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June 26, 2012
Dear Mr. XXXXXXXXXX:
Re: Private Health Services Plan
We are writing in reply to your letter dated May 8, 2012, wherein you
inquire whether a self-administered plan would qualify as a private health
services plan (“PHSP”).
Based on your letter, it is our understanding that the employer will
reimburse each of their employees for medical and dental expenses, upon
the submission of receipts, up to a maximum of $XXXXXXXXXX per year.
However, it would appear, based on your letter, that the employer can
terminate this agreement with its employees without notice at its sole
discretion.
Our Comments
Benefits received or enjoyed by an employee in respect of, in the course
of, or by virtue of an office or employment are generally taxable as
income from that office or employment pursuant to paragraph 6(1)(a) of the
Income Tax Act (the “Act”). However, subparagraph 6(1)(a)(i) of the Act
specifically excludes benefits derived from the contributions of a
taxpayer’s employer to or under a PHSP.
Pursuant to the Act, a PHSP means 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. In Interpretation Bulletin IT-339R2, Meaning
of Private Health Services Plan, the Canada Revenue Agency (the “CRA”) has
set out the requirements that must be met in order for a plan to be
considered a PHSP.
Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature
of insurance. Therefore, it must represent (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. As indicated in paragraph 7 of
IT-339R2, an arrangement where an employer reimburses its employees for
the cost of medical care or hospital care may be considered a PHSP where
the employer is obligated under the employment contract to reimburse such
expenses incurred by the employees or their dependants. While a cap on
benefits undoubtedly reduces the risk to the employer, it is our view that
an otherwise qualifying plan would not automatically be disqualified as a
PHSP solely by reason of the inclusion of such a feature. Where the
employer is uncertain as to the amount of claims an employee will submit,
the employer is at risk for the amount up to the cap. However, if the
plan or arrangement is such that it can be terminated at any time by the
employer, without notice, at its sole discretion, there may be some doubt
as to the level of risk undertaken and whether this would be in fact a
plan of insurance. This appears to be the case in the present instance.
In addition, as provided in paragraph 4 of the bulletin, coverage under a
PHSP must be in respect of hospital care or expenses, or medical care or
expenses, which normally would otherwise have qualified as medical
expenses under the provisions of subsection 118.2(2) of the Act in the
determination of the medical expense tax credit. A description of
eligible medical expenses can be found in Interpretation Bulletin
IT-519R2, Medical Expense and Disability Tax Credits and Attendant Care
Expense Deduction.
The interpretation bulletins mentioned herein are available on the CRA’s
Web site at www.cra.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
G. Moore
For Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs
Branch
February 16, 2012
Dear XXXXXXXXXX :
Re: Private Health Services Plan
We are writing in response to your letter of July 28, 2011.
You are asking whether a particular vision care plan (the "Plan") would
qualify as a private health services plan (PHSP) and whether amounts
reimbursed by an employer to its employees via payroll for vision-related
expenses would be non-taxable.
Further to the telephone conversation of February 10, 2012 (El-
Kadi/XXXXXXXXXX ), you indicated that the Plan had been set-up as a
separate plan that was self-administered by the employer without any
insurance company or other third-party involvement. You also indicated
that the arrangement required employees to submit receipts for vision
care-related expenses, and that coverage under the Plan was strictly
limited to those items listed in the Collective Agreement between the
Employer and the employees' union, up to a maximum dollar amount, toward
the cost of prescription eyeglasses or contact lenses, eye examinations,
and eye correction surgery for employees and their dependants.
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 ("CRA") publications can be
accessed on the internet at http://www.cra-arc.gc.ca. Since the particular
transactions that you referred to in your correspondence are complete, we
cannot comment on your specific situation. However, we are prepared to
provide the following comments which are of a general nature only, and
which are not binding on the CRA.
Our comments
Benefits that an employee receives or enjoys in respect of, in the course
of, or by virtue of an office or employment are generally taxable as
income from that office or employment pursuant to paragraph 6(1)(a) of the
Income Tax Act (the "Act"). However, subparagraph 6(1)(a)(i) specifically
excludes benefits derived from the contributions of a taxpayer's employer
to or under a PHSP.
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. The determination
of whether a plan of insurance qualifies as a PHSP is a question of fact.
However, the Agency has set out its views on the issue in Interpretation
Bulletin IT-339R2, Meaning of Private Health Services Plan. Paragraph 3 of
IT-339R2 specifies that a PHSP must be a plan in the nature of insurance.
Therefore, it must represent (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. In other words, a particular plan or arrangement would not
qualify as a PHSP unless it involves a reasonable element of risk that is
assumed by the insurer, whether that insurer is the employer or a third
party. While a cap on benefits undoubtedly reduces the risk to the
employer, it is our view that an otherwise qualifying plan would not
automatically be disqualified as a PHSP solely by reason of the inclusion
of such a feature. Where the employer is uncertain as to the amount of
claims an employee will submit, the employer is at risk for the amount up
to the cap. However, if the plan or arrangement is such that it can be
terminated at any time by the employer, without notice, at its sole
discretion, there may be some doubt as to the level of risk undertaken and
whether this would be in fact a plan of insurance.
In addition to the above-mentioned requirements, it is our view that
medical expenses covered under a PHSP must normally qualify for the
medical expense tax credit (METC) under subsection 118.2(2) of the Act, as
indicated in paragraph 4 of IT-339R2.
Based on paragraph 7 of IT-339R2, an arrangement where an employer
reimburses its employees for the cost of medical care or hospital care may
be considered a PHSP 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. In all cases, however, a particular arrangement or
plan must contain all the elements, as described above, to qualify as a
PHSP.
We trust that the above comments will be of assistance.
Yours truly,
G. Moore For Director Business and Partnerships Division Income Tax
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