Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
“There could be shareholder benefits and non-deductible payments for PHSP’s..”
In a recent case (Spicy Sports Inc.), the Tax Court dealt with private health services plans (“PHSP’s”). There are a number of conditions in order to make a PHSP acceptable to CRA. These conditions are not based on the tax law. Instead, it is an administrative policy of the CRA. The main benefit of a PHSP is the ability of a corporation to make a tax-deductible payment into the PHSP which would then reimburse employees for any medical or health expenses. The corporate tax savings on payments to the PHSP are at a rate of 37% in Ontario versus personal tax savings of 25%.
In the case at hand, the issue was whether those payments into the PHSP were a shareholder benefit. The majority shareholder of Spicy Sports Inc. paid in over $38,000 to cover the cost of a knee operation performed in the United States. The corporation had purchased a “cost plus” insurance policy. This is very similar to the policies that are being offered now.
The only person who had used it was the shareholder. The judge stated that the issue was whether the benefit was conferred to the shareholder in his capacity as a shareholder or an employee and whether the payment to the PHSP was a business transaction made by the corporation for the purposes of earning income. The judge determined that the payments into the PHSP were only available to the shareholders and not to all of the employees in the company. He therefore determined that there was a benefit to the shareholder pursuant to subsection 15(1). The judge also went on to state that the payment into the health plan was not deductible as it was not incurred to earn business income.
This case shows an important distinction between those situations where a PHSP has been set up for all employees and those situations where it has been set up for the shareholders. In those cases where the only employees are shareholders, there is a strong possibility that there would always be a shareholder benefit for any payment made into a PHSP. As well, the payment would be non-deductible to the company.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.