You've just been promoted to the executive team -- congratulations! In
addition to your reserved parking space and your fitness-club membership, you
are informed that you are now eligible to participate in the company's executive
health program.
Under this program, eligible executives can visit a private medical clinic
and undergo a complete health assessment, which typically comprises an array of
tests, X-rays, blood work, and even a nutritional and fitness appraisal.
The best part is that the entire cost of the assessment, which can be as high
as $1,300, is paid for by your employer.
The unanswered question, however, is whether the cost of such a program is
reportable as taxable benefit. For an Ontario executive in the top tax bracket,
this could mean a personal tax bill of just over $600.
"It's a bit of a grey area," concedes Stuart Elman, CFO and vice-president of
Corporate Development & Strategy at publicly-traded Medisys Health Group Inc. of
Montreal.
The appropriate tax treatment may depend on who is seen to be the primary
beneficiary of the assessment -- the employee or the employer.
Over the years, both the CRA and the courts have considered various
employer-provided health benefits to determine whether the benefit should be
taxable.
In fact, just last week the CRA concluded that a weight-loss program made
available by an employer to all of its employees at a nominal fee would be a
taxable employment benefit, despite the employer's argument that it was the
primary beneficiary since "a healthier and happier work force leads to decreased
absenteeism."
This finding is consistent with the CRA's longstanding position that if your
employer pays or reimburses you for a fitness club membership, it is typically
considered to be a taxable benefit from employment unless the membership is
"principally for the employer's advantage rather than the employee's." The onus
is both on the employer and employee to prove that the membership is primarily
to the employer's advantage, and thus non-taxable to the employee.
A tax case decided last November concluded that an employee whose company
paid for membership dues at the Winnipeg Squash Club was required to include at
least part of the value of the membership in his income as a taxable benefit.
While the employee argued that since his membership was used to promote new
business and to entertain clients the fees were incurred "primarily for the
benefit of [his] employer," the judge concluded that the business portion was
only 25%.
In 2001, the CRA was specifically asked whether a taxable benefit would arise
when a company physician provides comprehensive annual medical exams to
executives over the age of 40. The CRA responded that if the exam was a
condition of employment, the employer was the primary beneficiary; however, if
the exam was voluntary, it should be reported as a taxable benefit, but would
likely qualify for the medical expense credit on the employee's tax return.
This position, however, has not been tested in the courts, and a strong
argument could be made that the employer is, indeed, the primary beneficiary of
an executive health program, since many of the tests in the medical exam are
preventative and diagnostic in nature, and attempt to catch major health risks
before they arise. Preventing a major illness that could put a senior key
executive out of commission for weeks, if not longer, is a significant
risk-reduction strategy that can be seen as substantially benefitting the
employer, whose business might suffer irreparably in the absence of a senior
management team member.
According to Mr. Elman, in many companies the cost of participating in such a
program is paid out of an employee's healthcare spending account (HSA). An HSA
is a tax-effective way employers can offer additional health benefits to
employees by depositing HSA credits or dollars into employees' accounts.
Each year, the employee can use the allocated credits as needed for eligible
health-related expenses not regularly covered under a provincial health plan or
the employer's own benefits plan, as long as they are otherwise qualifying
medical expenses. Since the HSA is considered to be a private health services
plan, any benefits received out of such a plan are specifically exempt from
being a taxable benefit under the Income Tax Act.