IT339R2 Meaning of private health services plan [1988 and subsequent taxation years]

INTERPRETATION BULLETIN

SUBJECT:        INCOME TAX ACT
                Meaning of "Private Health Services Plan"

NO.:            IT-339R2

DATE:           AUGUST 8, 1989

REFERENCE:      Subsection 248(1) (also paragraphs 6(1)(a), 18(1)(a),
                118.2(2)(q) and 118.2(3)(b))

APPLICATION

The provisions discussed below are effective for the 1988 and
subsequent taxation years. For taxation years prior to 1988, refer to
Interpretation Bulletin IT-339R dated June 1, 1983.

SUMMARY

This bulletin discusses the meaning of a "private health services plan"
and describes some of the arrangements for covering the cost of medical
and hospital care under such a plan.  It also discusses the tax status
of contributions made to such a plan by an employer on behalf of an
employee and the circumstances under which the premium costs incurred
by an employee qualify as medical expenses for purposes of the medical
expense tax credit.

DISCUSSION AND INTERPRETATION

1.   Contributions made by an employer to or under a private health
services plan on behalf of an employee are excluded from the employee's
income from an office or employment by virtue of subparagraph
6(1)(a)(i). On the other hand, an amount paid by an employee as a
premium, contribution or other consideration to a private health
services plan qualifies as a medical expense for purposes of the
medical expense tax credit by virtue of paragraph 118.2(2)(q). The
amounts so paid must be for one or more of

    (a) the employee
    (b) the employee's spouse and
    (c) any member of the employee's household with whom the employee
    is connected by blood relationship, marriage or adoption.
For further comments on the medical expense tax credit see the current
version of IT-519.
For purposes of the Act, a "private health services plan" is defined in
subsection 248(1).

2.   The contracts of insurance and medical or hospital care insurance
plans referred to in paragraphs (a) and (b) of the definition in
subsection 248(1) of "private health services plan" include contracts
or plans that are either in whole or in part in respect of dental care
and expenses.

3.   A private health services plan qualifying under paragraphs (a) or
(b) of the definition in subsection 248(1) is a plan in the nature of
insurance. In this respect the plan 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.

4.   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).

5.   If the agreed consideration is in the form of cash premiums, they
usually relate closely to the coverage provided by the plan and are
based on computations involving actuarial or similar studies.  Plans
involving contracts of insurance in an arm's length situation normally
contain the basic elements outlined in 3 above.

6.   In a "cost plus" plan an employer contracts with a trusteed plan
or insurance company for the provision of indemnification of employees'
claims on defined risks under the plan. The employer promises to
reimburse the cost of such claims plus an administration fee to the
plan or insurance company. The employee's contract of employment
requires the employer to reimburse the plan or insurance company for
proper claims (filed by the employee) paid, and a contract exists
between the employee and the trusteed plan or insurance company in
which the latter agrees to indemnify the employee for claims on the
defined risks so long as the employment contract is in good standing. 
Provided that the risks to be indemnified are those described in
paragraphs (a) and (b) of the definition of "private health services
plan" in subsection 248(1), such a plan qualifies as a private health
services plan.

7.   An arrangement where an employer reimburses its employees for the
cost of medical or hospital care may come within the definition of
private health services plan. This occurs where the employer is
obligated under the employment contract to reimburse such expenses
incurred by the employees or their dependants. The consideration given
by the employee is considered to be the employee's covenants as found
in the collective agreement or in the contract of service.

8.   Medical and hospital insurance plans offered by Blue Cross and
various life insurers, for example, are considered private health
services plans within the meaning of subsection 248(1). In addition,
the Group Surgical Medical Insurance Plan covering federal government
employees qualifies as a private health services plan within the
meaning of subsection 248(1). Therefore, payments made by an individual
under any such plan qualify as medical expenses by virtue of paragraph
118.2(2)(q).

9.   Private health services plan premiums, contributions or other
consideration paid for by the employer are not included as medical
expenses of the employee under paragraph 118.2(2)(q) by virtue of
paragraph 118.2(3)(b) and are not employee benefits (see 1 above). They
are however, business outlays or expenses of the employer for purposes
of paragraph 18(1)(a). On the other hand, contributions or premiums
qualify as medical expenses under paragraph 118.2(2)(q) where they are
paid directly by the employee, or are paid by the employer out of
deductions from the employee's pay. The amounts so paid must be for one
or more of 
    (a) the employee,
    (b) the employee's spouse and
    (c) any member of the employee's household with whom the employee
    is connected by blood relationship, marriage or adoption.

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