Canada Revenue Agency – PHSP Stance

Recently, CRA has come out and explained their stance on PHSP’s a bit more than what is currently published on their website. 

Previously, it was vague as to who actually qualified to have a PHSP or HSA (Private Health Services Plan or Health Spending Account). One article they released mentioned a Sole Proprietor having no employees (see below) having a PHSP, one article says no, a Sole Proprietor needs at least one arms-length employee. As of the date of this blog post, CRA has firmed up their stance on Sole Proprietors and PHSPs. Read below:

Incorporated businesses, including shareholder employees and all other corporate employees, are eligible to participate in an HSA. Corporations with as few as one employee can be eligible as well. However, the HSA cannot be solely for shareholders unless the shareholders are also employees earning a T4 income. In the case of unincorporated businesses or sole proprietors, the owner and their employees are also eligible if the owner has at least one arm’s-length employee.

So what does the above mean? It’s simple:

If you have no arms-length employees AND you are a Sole Proprietor (unincorporated), you do NOT qualify for a PHSP/HSA in CRA’s eyes.

What else does CRA say about this?

Some insurance agents/brokers and financial planners are marketing HSAs to businesses operating as sole proprietorships that have no arm’s-length employees. Participants are told that they will be onside with meeting the Income Tax Act rules for private health services plans if they purchase additional types of insurance.

CRA’s revised explanation goes on to further state that if there are no arm’s-length employees, then there is no element of risk because you are still paying for your own medical expenses.

The above is somewhat in contradiction to CRA’s own published T4002 guide on Self-employed Business, Professional, Commission, Farming, and Fishing Income. See below for the screenshot:

As you can read above, CRA even gives examples on a sole prop who has NO employees, which goes against what they are saying in their above statements. The examples were taken directly from the 2018 version of the T4002 (link at the end of the article).

At Accountable Value Financial Services, our stance has always been that for an Unincorporated / Sole Proprietorship to be eligible for a PHSP with us, they MUST have at least 1 arm’s-length employee. We feel that since they are noticing these types of plans, they are going to be watching them a lot closer and unincorporated companies will be under higher scrutiny than an incorporated company.

Two questions you need to ask yourself:

  1. Does my PHSP provider have my best interests at heart?
  2. Do I fall into this category?


Reach out to us for a free discussion on PHSP’s and how it may or may not work for you!

Links for further reading:

Canada Revenue Agency


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