Non Incorporated Businesses or Professionals - Shareholder Benefit
Rules
2002 CR-34 DRAFT Trends & Development in Group Benefit
Plans
ITA 20.01
Before we parse section 20.01, which permits a deduction
from business income for private health services plan (PHSP)
[fn 204] premiums, we begin with a consideration of the shareholder
benefit rules.
Subsection 15(1) generally provides that where corporate
paid benefits, including group insurance benefits, are enjoyed
by an individual in that the individual's capacity as a shareholder:
1. the exclusion for benefits derived from contribution
by an employer to a PHSP in subparagraph 6(1)(a)(i) does not
apply;
2. the individual receives a benefit that is fully taxable
under subsection 15(1), and
3. payments for the coverage made on the shareholder's behalf
are not deductible by the corporation because the payments
are not incurred by the corporation for the purpose of gaining
or producing income from a business or property as is required
under the exception in paragraph 18(1)(1)(a) of the Act. [fn
205]
The CCRA has developed the following administrative positions
in determining whether corporate paid group insurance plan
benefits are provided to an individual in the individual's
capacity as an employee or a shareholder [fn206]:
1. The determination of whether a benefit is received by
an employee-shareholder in his or her capacity as an employee
or as a shareholder is a question of fact.
2. The presumption is that an employee-shareholder receives
a benefit by virtue of his or her shareholdings where the
employee-shareholder can significantly influence business
policy, {fn 207]
3. The existence of any of the following facts will rease
a presumption that benefits are provided to the recipient
qua shareholder and not qua employee:
1. Participation in a benefit plan is not available to all
employees, including those who are neither shareholder nor
related to a shareholder, unless there is a logical reason
for the exclusion of certain employees.
2. The benefits available under the plan are not the same
for all employees of the business. In determining whether
benefits are the same, regard is had to the nature of the
benefits, their quantum and the relative cost borne by each
employee.
3. All participating employees are also shareholders and the
benefit coverage is better than that afforded to non-shareholder
employees of similarly situated businesses. In other words,
the benefits provided for the employee-shareholder groups
are out of whack with the benefits provided to employee groups
of competitive businesses, [fn 208]
4. When equivalent coverage under PHSP is extended to all
employees, including employee-shareholders, the benefit provided
to the employee-shareholders is normally considered to be
an employment benefit and not a shareholder benefit.
A PHSP may be set up for executives only, [fn 209] Of particular
note is the following position with respect to one-person
and closely held corporations: Where a benefit in respect
of a PHSP is granted by a corporation to its sole employee
who is also the controlling shareholder, it is the Department's
general view that the benefit would be considered to have
been conferred on the individual in his or her capacity as
a shareholder. In the case of the situation where a self-funded
PHSP is established for its five unrelated employees of which
one of them is the controlling shareholder, it is our general
view that, where benefits are granted by an employer corporation
to the five employees in respect of a PHSP, the benefits would
be considered to have been conferred on them in their capacity
as employees. However, we also note that our comments on this
situation have been based on the assumption that the PHSP
coverage provided to each employee is identical (i.e. enhanced
coverage was not provided to the employee/shareholder), [fn
210]
In the above case the five unrelated employees, one of whom
is the controlling shareholder of the PHSP sponsor, the other
four employees were not shareholders. It appears, however,
that the five unrelated employees were the only employees
of the sponsor. What is left unresolved, at least with respect
to CCRA published policy, is the situation where only executives
were participants in PHSP, the the exclusion of non-executive
employees, where the executives included both shareholders
and non-shareholders.
Introduction of Section 20.01
BASED ON THE 1998 INITIAL GUIDELINES
An Application for a "Private Health Services Plan"for
Sole Proprietors, Self Employed Contractors, Non-Incorporated
Businesses and Partnerships must adhere to certain guidelines
and rules with regard to the deduction allowed for their business,
The following applications contains examples from the Income
Tax Act. There are guidelines for our authorized broker to
use when completing this Application.
PHSP Premiums/Contributions
ITA 20.01(1)
Subsection of 20.01(1) of the Act provides that, in order
for the amounts to be deductible, either the individual's
income (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 a 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.
Limits
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(2Xc) provides that, where an individual has
no employees dealing at arm's length with the individual nd
to whom coverage is extended under 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
who are 18 years of age or over and $750 for other members
of the individual's household.
2002 CR 34 DRAFT Trends & Developments in Group Benefit
Plans
Introduction of Section 20.01
For 1998 and subsequent tax years, section 20.01 provides
some self-employed individuals with a deduction in computing
their business income. Prior to the introduction of this section,
payments made by self-employed individual to obtain health
and dental coverage were not deductible from the individual's
business income. The individual was limited to claiming personal
medical tax credits, [fn 211]
Section 20.01 is intended to improve the fairness of the
tax system by providing self-employed owner managers with
advantages simi;ar to those of corporate owner-managers: Currently,
self-employed individuals cannot deduct amounts paid for private
health insurance plan (PHSP) coverage, while owner-managers
of incorporated businesses may receive tax-except coverage
through their business. The budget seeks to improve the fairness
of the tax system by introducing provisions governing deductibility
of amounts paid for PHSP coverage for the self-employed, [fn
212]
The deduction under the provision equals to the amount the
individual pays into the PHSP of obtain benefits for the individual,
the individual's spouse and members of the individual's household.
The deduction is only available to self-employed individuals
who are actively engaged in a business, whether alone or as
a member of a partnership. To qualify, an individual must
either either earn more than 50% of his or her income from
the business or earn no more than $10,000 from sources other
than active business.
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 $1,7000. 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 employees' 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 1,7000. Again, the
nondeductible portion ($620.00 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 employee's premiums, and the cost of equivalent
coverage and benefits for each of the employees is $700 less
than for the individual (presumably due to the better health
of the employee). 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 that 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 individual. For the purpose of determining
the number of persons dealing at am's length with an individual,
the individual is considered not to deal at arm's length with
him or herself.
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