Principal Issues: [TaxInterpretations translation] What is the tax treatment of a "cost-plus" plan offered to a company's executives?
Position: General comments. The tax treatment of a "cost-plus" plan differs depending on whether or not it qualifies as a PHSP.
Reasons: Question of fact as to whether a "cost-plus" plan qualifies as a PHSP.
XXXXXXXXXX 2009-032874 I. Landry, M. Fisc. May 13, 2010
XXXXXXXXXX ,
Subject: "Cost-plus" Plan for Executives
This is in response to your email of June 23, 2009 requesting our comments regarding the tax treatment of a "cost-plus" plan offered to company executives.
You indicated in your email that this plan allows company executives to be reimbursed for health expenses not otherwise reimbursed by their group insurance, such as eyeglasses or dental expenses, up to $XXXXXXXXXX per year. If an executive has not been reimbursed for the maximum annual amount in a particular year, then the executive may carry forward the unused balance from that year to the following year. However, the maximum amount that can be so carried forward cannot exceed the allowable rebate amount for a year, i.e., an amount of $XXXXXXXXXX.
In order to obtain their reimbursement, the company's executives submit their claim to an external company. The latter reimburses the company executives and invoices the company on a monthly basis for the amount of the reimbursements plus 10% as management fees and applicable taxes.
We have assumed that the plan described is a "cost-plus" plan as explained in paragraph 6 of Interpretation Bulletin IT-339R2, Meaning of Private Health Services Plan, and that only the employer makes the necessary contributions to the plan.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
The situation you indicated in your email appears to be related to an actual situation, which involves specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not this Directorate’s practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you must send all the relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, willing to provide the following general comments, which we hope you will find useful.
Paragraph 6(1)(a) 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 an office or employment. However, subparagraph 6(1)(a)(i) excludes benefits derived from contributions made by an employer under a private health services plan ("PHSP").
By virtue of the definition of a PHSP in subsection 248(1), a PHSP is essentially 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.
Coverage under a PHSP must be for hospital or medical care or expenses that would normally qualify as medical expenses by virtue of subsection 118.2(2) for the purposes of the medical expense tax credit under subsection 118.2(1).
In order to qualify as a PHSP, the plan must be in the nature of an insurance contract. We are of the view that where a plan includes the following basic elements, it will be considered to be in the nature of an insurance contract:
(a) the engagement of a person;
(b) to compensate another person;
(c) for an agreed consideration;
(d) as a result of a loss incurred or an obligation incurred in respect of an event;
(e) the likelihood of which is uncertain.
In paragraph 6 of Interpretation Bulletin IT-339R2, Meaning of Private Health Services Plan, the CRA states that a "cost-plus" plan may be considered a PHSP to the extent that it contains the basic elements previously stated.
With respect to compliance with element (e) of the basic elements stated above, it is important to determine whether the plan involves a reasonable degree of risk. We are of the view that a plan carries a reasonable degree of risk if there is a risk that the maximum annual amount allocated to the employee may not be fully reimbursed one day.
That determination of the presence of a reasonable degree of risk and the qualification of a plan can only be made after reviewing all program terms and conditions, existing current employment contracts, the method by which salary, wages or other benefits and working conditions are established, the period over which salaries and other employment-related benefits are established, and all relevant documentation. To this end, we can only take a final determination in the context of a request for an advance ruling.
However, we are generally of the view that a plan has a reasonable degree of risk if it allows the unused limit for a year to be carried forward for up to 12 months.
On the other hand, we are of the view that a plan does not involve a reasonable degree of risk where, for example, the employer can unilaterally revoke the plan, where the unused annual allocation can be refunded, or where the unused limit in one year and the unclaimed medical expenses in one year are both transferable to a later year.
In situations where the "cost-plus" plan is a PHSP, the employer will be able to deduct its contribution to the PHSP from income if the contribution is reasonable and the expense is made for the purpose of earning business or property income. As previously stated, benefits so received by employees from employer contributions to a PHSP will not have to be included in their income under subparagraph 6(1)(a)(i).
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.