2015-0581431E5 Private health services plan deduction

Principal Issues: Whether a sole proprietor can deduct from business income the maximum dollar limit under section 20.01 of the Act, for the premiums paid to a PHSP, if the individual’s spouse, who also carries on business as a sole proprietor, deducted an amount in respect of premiums for another PHSP that covers the same individuals.

Position: It is a question of fact, in this case most likely yes.

Reasons: See response.

Author: Underhill, Cynthia
Section: 20.01, 20.01(2)(a)

XXXXXXXXXX
                                                2015-058143
                                                C. Underhill

August 18, 2015

Dear XXXXXXXXXX:

Re:  Private health services plan deduction

We are writing in response to your email dated April 15, 2015, concerning the deduction under section 20.01 of the Income Tax Act (Act) for premiums paid to a private health services plan (“PHSP”).

In the situation described, Mr. A, a sole proprietor, has a PHSP covering himself, his spouse (“Mrs. A”), and their XXXXXXXXXX children (Plan1). Mrs. A is also a sole proprietor and has a separate PHSP covering herself, Mr. A, and their XXXXXXXXXX children (Plan2). Both Mr. A and Mrs. A do not employ any individuals in their businesses throughout the year. You have asked whether Mr. A can deduct from his business income the maximum dollar limit (per paragraph 20.01(2)(c) of the Act) in respect of Plan1, if Mrs. A deducted an amount in respect of Plan2 under section 20.01 of the Act. It is assumed that although Plan1 and Plan2 provide coverage for the same group of individuals, the plans are separate and distinct.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Subject to certain conditions and limits, section 20.01 of the Act allows individual business proprietors, and individuals carrying on a business through a partnership, to deduct as a business expense amounts paid as a premium, contribution, or other consideration under a PHSP in respect of the individual, his or her spouse or common-law partner, or members of his or her household.

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 or hospital care insurance plan, or any combination of such plans. Paragraph 3 of Interpretation Bulletin, IT-339 Meaning of private health services plan [1988 and subsequent taxations years] explains that in order for a plan to qualify as a PHSP, the plan must be in the nature of insurance and describes the basic elements of an insurance plan.

Pursuant to paragraph 20.01(2)(a) of the Act, an individual cannot claim a deduction for PHSP premiums under subsection 20.01(1) of the Act if another individual deducted the same amount under that subsection, or if any individual claimed the same amount under section 118.2 of the Act (as a medical expense). For example, spouses cannot each deduct the same amount in respect of premiums paid for the same PHSP. However, it is our view that paragraph 20.01(2)(a) of the Act would not prevent a sole proprietor from deducting an amount in respect of a particular PHSP, where a related sole proprietor (e.g., spouse) deducts an amount in respect of a separate and distinct PHSP that provides coverage for the same group of individuals.

Where a sole proprietor has no employees, paragraph 20.01(2)(c) of the Act limits the premium deductible for each full year of coverage by a dollar maximum. This limit is equal to $1,500 for each of the individual, the individual’s spouse and members of the individual’s household who are 18 years of age or over, and $750 for members of the individual’s household who are under the age of 18, pro-rated based on the number of days in the period which are in the year. The dollar limit includes any applicable provincial sales tax and goods and services tax.

Therefore, where the conditions of section 20.01 of the Act are otherwise met, Mr. A could deduct from his business income the maximum dollar limit (per paragraph 20.01(2)(c) of the Act) in respect of Plan1, even if Mrs. A deducted the maximum dollar limit from her business income in respect of Plan2.

We trust these comments will be of assistance.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate

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