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Excerpt From The Explanatory Notes to the Government of Canada Budget, 1998
PHSP Premiums
ITA
20.01
PHSP Premiums
ITA
20.01(1)
Subsection 20.01(1) of the Act provides that, in order for the amounts to be deductible, either the individual’s total incomes (excluding losses) from businesses in which the individual is actively engaged on a regular and continuous basis must represent more than 50% of the individual’s income for the year, or the individual’s income from other sources do not exceed $10,000. To be deductible by the individual, the amounts have to be payable under a contract between the individual and
- a person licensed or otherwise authorized under federal or provincial law to carry on in Canada an insurance business or the business of offering services as trustee,
- a person (or partnership) offering to the public its services as a PHSP administrator, or
- a tax-exempt entity that is a business or professional organization of which the individual is a member or a trade union of which the individual or the majority of the individual’s employees are members.
ITA
20.01(2)
Paragraph 20.01(2)(a) of the Act stipulates that no deduction may be claimed under subsection 20.01(1) by an individual in respect of an amount payable under a PHSP to the extent that the amount is deducted under that subsection by another individual or is claimed under section 118.2 (as a medical expense) by any individual for any taxation year.
Paragraph 20.01(2)(b) provides that, where one or more persons are employed on a full-time basis and have accumulated at least 3 months of service in a business carried on by the individual, a partnership of which the individual is a majority interest partner or a corporation affiliated with the individual, the deduction is restricted to the lowest cost of equivalent coverage made available to any arm’s length employee.
Paragraph 20.01(2)(c) provides that, where an individual has no employees or where the employees dealing at arm’s length with the individual and to whom coverage is extended under a PHSP represent less than 50% of the persons who carry on, or are employed in, such a business and to whom coverage is extended under the plan, the deduction is further restricted by a dollar maximum, which is, on an annual basis, equal to $1,500 for each of the individual, the individual’s spouse and members of the individual’s household you are 18 years of age or over and $750 for other members of the individual’s household.
Equivalent Coverage
ITA
20.01(3)
Subsection 20.01(3) determines when an amount payable in respect of an individual under a PHSP does not exceed, in relation to a particular period, the individual’s cost of coverage under the plan in respect of another person. The calculation provided in that subsection is illustrated in the following examples. In the examples, it is assumed that the individual’s cost of coverage is $1,700 on an annual basis.
EXAMPLE 1
An individual is the sole proprietor of a business in which the individual employs 5 arm’s length full-time persons. While the coverage and benefits under the plan made available to the employees are identical to the coverage and benefits enjoyed by the individual, the individual agreed to pay only 30% of the premiums payable in respect of the employees’ coverage. In this case, the individual’s deduction for his or her own coverage is $510, i.e., 30% of $1,700. The remainder ($1,190) may, once paid, be included in the individual’s total medical expenses for the purposes of the medical expense tax credit under section 118.2 of the Act.
EXAMPLE 2
Same as in example 1, except that the individual now pays 90% of the employees’ premiums, each employee’s coverage being restricted to $3,000 in benefits while the individual’s coverage in terms of maximum benefits is set at $5,000. For the purposes of this example, assume that the cost of $3,000 coverage is $1,200. In this case, the individual’s deduction for his or her own coverage is $1,080, i.e. 90% of ($1,700 x $1,200/$1,700). Again, the non-deductible portion ($620 in this example) may, once paid, be
included in the individual’s total medical expenses. Where the costs are not constant, the eligible amounts would be calculated by reference to the actual costs.
EXAMPLE 3
Same as in example 1, except that the individual agrees to pay 100% of the employees’ premiums, and the cost of equivalent coverage and benefits for each of those employees is $700 less than for the individual (presumably due to the better health of the employees). In this case, the individual may deduct the full cost of his or her own coverage.
EXAMPLE 4
A partnership of 2 single doctors, of which the individual is a member, operates a medical clinic. The partners are related to each other and the partnership has 1 arm’s length employee. Assuming that both partners and the employee are covered to the same extent under the plan and the partnership pays the full amount of the premiums, the amount payable ($1,700) allocated to the individual is, for the purpose of the deduction, restricted to $1,500, since less than 50% of the total number of persons to whom coverage under the plan is extended and who either carry on the business or are full-time employees of the business deal at arm’s length with the individual. For the purpose of determining the number of persons dealing at arm’s length with an individual, the individual is considered not to deal at arm’s length with him or herself.
Contact
Postal address:
Aquilian Benefits Corp.
2189 6th Concession Rd.
Uxbridge, ON L9P 1R4
Telephone:
(647) 333-7229
Email:
info@aquilian.ca
Web:
www.aquilian.ca
