Employee Hospital Benefits
Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a retail sales tax publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter IN-0008, May 2001
Thank you for your letter of March 21, 2001 inquiring about the application of Ontario retail sales tax (RST) on employee hospital benefits that are administered by your company.
Understanding of Facts
Company A has implemented a benefit for employees. Under the benefit, Company A administers semiprivate hospital coverage and does not involve a third party to administer the plan, i.e.
- An employee who is hospitalized opts for semi-private care.
- The employee pays the difference to the hospital for the semi-private care.
- Employee submits proof of payment to Company A and Company A reimburses the employee directly for the fee paid.
Company A would like to know if there are any RST implications regarding this self-administered benefits plan.
Legislation and/or Administrative Policy
Under the Ontario Retail Sales Tax Act (Act):
2.1(1) Every person who is a resident of Ontario, or who carries on business in Ontario, and who,
- enters into a contract of insurance with an insurer;
- is a person whose risk is covered by group insurance;
- is a planholder or member of a benefits plan; or
- is required to contribute to an insurance scheme or a compensation fund established by or under any Act of the Parliament of Canada or the Legislature of Ontario,
shall pay to Her Majesty in right of Ontario a tax at the rate of 8 per cent of the premium payable.
Funded Plans
Under section 1 of the Act, a "funded benefits plan means a plan, including a multi-employer benefits plan, which gives protection against risk to an individual that could otherwise be obtained by taking out a contract of insurance, whether the benefits are partly insured or not, and which comes into existence when the premiums paid into a fund out of which benefits will be paid exceed amounts required for payment of benefits foreseeable and payable within thirty days after payment of the premium".
Under section 1 of the Act, "premium" includes,
- in respect of a funded benefits plan,
- any amounts paid by the planholder less any amounts paid to the planholder by members in order to receive benefits under the plan, and
- any amounts paid by members in order to receive benefits under the plan,
and includes dues, assessments, or administrative costs and fees paid for the administration or servicing of the plan to the vendor".
A funded benefits plan is a plan under which the planholder/employer pays amounts into a fund to cover all potential benefit payments to members for a 30 day period. Benefit claims are paid out of this fund. The payments into the plan are considered premiums and RST is payable on these amounts less the total payments to the planholder by members of the plan. Payments made by members to receive benefits are also taxable premiums.
"Protection against risk to an individual" is defined in section 1 of the Act to include "any undertaking to pay on death, or disability, or for supplemental health care, drugs, dental care, vision care, hearing care, or for protection against loss of income due to illness or accident or that provides any other similar benefits to an individual".
Unfunded Plans
Under section 1 of the Act, an "unfunded benefits plan means a plan which gives protection against risk to an individual that could otherwise be obtained by taking out a contract of insurance, whether the benefits are partly insured or not, and where the payments are made by the planholder directly to or on behalf of the member of the plan or to the vendor upon the occurrence of the risk".
The definition of "premium" in section 1 of the Act includes,
- in respect of an unfunded benefits plan,
- any amounts, other than an amount that would be included in the total Ontario remuneration of the planholder under the Employer Health Tax Act, paid by the planholder by reason of the occurrence of a risk, less any amounts paid to the planholder by members in order to receive benefits under the plan, and
- any amounts paid by members in order to receive benefits under the plan,
and includes dues, assessments, or administrative costs and fees paid for the servicing of the plan to the vendor.
The Act, as it applies to unfunded employee benefit plans, has been designed to tax all benefit claims paid from such plans, subject to the provision of an exemption where the premiums, as defined in the Act, are subject to the payment of employer health tax (EHT). This is accomplished by reference to amounts included in the total Ontario remuneration of an employee as defined in the Employer Health Tax Act. Where an amount is not subject to EHT (e.g. disability plans), the exemption available in the Act does not apply and the amount, if it meets the definition of a premium, is subject to RST. Payments made by members to receive benefits are also taxable premiums.
Analysis and Conclusion
Company A must pay RST on payments made into the plan if it is a funded plan less any amounts paid by the employees to receive benefits. The employees must pay RST on any payments or contributions made by them into a funded plan.
Company A must self-account for RST on amounts reimbursed as qualifying expenses if it is an unfunded plan. These amounts are considered to be premiums of a benefits plan.
A 2% premium tax is levied under the Corporations Tax Act (CTA) in respect of funded and unfunded plans. The RST definition of a "premium" for funded plans and for unfunded plans includes dues, assessments, and administrative fees paid to the vendor for servicing the plan.
A tax liability incurred by the planholder or members under the CTA is not considered a premium for RST purposes. The 2% premium tax on uninsured benefits plans is therefore not subject to RST.
We are enclosing Sales Tax Guide # 519 - Insurance - General Information for your information.
Company A must become a registered vendor under the Act so that it can self-account for RST due on the above-mentioned premiums. To register and obtain a vendor permit number please contact your local retail sales tax office.
If you have any further questions, please contact our office.
ISBN 0-7794-2507-3
© Queen's Printer for Ontario, 2002
