Principal Issues: Is the proposed plan a PHSP?
Position: General comments provided.
Reasons: Insufficient details of plan to provide more than general comments.
XXXXXXXXXX 2006-016835
May 3, 2006
Dear Sir:
Re: Technical Interpretation Request - Private Health Services Plan (PHSP)
This is in response to your letter dated November 23, 2005 to the Summerside Tax Centre, which was received by the Income Tax Rulings Directorate on January 25, 2006. You are seeking comments on whether a proposed dental plan for your employees would be viewed as a PHSP for purposes of the Income Tax Act ("the Act"). We acknowledge our telephone conversations (XXXXXXXXXX/Maley) and your subsequent letter of March 27, 2006 in this regard.
Our Comments
Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the local Tax Services Office. However, we are prepared to provide the following general comments which may be of assistance.
A PHSP is defined in subsection 248(1) of the Income Tax Act (the "Act"), as 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. A plan in the nature of insurance, in this respect, must contain the following basic elements:
(a) an undertaking by one person,
(b) to indemnify another person,
(c) for an agreed consideration,
(d) from a loss or liability in respect of an event,
(e) the happening of which is uncertain.
An arrangement where an employer reimburses its employees for dental expenses may come within the definition of a PHSP where the employer is required by the employment contract to pay such expenses. Whether or not such an obligation exists would involve a finding of fact in each particular situation based on the specific contracts and other relevant documentation concerning the arrangement. However, based on the general description of the proposed plan we would refer you in particular to the following requirements for a PHSP.
First, in order for a plan or arrangement to qualify as a PHSP it must be a plan of insurance and thus involve a reasonable element of risk that is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee would 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. A carry forward period reduces this risk. The CRA generally agrees that a plan permitting the carry forward of either the unused allocation or eligible medical expenses (but not both) up to a maximum of 12 months would not be disqualified as a PHSP by reason of the carry forward provision.
Second, qualifying medical expenses for purposes of a PHSP include those paid in respect of the individual's spouse or common-law partner, or a dependant of the individual. The meaning of "common-law partner" and "dependant" are defined by the Act for this purpose. If the proposed plan provides coverage to an employee in respect of any person (including a person considered by the plan to be a common law spouse or dependant of the employee) other than the employee, or a common-law partner or dependant of the employee as defined in the Act, the related expenses would not be qualifying medical expenses and the plan would not be a PHSP.
The term "common-law partner" in respect of an individual is defined in subsection 248(1) of the Act and generally includes at a particular time, a person who, at that time, cohabits in a conjugal relationship with the taxpayer and either has cohabited with the taxpayer for a continuous period of at least one year or is the natural or adoptive parent of a child of the taxpayer. The term "dependant" in respect of an individual is defined in subsection 118(6) of the Act to include a child or grandchild of the individual if the child was dependent on the individual for support in the year. Generally, a person will be dependent for support on an individual if the individual has actually supplied necessary maintenance, or the necessities of life, to the person on a regular and consistent basis.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency.
Yours truly,
Robin Maley
Manager
Partnerships and Health Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch