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.
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