ARCHIVED – Lump sum amounts received in lieu of health and dental coverage

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1. The Budget indicates that the CRA is clarifying its administration of the rules regarding the tax treatment of lump sum amounts received in lieu of health and dental coverage. What are these rules?
2. Why is there a reference to clarifying the treatment of these amounts in the 2011 Budget commentary?
3. What are the reporting and withholding requirements for the payer of a lump sum amount paid in lieu of continuing medical or dental coverage under a private health services plan?
4. What are the reporting requirements for an individual who receives a lump sum payment in lieu of the continuation of medical or dental coverage under a private health services plan?

1. The Budget indicates that the CRA is clarifying its administration of the rules regarding the tax treatment of lump sum amounts received in lieu of health and dental coverage. What are these rules?

An employer can provide an employee or a retiree with health and/or dental coverage under a private health services plan on a non-taxable basis. However, if an employer simply pays a cash lump sum amount to that individual in circumstances in which there is no corresponding medical expense, that cash payment is taxable to the employee or former employee.

2. Why is there a reference to clarifying the treatment of these amounts in the 2011 Budget commentary?

The CRA had previously held that lump sum amounts received by retirees or employees upon cancellation of their private health services plans could be considered advance reimbursements of medical expenses and therefore not taxable when received. The CRA has re-examined this position and concluded that such amounts are clearly taxable when received and medical expense tax credits can be claimed as they are incurred. However, to provide for adequate public notice of the revised position, CRA decided that this position would not apply to payments of this nature made prior to 2012.

It is understood that in an employer insolvency situation, there may be a significant delay between the insolvency and the eventual payment of amounts to the retirees or former employees. Accordingly, CRA is clarifying that where the employer's insolvency arose prior to 2012, the payment eventually made to the retirees in connection with the termination of the PHSP would not be subject to the revised position on taxability even if it is made in 2012 or later.

3. What are the reporting and withholding requirements for the payer of a lump sum amount paid in lieu of continuing medical or dental coverage under a private health services plan?

Provided the amount is paid prior to 2012, or is paid at any time in connection with the termination of coverage provided by an employer whose insolvency arose before 2012, the payer of the amount need not report the payment on an information return. Similarly, there is no requirement to withhold any amount from such a payment.

Lump sum payments, that will be subject to this treatment in 2012 and onwards, should be reported on a T4A Information Return, and will be subject to withholdings in accordance with subsection 153(1) of the Income Tax Act.

4. What are the reporting requirements for an individual who receives a lump sum payment in lieu of the continuation of medical or dental coverage under a private health services plan?

Where such an amount is received prior to 2012, or at any later time in connection with the termination of coverage provided by an employer whose insolvency arose before 2012, it need not be reported by the recipient on his or her T1 General Income Tax and Benefit Return.

However, it is expected that individuals who receive a payment (as an advance reimbursement) in the foregoing circumstances will not claim the medical expense tax credit until such time as their cumulative medical expenses since the termination of the PHSP exceed the amount received.

Date modified:

2015-07-15