Interpretation Letter IN-0013, April 2002

Thank you for your facsimile message dated December 5, 2001, inquiring about the application of Ontario retail sales tax (RST) on group benefits plans.

Understanding of Facts

It is our understanding that Company A, changed the carrier of its group benefit plan, as well as the way in which its benefits are paid. Under the new package, Company A no longer pays a premium, and the following is an outline of the way in which the transactions flow:

1. Money is collected from Company A's member employer on behalf of Company A's membership. Company A collects and remits RST on this money.
2. Company A's carrier pays all benefits i.e. dental, drugs, etc.
3. The carrier bills Company A's trust fund for the actual monies paid on behalf of the Company A's members, plus an administration fee.

Company A believes, that the reimbursement and administration fees should be exempt from RST and have asked for clarification on the matter.

Legislation and/or Administrative Policy

Subsection 2.1(1) of the Ontario Retail Sales Tax Act (Act) states:

Every person who is a resident of Ontario, or who carries on business in Ontario, and who,

1. enters into a contract of insurance with an insurer;
2. is a person whose risk is covered by group insurance;
3. is a planholder or member of a benefits plan; or
4. 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,

(e) in respect of a funded benefits plan,

1. any amounts paid by the planholder less any amounts paid to the planholder by members in order to receive benefits under the plan, and
2. 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 Retail Sales Tax 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,

(d) in respect of an unfunded benefits plan,

1. 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
2. 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

If an employer hires, appoints, or contracts for an administrator and then pays the administrator regular payments to establish a fund from which benefits can be paid by the administrator, this is a funded plan. Payments into the fund by the employer attract RST.

On the other hand, an employer may pay the benefits as they are claimed by employees, either directly or through an administrator. The administrator may be an employee or a third party. The key is that benefits are paid by the employer as they are claimed. This is an unfunded plan. In an unfunded plan, the payment of benefits are subject to RST as they are made.

If an employee makes contributions toward a benefit plan, these payments are taxable to the employee. The employer must collect tax on these contributions.

Conclusion

Based on the information provided, Company A's employer will enter into a benefits plan that will give protection against risk to employees. The protection against risk to employees includes an undertaking to pay for health care services that could otherwise be obtained by taking out contracts of insurance. Based on the fact that the employer makes payments into a trust fund out of which benefits claims will be paid by Company A, this is a funded plan provided the premiums paid into the fund exceed amounts required for payment of benefits foreseeable and payable within thirty days after payment of the premium.

RST applies to payments made by the employer into the funded plan less any amounts paid by the employees to receive benefits. RST also applies to contributions made by employees to receive benefits. RST is due on funded plans at the time the employer contributes an amount into the fund out of which claims will be paid. It is the responsibility of the employer to collect RST on the employees' contributions. Company A is required to charge, collect and remit the required RST on contributions into the fund. Any payments into the funded plan by the employer will include both premium and RST.

The definition of "premium" in section 1 of the Act includes dues, assessments or administrative costs and fees paid for the administration or servicing of the plan to the vendor. Administration fees include such charges that are made for claims management, processing and servicing of the insurance or benefit program.

Therefore, if insured plans (e.g. group insurance) are purchased with monies from the trust fund, no additional RST is payable on the premiums paid to an insurance carrier provided RST has been collected and remitted on the contributions originally paid into the fund.

ISBN 0-7794-2507-3

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