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: Whether the CRA administrative relief provided in document 2020-084675 for health care spending accounts (“HCSA”) should be revised to allow a HCSA which has unused credits expiring between March 15, 2020 and March 16, 2021
Position: Yes, in these extraordinary circumstances (due to the COVID -19 pandemic), a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15, 2020 and March 16, 2021, could allow a one-time carry forward of those unused credits for a reasonable period to allow members to access services that were otherwise restricted during the COVID-19 outbreak. A period of up to 12 months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a PHSP.
Author: D'Angelo, Sandro
Section: 6(1)(a), 248(1) - PHSP definition
January 26, 2021
Re: Health care spending account – expiry of unused credits
This is in reply to your correspondence of July 24, 2020, and our subsequent telephone conversation (D’Angelo/XXXXXXXXXX), where you asked whether the Canada Revenue Agency (“CRA”) would revise the administrative relief outlined in document 2020-084675 regarding unused health care spending account (“HCSA”) credits expiring between March 15, 2020 and December 31, 2020. In particular, you have asked that the temporary carry-forward period be increased from six months to 12 months.
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 a particular transaction 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
In document 2020-084675, we commented:
“Paragraph 6(1)(a) of the Act includes in a taxpayer's income the value of board, lodging, and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of the taxpayer’s office or employment. Subparagraph 6(1)(a)(i) of the Act, however, specifically excludes benefits derived from the contributions of the taxpayer's employer to or under a private health services plan (“PHSP”).
A PHSP is defined in subsection 248(1) of the Act. As of January 1, 2015, the CRA considers a plan to be a PHSP, where all of the following conditions are met:
* All of the expenses covered under the plan are: medical and hospital expenses (medical expenses)
o expenses incurred in connection with a medical expense and within a reasonable time period following the medical expense (connected expenses)
o a combination of medical expenses and connected expenses
* All or substantially all of the premiums paid (generally 90% or more) relate to medical expenses that are eligible for the medical expense tax credit
* The plan meets the conditions outlined in paragraph 3 of the Interpretation Bulletin IT-339R, Meaning of private health services plan [1988 and subsequent taxation years].
Further, a HCSA must involve a reasonable element of risk to qualify as a PHSP. It is the view of the CRA (as outlined in paragraph 16 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs) that although a carry forward provision in a HCSA undoubtedly reduces the risk of loss to the employee, a HCSA which permits a carry forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months will not generally disqualify the HCSA from being a PHSP.
However, we acknowledge that employees may not have been able to use the amounts in their HCSAs because of the restrictions placed on many services during the current COVID-19 outbreak. In these extraordinary circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a reasonable period to allow members to access services that were otherwise restricted during the COVID-19 outbreak. A carry-forward period of up to six months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a PHSP. This applies to the three general models of HCSAs as described by you. That being said, it is the terms of the particular HCSA that will determine whether an employee can carry forward any unused credits.”
It is our understanding that the second wave of the COVID-19 pandemic, including additional government restrictions, has resulted in significantly lower usage of HCSA credits by employees. It has not only affected HCSAs which have unused credits expiring between March 15 and December 31, 2020, but also those with credits expiring after December 31, 2020.
In light of the severity of the second wave of the COVID-19 pandemic, the CRA will allow a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15, 2020 and March 16, 2021, to temporarily carry forward those unused credits for a period of up to 12 months. This will allow members to access services that are restricted during the COVID-19 pandemic and would not, in and of itself, disqualify the HCSA from being a PHSP. However, since a HCSA must involve a reasonable element of risk to qualify as a PHSP, it is our view that any further extension of the temporary carry-forward period beyond 12 months, would likely disqualify the HCSA from being a PHSP.
We trust these comments will be of assistance to you.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
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