Muddying the Waters for Employer Drug Plans

The Budget proposed amendments to the Income Tax Act (ITA) to specifically exclude coverage for OTCs from eligibility for the METC, in light of a number of court rulings where vitamins and other OTCs were found eligible for the tax credit. Specifically, the Budget proposed to amend ITA subsection 118.2(2) to restrict drug eligibility for the METC to those medications “that can lawfully be acquired for use by the patient only if prescribed by a medical practitioner or dentist.” This change would have made OTCs, which are available without a prescription, ineligible for the METC.

This proposed change raised concerns for the sponsors of PHSPs, as the 1989 interpretation bulletin issued by the Canada Revenue Agency (CRA) on these plans states that hospital or medical expenses covered by a PHSP are those “which normally would otherwise have qualified as an expense” under the METC provisions of the ITA. The CRA has consistently interpreted this bulletin to provide that the only items that can be covered under a PHSP are those eligible for the METC. In addition, a letter issued by CRA in March 2008 indicated that the Budget did not change CRA’s position on the coverage of OTCs under PHSPs. Accordingly, covering OTCs could constitute non-compliance with current CRA policy.

There are significant consequences attached to a finding that a PHSP does not comply with CRA policy. The plan could lose its PHSP status, which would make employer contributions taxable income to the employee, while employee contributions would lose their eligibility for the METC. The CRA could also charge penalties for non-compliance.

Many PHSPs provide coverage for some OTCs, and coverage of specific OTCs is actually required for plans with Quebec members, which must offer coverage for at least the medications included on the provincial drug plan formulary published by the Régie de l’assurance maladie du Québec (RAMQ). Plans with Quebec members that do not cover the OTCs in the provincial formulary could be deemed illegal pursuant to the province’s prescription drug insurance legislation.

In addition to the concerns raised by PHSP sponsors, other stakeholders expressed their concern to the CRA and the federal Department of Finance that the change to the ITA would cause insulin, diabetic supplies, vaccines and other items to lose their METC eligibility because they are available without a prescription.

Draft Legislation “Clarifications”

As a result of discussions that took place following the Budget, the draft legislative proposals released on July 14, 2008 seek to add section 5701 to the Income Tax Regulations (Regulations). This new section provides that a “drug, medicament or other preparation or substance” will now be considered to be “prescribed” for the purposes of the METC rules in the ITA if it meets the following three-part test:

1. It is manufactured, sold or represented for use in the diagnosis, treatment or prevention of a disease, disorder or abnormal physical state, or its symptoms, or in restoring, correcting or modifying an organic function;

2. It is prescribed for a patient by a medical practitioner; and

3. It may, in the province in which it is acquired, be lawfully acquired for use by the patient only with the intervention of a medical practitioner.

For the purpose of the ITA and Regulations, “medical practitioners” include doctors, nurses, pharmacists, occupational therapists, psychologists, physiotherapists, dentists, audiologists, optometrists and speech-language pathologists. Finance has indicated that medications that are only available behind the counter at a pharmacy will meet the “intervention” requirement of the third part of the test. Such OTCs would therefore be eligible for the METC, and also for coverage under PHSPs.