2022-0928901C6 2022 CALU – Q10 – Private Health Services Plan
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 a health spending account established for a sole employee-shareholder can qualify as a private health services plan.
Reasons: Plan is not in the nature of insurance.
Section: 6(1)(a), 248(1) “private health services plan”
CALU Roundtable – May 2022
Question 10 – Private Health Services Plans
An employer can offer its employees a Private Health Services Plan (PHSP) that takes the form of a Health Spending Account (HSA), also known as a cost-plus plan. Under an HSA, an employer agrees to reimburse their employees’ hospital and medical expenses incurred during the year up to a pre-determined limit. Above that limit, employees must pay their own expenses.
The Income Tax Act (the “Act”) affords several tax advantages to PHSPs. An employer may deduct its PHSP contributions if those contributions are reasonable and are made to earn income (paragraph 18(1)(a) and section 67 of the Act). But an employee need not include the value of the employer’s contributions in income, nor any of the benefits they receive from the plan (subparagraph 6(1)(a)(i) of the Act).
There is some confusion over whether an incorporated business can create an HSA for its sole shareholder (and family members) when that shareholder is the business’ only employee. In CRA document 2005-0163771E5, dated March 14, 2006, the CRA stated that it would allow such plans, subject to certain conditions:
In the case of a PHSP established for the benefit of a corporation’s sole shareholder/employee, it is a question of fact whether the resulting benefit is derived by virtue of the individual’s shareholdings or by virtue of his or her employment. The presumption is that the benefit is received by the individual in his or her capacity as a shareholder. However, provided that the individual is actively engaged as an employee of the corporation and the benefits under the PHSP (including the applicable limits) are reasonable and consistent with the benefits that would be offered to an arm’s length employee performing similar services, it is our general view that the benefit would be derived by virtue [of] the individual’s employment.
However, in CRA document 2014-0521301E5, dated June 25, 2014, the CRA stated that it would not allow such a plan because it “would not likely constitute a plan in the nature of insurance”:
[A] cost-plus plan under which the administrator agrees to reimburse the sole employee/shareholder, his or her spouse, and members of his or her household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP since it does not contain the necessary elements of insurance. Effectively, the sole employee/shareholder is paying for the personal hospital and medical expenses for himself or herself and his or her household members through his or her solely owned corporation without any risks being assumed by the Plan administrator. Therefore, it is our view that a cost-plus plan for a sole employee/shareholder would not likely constitute a plan in the nature of insurance.
Even so, in CRA document 2017-0703871C6, dated September 14, 2017, the CRA appeared willing to allow an incorporated business to create an HSA for its sole shareholder/employee:
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 Act.
Can the CRA provide further guidance as to whether an HSA established for a single shareholder/employee (and family members) can qualify as a PHSP?
It is the CRA’s long standing position that one of the criteria which must be met in order for a plan to be a PHSP is that the plan must be a plan of insurance. Thus, in order for an HSA to qualify as a plan of insurance, there must be a reasonable element of risk that is assumed by the employer.
For example, if the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP. Similarly, if the plan or arrangement is such that it can be terminated at any time by the employer, without notice, at their sole discretion, this would also raise doubt as to the level of risk undertaken and whether this would in fact, be a plan of insurance.
In a situation where a corporation provides a self-insured HSA for its only employee who is also its sole shareholder (sole employee-shareholder) and family members, it is likely that the sole employee-shareholder and their family members would be reimbursed for the full amount allocated to them annually. Furthermore, it is also likely that the corporation, controlled by the sole employee-shareholder, can modify or terminate the HSA plan or arrangement at any time, without notice, at its sole discretion. Effectively, the sole employee-shareholder is paying for the personal hospital and medical expenses for themselves and their family members through their solely owned corporation without any risks being assumed by the corporation.
Therefore, it is our view that a self-insured HSA established for a sole employee-shareholder and family members would likely not constitute a plan in the nature of insurance and consequently, would not qualify as a PHSP.
May 3, 2022
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, 2022
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, 2022
Video Tax News is a proud commercial publisher of Canada Revenue Agency's Technical Interpretations. To support you, our valued clients and your network of entrepreneurial, small businesses, we choose to offer this valuable resource to Canadian tax professionals free of charge.
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses see the Video Tax News Monthly Tax Update newsletter. This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and your clients are fully supported and armed for whatever challenges are thrown your way. Packages start at $400/year.