Personal Health Service Plans – The Story Continues

Volume No. 05-15

“The health plan must be available to employees, not just shareholders..”

The Tax Court has again looked at situations where a corporation has paid medical fees to a health service plan and deducted those fees from taxable income. (O’Flynn et al v. The Queen (2004 — 2977 Tax Court)). In this case, the taxpayer’s corporation, 674418 Alberta Ltd. paid amounts to a health service plan as medical expenses for O’Flynn and others. The first appellant was a 50% shareholder of 674418 Alberta Ltd., and the Minister alleged that, by virtue of his capacity as a shareholder, he directed the corporation to make payments to the dental plan for his benefit. The taxpayer argued that the right to belong to the dental plan was available to all employees, not just to shareholder employees. He further argued that the only reason employees did not belong to the plan was their own choice, not because it was unavailable to them. Moreover, the taxpayer argued that the reason the company had offered the plan to the employees was to entice employees to work for them. The Court’s judgement actually explained in detail why various employees decided not to belong to the plan.

In a previous Tax Tip (04-20) dated July 30, 2004, we discussed the Spicy Sports case that dealt with a similar issue. In that case, the Court found that health care premiums paid by the corporation were not deductible because they were provided on the basis that the recipient was a shareholder, not an employee. In O’Flynn, the Court distinguished the Spicy Sports case because all payments made by the corporation were on the basis that the individuals were employees and not shareholders. The Court held that because certain employees declined to participate in the plan, that did not mean that the plan was not available to them.

The Court concluded that the amounts paid were deductible and were not shareholder benefits to the shareholder managers.

It appears that the key issue is that a company health plan has to be available to all employees, not only to employees who are shareholders.


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.