2017-0703871C6 CPA Alberta 2017 Q9: PHSP for owner-managers

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does a plan qualify as a private health services plan when it is provided by an employer with a sole employee-shareholder?

Position: Question of fact but likely no.

Reasons: Plan may not be in the nature of insurance.

Author: Waugh, Phyllis
Section: -

2017 CPA Alberta Tax Conference

Question 9 - Private Health Services Plans for Sole Shareholders

Many small businesses only have employee(s) that are also shareholder(s).  For cost saving reasons, some of those businesses establish notional health care spending account(s) (a type of “private health services plan” under subsection 248(1) of the Income Tax Act under which the corporation administers the accounts for their employee(s) as part of the corporation’s contract(s) of employment with its employee(s).

Does Technical Interpretation 2005-0163771E5 “Private health services plan for sole shareholder sole employee” dated March 14, 2006 continue to reflect the Canada Revenue Agency’s position?  Provided that an employee (who is also a shareholder) is active in the corporation’s business and the benefits under the private health services plan are reasonable and consistent with the benefits that would be offered to an arm’s length employee performing similar services, it would appear to us that the benefits would be derived by the individual’s employment and in respect of a private health services plan.  Does the CRA agree?

CRA Response:

The determination of whether a health care spending account (HCSA) qualifies as a private health services plan (PHSP) is a question of fact. As explained in paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years], a PHSP is a plan in the nature of insurance.

Further, as noted in paragraph 16 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs, “[I]n order for a health care spending account to qualify as a plan of insurance, there must be a reasonable element of risk.  For example, if the plan or arrangement is such that there is little risk that the employee will not be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a private health services plan.” In a situation where a corporation provides a self-insured HCSA for its only employee who is also its sole shareholder (sole employee-shareholder), it is likely that the sole employee-shareholder would be reimbursed for the full amount allocated to him or her annually.

It should be noted that regardless of whether a HCSA qualifies as a PHSP, a sole employee-shareholder who receives benefits out of the HCSA in his or her capacity as a shareholder is required to include such benefits in his or her income under subsection 15(1) of the Income Tax Act.

Consistent with the comments in paragraphs 2.2 and 2.3 of Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment, unless the particular facts establish otherwise, there is a general presumption that a sole employee-shareholder receives a benefit or an allowance in his or her capacity as a shareholder since the individual can significantly influence business policy. This presumption may not apply if the benefit or allowance is comparable (in nature and amount) to benefits and allowances generally offered to non-shareholder employees of similar-sized businesses, who perform similar services and have similar responsibilities.


Phyllis Waugh
September 14, 2017

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