Canada Revenue Agency (CRA) allows business owners whether a Sole Proprietor, Partnership or Corporation to fully tax deduct healthcare, dental and vision expenses in a tax-effective and cost-efficient manner. A PHSP / Health Spending Account is an alternative to traditional health insurance. Used by thousands of small business owners across Canada, an HSA is a special account established to exclusively pay for health care services for you and your family members.

A PHSP enables a small business to deduct 100% of their family health and dental expenses – without paying standard premiums typically associated with traditional health insurance plans.

The ability to write-off health and dental expenses can create savings of more than 30% on medical and dental related expenses. For contractors, consultants, and other incorporated small business owners, this is an effective tool to cut your taxes and reduce your medical costs.

With a Private Health Services Plan (PHSP) the company does not pay a monthly premium and there is no co-insurance. Reimbursement is 100% and is paid by Interac eTransfer the same day AVFS is paid and is non-taxable to the employee.

With a group insurance plan the company must pay a monthly premium whether the plan is used or not and reimbursement is usually 80/20, 50/50 or the expense is not covered at all leaving the employee out of pocket a portion or the entire amount. Also, group insurance is a taxable benefit to the employee.

For Corporations, there are no set annual limits.

Unincorporated individuals and their families, there is an annual limit of $1,500 per adult and $750 per child. For example, two adults and two children would be entitled to a maximum of $4,500 per calendar year.

No. Anyone in the family can spend up to the total allowable amount for the entire family.

One-time set-up fee ($75.00) which includes taxes. The additional cost is 5% administration fee on all claims submitted plus applicable taxes (only paid on administration fee) depending on which province you live in.

You are an excellent candidate for an HSA if you own a business, have medical bills, and pay income tax.

An HSA/PHSP will save you money in three ways:

• Tax savings from deducting 100% of your medical costs
• Reducing your costs by avoiding high premiums associated with traditional health insurance
• The elimination of expensive deductibles and co-payments

Below is an example of a savings comparison between a medical expense paid personally vs. through your business. Let’s assume your corporate tax rate is 15% and personal tax rate is 43% and let’s also assume you have a medical expense of $1000.00

Choice 1 – After Tax (personal medical expense paid for out-of-pocket)

After tax dollars is the amount remaining after personal income tax is paid. In this example’s tax bracket, the company will pay $2325.58 (including income tax), of which 43% is used to pay income tax ($1325.58) in order for you to pay this $1000.00 medical bill.

To explain in detail, each $1.00 you spend on medical expenses would require your company to pay you approximately $2.33 before tax. The amount of 43% (or $1.33) is paid in tax to Canada Revenue Agency in the form of provincial and federal taxes.

Choice 2 – Before Tax (medical expense is paid for through your business)

In this case, the medical expense is paid through your corporation as a before tax business expense. Effectively, your business is able to write off 100% of your medical expense. You save money by keeping the additional 43% tax inside your corporation. This means that for that $1000.00 expense, your company only pays $1050.00 to cover the cost instead of $2325.58; leaving $1275.58 in the company. On top of this, you get $1000.00 in your pocket tax free AND your company gets a tax deduction of 15% ($157.50) so the total savings is now $1433.08.

The cost of the Health Spending Account (HSA) will vary by provider. In this example, admin fee is 5% ($50.00 in this example). You would pay $50.00 instead of $1325.58 in taxes.

This category of business includes incorporated consultants, contractors, and professional corporations. This segment of Canada’s business community is overlooked by traditional health insurance carriers as it is difficult and expensive to insure.

Interestingly, a PHSP can be most effective for a one person business. By using a PHSP, you and your family would benefit from a 100% tax deduction for your family medical benefits.

Here are some of the advantages a PHSP provides for an owner/operator/one person business:

• Deduct 100% of your family’s medical expenses
• Reduce your personal and corporate taxes
• Get extensive medical coverage for your expenses (more than traditional insurance)
• There are no premiums – no monthly, yearly, or ongoing
• Complement your spousal insurance

CRA doesn’t define dependents in the same sense when dealing with a PHSP / HSA. CRA uses the term Members of Household. As long as they are related to you by blood, marriage (including common-law and civil unions), or adoption AND living under the same roof / address, then they are covered.

There are several advantage of a PHSP compared to a traditional health insurance plan. Premiums, expense eligibility, coverage, ease of use, deductibles, and claims are some of the areas a PHSP is considered more favorable. Understanding the difference between insurance and administration is critical when deciding on how to pay for your medical expenses.

Here’s 5 reasons a PHSP / HSA is better than a traditional health insurance plan:

Yes, you qualify. Pre-existing conditions do not affect your eligibility for an HSA.

There are several factors that determine the limits within an HSA/PHSP. A reasonable maximum benefit level for an incorporated business owner is $15,000 per year. AVFS believes that a reasonable amount would be considered 20% of your annual taxable wage/salary. If the business has additional employees, the business owner is able to determine specific amounts for each classification of employee (management, full time, etc).

In theory, you can self administer an HSA for your business. You can also do your own accounting, legal work, and website development. The fact of the matter is that time is your most valuable asset and you would need to determine if you have the expertise and resources at hand to properly establish, organize, and maintain your own plan. Are you going to be able to dedicate scarce resources to the administration of your HSA?
Strict guidelines and conditions are required to qualify an HSA and ongoing knowledge is required to properly adjudicate claims. In exchange for a small fee to a provider, you can be worry free that your HSA qualifies with CRA and focus your time on your business and more important matters.
Moreover, what happens if you are audited and there is a problem with your plan? Having a third party administrator gives you an added layer of protection and signals your HSA is in the hands of an expert that is well equipped in the specifics and intricacy of this financial product.

Although straightforward to use, an HSA does require proper explanation and understanding before it is adopted by any particular small business. An HSA directly involves matters of taxation and ultimately some small business owners speak with their accountant for clarification. You can forward our website and contact info to your accountant. We would be happy to explain to them the benefits and concepts of a PHSP and how to claim them on taxes. AVFS provides you with a summary tax receipt that you give to your accountant at the end of your fiscal year.

Yes! They are legal in Canada – as long as the guidelines are properly adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.

CRA legislated a version of the PHSPs into existence in the late 1970’s as a tool for small business owners to decrease tax to spur economic growth. In the early years, it was only open to Incorporated companies but in the 1980’s, CRA opened it up to include Sole Proprietors. Over at AVFS, we have 9+ years of experience in PHSPs and know the Income Tax Act with regards to medical expenses and PHSPs intimately.

Boiled down, a PSHP/HSA is a contract. It is a contract between an employer (a business) and an employee. The conditions of the contract should outline the relationship between the employer, employee, and the administrator. So in that sense, all Health Spending Accounts (HSAs) are the same but some companies operate them differently.

However, there are some key conditions that will affect these plans. Are there arm’s length employees? What type of compensation does the owner receive (dividends)? Are the employees part time? As a plan with tax planning components, an HSA adapts to the company structure.

Large providers of traditional health and dental insurance in Canada are very adept at marketing. In fact, they are so effective at developing and delivering targeted messaging that many small Canadian business owners firmly believe that purchasing traditional insurance is a must to effectively protect themselves and their families. The truth is that there are viable alternatives to insurance.

A Health Spending Account is a tax plan in the nature of insurance. It feels like insurance since it deals with medical costs but it is not insurance. The critical difference however, is that by paying for medical expenses through a PHSP, you are self-insuring. There are significant advantages to paying for medical expenses through a tax plan instead of an insurance plan.