Insurance companies as we noted in our first article are regulated financial institutions.
A PHSP is not regulated as a financial institution. A PHSP, however, has to follow the rules of the Income Tax Act.
This is a critical distinction. In other words, if a benefit plan does not fall under the rules and legislation of financial institutions and insurance companies, then it falls under the rules of the Income Tax Act.
Before looking at the tax rules it’s important to clarify some terminology.
There are many benefit plans offered in the marketplace outside of the regulated insurance industry.
You may have heard the following names
TPA, or Third Party Administrator
ASO, Administrative Services Only
HCSA, Health Care Spending Account
Cost Plus Plan
PHSP, Private Health Service Plan
Regardless which of the above names are used, they must all follow the same rules.
The rules, or fundamental principles are outlined in an Interpretation Bulletin, referred to as IT-339.
TO QUOTE THIS BULLETIN;
The term “private health services plan” (“PHSP“) is defined in subsection 248(1) of the Income Tax Act. Under the definition, a plan must be a plan in the nature of insurance. In order to be considered a plan of insurance, it is our view that the plan must contain the following basic elements:
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 (see IT-519). |
So what does a to (d) mean?
- An undertaking by one person means the employer
- To indemnify another person means the employee
- For an agreed consideration means a fixed dollar limit
- From a loss or liability in respect of an event, means a qualifying medical expense
- The happening of which is uncertain, meaning the qualifying medical expense may or may not occur, leaving the employer / employee each with a risk element.
And it’s this latter point which is important. To be considered in the nature of insurance, means there has to be risk. The risk is there is a contractual relationship between the employer and the employee with respect to qualifying medical expenses. The employer is financially exposed to a liability to pay qualifying medical claims. The employee has the right to claim qualifying medical expenses within a defined time period and for defined limits and qualifications.
The above is the guiding principles to be followed. Given the broad nature of the definition there have been many requests for clarification. How do the rules get clarified? There is procedurual process in which the Canada Revenue Agency is asked for tax rulings. For close to 30 years there have been numerous rulings on the subject. We’ve read them all!
In our future blog we will address many of the rulings that clarified the operation of the benefit plans.
