Section 118.2 of the Income Tax Act (the Act) allows an individual to deduct certain medical expenses, including premiums for private health services plans (PHSPs), to the extent that the payment was not deductible by the individual as a business expense under an LTC plan to be eligible under 20.01(1) in computing the individual’s income from a business, the plan must qualify as a PHSP.
A private health services plan is defined in section 248(1) of the Act and means “a contact of insurance in respect of hospital expenses, medical expenses or any combination of such expenses or a medical care insurance plan or hospital care insurance plan or any combination of such plans…”
Whether a specific LTC plan qualifies as a PHSP is a question of fact; however, the Canada Revenue Agency (CRA) provides its views in IT-339R2:
Meaning of “Private Health Plan”. The following points based on this bulletin and other technical interpretations provide some guidance on such plans:
- It should be clear from the plan documentation that particular expenses for which a plan provides coverage are described under “medical expenses” (subsection 118.2(2) of the Act)
- Any features of the plan that are not qualifying medical expenses would throw the plan offside.
- Proper receipts must support expenses claimed as qualifying medical expenses; in the case of a PHSP premium, the expense must be evidence by the policy’s payment confirmation or some form of receipt issued by the insurer
- Where the benefit under an LTC plan is paid regardless of the nature and amount of expenses actually incurred (i.e. it is an indemnity style plan), the plan would not qualify as a PHSP.
- Premiums must relate/be identifiable to the coverage provided by the plan; for example, if the premium for the coverage is buried in a premium that covers more than just LTC expenses, this may also throw the plan offside
- Since a death benefits is not a medical expense and could be paid to a non-qualifying individual, an LTC plan with such a feature would not qualify as a PHSP (this was also confirmed by CRA at the 2001 CALU AGM)
Where an individual owned LTC plan is a PHSP, the individual is entitled to claim premiums paid as a medical expense. In some instances, medical plans pay only a portion of the total expense and the insured is required to pay the remainder. The premiums paid plus the difference between the amounts of the expense paid by the insured and the amount reimbursed may be claimed as a medical expense.
If the individual is self-employed and actively engaged in a business, whether alone or as a member of a partnership, section 20.01 permits amounts paid for PHSP coverage to be deducted from business income. In order for the amount to be deductible, certain requirements must be met. Otherwise, the deductible is limited. To the extent that the premiums for an LTC plan that qualifies as a self-employed individual can claim the premiums paid as a medical expense.
However, the individual may still be able to claim medical expenses when incurred, if they qualify under the Act. Where an LTC plan is not a PHSP but is a reimbursement style plan, any medical expense claims made when expenses are incurred would be reduced by amounts reimbursed. This treatment is based on a technical interpretation of the Act, which appears to provide an inappropriate result.