Principal Issues: [TaxInterpretations translation] Can a self-employed business operator, who is a member of a union (which is a tax-exempt entity), deduct in computing income an amount as a contribution to a drug plan?
Position: Possibly, if the drug plan qualifies as a private health services plan and all the conditions of subsection 20.01(1) of the Income Tax Act (the Act) are satisfied, subject to restrictions and limits referred to in subsection 20.01(2) and section 67 of the Act.
Reasons: Application of the conditions and restrictions of subsections 20.01(1) and 20.01(2).
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Question 28
Contributions to a fund for drug insurance coverage
Members of a professional union, which is a person whose taxable income is exempt by virtue of section 149, make contributions, by means of source deductions, representing a certain percentage of the remuneration they receive from their firm.
The resulting fund belongs to the professional union and is not a separate legal entity.
These contributions to the professional union's fund are used for members' drug insurance coverage.
The union, in turn, negotiates, with an insurer, different drug insurance coverage options for all of its members.
Sometimes the negotiated amount (paid by the union to an insurance company) for a member is greater than what the member has paid in total in the year to the union's fund for drug insurance coverage. The reverse also can occur, that is, a member's contribution to the health insurance fund for the member’s drug insurance coverage is greater than what the union pays to the insurance company for such coverage.
We are of the view, assuming that the conditions set out in section 20.01(1) are satisfied, that the amount that could be deductible by the (self-employed) union member would be the member’s contribution to the fund on account of the drug plan.
In particular, according to the preamble of section 20.01(1):
[…]there may be deducted in computing an individual’s income […] an amount payable by the individual […] as a premium, contribution or other consideration under a private health services plan in respect of the individual […]
In addition, subparagraph 20.01(1)(b)(iii) provides that the amount must be payable under a contract that the individual has entered into with "a person the taxable income of which is exempt under section 149 and that is a business or professional organization of which the individual is a member or a trade union of which the individual or a majority of the individual’s employees are members.”
Consequently, even if a premium is not paid directly by an individual (a self-employed person) to an insurance company, the amount paid by the individual as a contribution to a fund in order to benefit from a drug insurance plan is deductible.
Question to the CRA
In the above context, can a union member (a self-employed person carrying on a business) deduct an amount payable in respect of his or her contribution to a drug plan, even if it differs from the amount paid by the union to the insurance company for that individual's coverage?
CRA Response
Subject to the conditions set out in section 20.01(1), limits and ceilings set out in subsection 20.01(2) and the general limitation on expenses provided in section 67, subsection 20.01(1) allows, among other things, an individual, who earns income from a business carried on by the individual and in which the individual is actively engaged on a regular and continuous basis, to deduct an amount payable by the individual as a premium, contribution or other consideration under a private health services plan ("PHSP") in respect of the individual, the individual’s spouse or common-law partner or any person who is a member of the individual’s household.
One of the conditions in section 20.01(1) is that the amount must be payable under a contract that the individual entered into with one of the entities referred to in paragraph 20.01(1)(b). In this regard, subparagraph 20.01(1)(b)(iii) applies to a person the taxable income of which is exempt under section 149 and that is a business or professional organization of which the individual is a member or a trade union of which the individual or a majority of the individual’s employees are members.
In that regard, the contract must show that the contributions were paid pursuant to a PHSP within the meaning of section 20.01. Subsection 248(1) defines the term "private health services plan" as a contract of insurance in respect of hospitalization 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, and which, in brief, is not a public plan. According to paragraph 4 of Interpretation Bulletin IT-339R2 - Meaning of Private Health Services Plan (the "Bulletin"), coverage under a plan must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit.
Furthermore, paragraph 3 of the Bulletin specifies that a PHSP qualifying under paragraphs (a) or (b) of the definition in subsection 248(1) is a plan in the nature of insurance. In this regard, a PHSP is an insurance plan that consists of an undertaking by one person to indemnify another person, for agreed consideration, from a loss or liability in respect of an event, the happening of which is uncertain.
Thus, although the answer to your question requires a review of the contract between the individual and the tax-exempt person by virtue of section 149, a contribution to a plan that qualifies as a PHSP could result in a deduction in computing the income from a business of the individual, who is a self-employed business owner, if all the conditions set out in subsection 20.01(1) were also met and to the extent that such an expense was reasonable in the circumstances.
Response prepared by:
Lucie Allaire
613) 957-2046
2012-045405