PRIVATE HEALTH SERVICES PLAN (PHSP) – SOLE SHAREHOLDER/EMPLOYEE
A May 3, 2022 Technical Interpretation (2022-0928901C6, Brenna Leung) provided comments on whether health spending accounts (also known as cost-plus plans) set up for a sole employee and shareholder of a corporation could be a PHSP. A health spending account allows employees to be reimbursed for medical expenses up to a certain limit. If the plan constitutes a PHSP, payments by the corporation are deductible, and the benefits received by the employees are not taxable.
CRA stated that a plan can only be a PHSP where it is a plan of insurance, which means that there must be a reasonable element of risk that is assumed by the employer. CRA provided the following examples that could indicate insufficient transfer of risk:
the employer must assume a reasonable element of risk
- where there is little risk that the employee will not receive the full annual amount allocated to them; and
- where the plan can be terminated by the employer at their sole discretion, at any time, without notice.
In the case of a corporation that only has one employee who is also the sole shareholder, it is likely that they will receive their full allocation annually. Further, that individual would likely have control over the plan (i.e., they could modify or terminate it at any time), thereby reducing or eliminating the corporation’s risk. CRA noted that such plans effectively allow the individual to pay their own personal medical expenses through the corporation without any risk being assumed by the corporation in its capacity as an employer. As the plan would not constitute a plan of insurance, it would not qualify as a PHSP. See VTN 438(7) for more comments on this concept.
If the plan is determined to not be a PHSP, not only would the benefit be taxable to the individual, but it may also be non-deductible to the corporation if it was received by the individual in their capacity as a shareholder.