the value of the benefit

   If the benefit is taxable, the value of the benefit is equal to:

   • Value of the benefit received or enjoyed
   • minus Any amounts your employee reimbursed you
     
   • equals Value of the benefit to be included on the T4 slip using code 40 and box 14

   Example - Calculations

   An employer reimbursed their employee $300 throughout the year for prescription drugs but the amount was not paid under a private health services plan. Since it was not paid under the terms of a PHSP, the amount would be a taxable benefit.

   • $300 is the value of the benefit received or enjoyed
   • minus $0 because the employee does not reimburse the employer
     
   • equals $300 is the value of the benefit to be included on the T4 slip using code 40 and box 14

4. Withhold payroll deductions and remit GST/HST

   The withholding and remitting requirement depends on the type of remuneration: cash , non-cash , or near-cash .

   If the benefit is taxable, you must withhold the following deductions:

   • Non-cash and near-cash: Option 1

     Withhold:

     • Income tax
     • CPP
     • EI (do not withhold)

     Remit:

     • GST/HST in certain situations

   • Cash: Option 2

     Withhold:

     • Income tax
     • CPP
     • EI

     Do not remit:

     • GST/HST (do not remit)

   The amounts must be included in the pay period they were received or enjoyed.

   Learn how to calculate deductions and the GST/HST to remit: How to calculate - Calculate payroll deductions and contributions

5. Report the benefit on a slip

   If the benefit is taxable, you must report the following amounts on the T4 slip:

   • Non-cash and near-cash: Option 1

     Report on:

     • Box 14 - Employment income
     • Box 26 - CPP/QPP pensionable earnings
     • Code 40 - Other taxable allowances and benefits

   • Cash: Option 2

     Report on:

     • Box 14 - Employment income
     • Box 24 - EI insurable earnings
     • Box 26 - CPP/QPP pensionable earnings
     • Code 40 - Other taxable allowances and benefits

   Learn how to report on a slip: Fill out the slips and summaries - File information returns (slips and summaries).

References

Legislation