Health Spending Account / PHSP Rules: How is this Legal? Due Diligence Information for Accountants and Professional Advisors
The legal framework for the Health Spending Account is provided by the Income Tax Act.
In 1989 the Canada Revenue Agency released interpretation bulletin IT-339R2, which discusses the concept of a “Private Health Services Plan” (or PHSP).
This bulletin clarifies constraints for covering the cost of medical care under a PHSP and discusses the tax status of contributions made via such a plan by an employer on behalf of an employee. It clarifies the legal tax framework for providing Health Spending Accounts.
Some excerpts from the CRA bulletin:
“…CRA has indicated that there are three contractual obligations that must exist” … for a plan to…” qualify as a Private Health Services Plan (PHSP)…..”
“…the courts (they conclude) to qualify as a contract of insurance (plan) five (5) basic elements of insurance must exist. Interpretation Bulletin IT-339R2, “Meaning of Private Health Services Plan” (“IT-339R2”) identifies these five elements..
In fact, this CRA review has lead us to conclude that many other providers of Health Spending Accounts (or similar products) are *not* in fact properly compliant with the Income Tax Act. One example of this is the numerous providers who also offer Health Spending Accounts to sole proprietorships: the aforementioned review found quite unequivocally that this violates IT-339R2’s requirement that a PHSP must be a proper contract of indemnity/insurance. This is why PreTax Health is only available to incorporated Canadian companies.
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