2016-0636871E5 private health services plans

Principal Issues: 1. Does non-eligible medical expense tax credit coverage under a plan need to meet any specific criteria? 2. If a plan meets the new PHSP criteria, are employer contributions to the plan excluded from the employee’s income? 3. If an employer has a number of plans under their group benefits program, can the plans be combined for purposes of determining PHSP eligibility?

Position: 1. Yes 2. Yes 3. No.

Reasons: See response.

Author: Waugh, Phyllis
Section: 6(1)(a); 248(1); Taxation Act (Quebec)

XXXXXXXXXX                                                                                                      2016-063687
                                                                                                                              P. Waugh
September 25, 2018

Dear XXXXXXXXXX:

Re:  Private health services plans

We are writing in response to your email dated March 14, 2016, and our conversations of July 19, 2016 and September 1, 2016 (Waugh/XXXXXXXXXX), concerning clarification of the new published position on private health services plans (PHSPs).  Thank you for your understanding regarding the delay of this response.

In November, 2015, the Canada Revenue Agency (CRA) announced new PHSP criteria. Effective January 1, 2015, the CRA now considers that a plan is a PHSP where:

1.    all or substantially all (i.e., 90% or more) of the premiums paid under the plan relate to medical expenses that are eligible for the medical expense tax credit (METC); and

2.    the plan meets all other conditions as outlined in paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years].

In regard to this new PHSP criteria, you have asked the following three questions:

1.    Are there any restrictions on the expenses that are not eligible for the METC but covered under a plan (hereinafter referred to as the 10% coverage)? For example, does the 10% coverage still need to be medical expenses?

2.    If a plan meets the new PHSP criteria, are employer contributions to the plan excluded from an employee’s income?

3.    If an employer has a number of plans under their group benefits program, can the plans be combined for purposes of meeting the new PHSP criteria?

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

1.    Any restrictions on the expenses that can be included in the 10% coverage?

Expenses included in the 10% coverage must be a medical or hospital expense or an expense that is incurred in connection with a medical or hospital expense (“connected expense”).  However, the connected expense must be incurred within a reasonable time period following the medical or hospital expense.  It is a question of fact whether:

*     an expense is a medical or hospital expense;
*     an expense is a connected expense; and
*     the connected expense was incurred within a reasonable time period following the medical or hospital expense.

For an example of an expense that would be included in the 10% coverage, consider a situation where a group employee benefit plan includes coverage for transporting an employee’s vehicle home when the employee suffers an illness while out-of-country.  Such coverage would generally apply when an employee incurs a medical expense as the result of an illness, is unable to drive home due to this illness, and is transported home for medical treatment.  In this situation, the cost of transporting the employee’s vehicle home, provided it is within a reasonable time period of the incident of the illness, would be considered a connected expense and included in the 10% coverage for purposes of determining whether the plan meets the new PHSP criteria.

2.    Employer contributions- inclusion in employment income

Employer contributions to a private health services plan are excluded from an employee’s income by subparagraph 6(1)(a)(i) of the Act.

Therefore, if the plan is determined to meet the new PHSP criteria, all employer contributions to the plan will be excluded from the employee’s income provided the employee is not a shareholder receiving the benefit in his or her capacity as a shareholder.

The determination of whether an employee-shareholder is receiving benefits in his or her capacity as an employee or shareholder is a question of fact.  Unless the particular facts establish otherwise, there is a general presumption that a sole employee-shareholder receives a benefit in his or her capacity as a shareholder since the individual can significantly influence business policy. This presumption may not apply if the benefit is comparable (in nature and amount) to benefits generally offered to non-shareholder employees of similar-sized businesses, who perform similar services and have similar responsibilities.

3.    Multiple plans

In the situation you described, an employer has a number of plans which may not individually meet the new PHSP criteria.

The determination of whether one plan or multiple plans exists is a question of fact and law.  However, it is our view that two or more plans covered by the same insurance policy will be considered separate plans when the administration of the plans demonstrate that they are in fact separate. This would be the case where there is separate accounting for claims, premiums, and administrative charges. Additionally, the plans will be considered separate plans if there is no cross-subsidization between the plans and the level of benefits, the premium rates, the qualifications for membership, and the other terms and conditions of each of the plans are not dependent upon the existence of any of the other plans.

If it is determined that there are separate plans, it is our view that these plans cannot be combined for purposes of determining whether the new PHSP criteria have been met.

We trust these comments will be of assistance to you.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc: XXXXXXXXXX

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018