Private Health Services Plans - a
tax-free benefit for employees
A business may deduct private health services plan
(PHSP) payments made on behalf of employees and their dependents. These payments are not
taxable to the employees, and there are no CPP or EI premiums charged on these
payments.
If employees pay a portion of the PHSP premiums, this qualifies as a medical expense for purposes of the medical expense
tax credit.
S. 248(1) of the Income Tax Act defines a PHSP as
a contract of insurance in respect of hospital expenses, medical expenses
or any combination of such expenses, or
a medical care insurance plan or hospital care insurance plan or any
combination of such plans,
except provincial and federal government health care insurance
plans.
Payments made by a PHSP to an employee must be for reimbursement of expenses
which would qualify as medical expenses under the Income Tax Act.
These expenses include prescriptions, medical, dental, vision care and hospital expenses.
For more
information on qualifying medical expenses, see our article on eligible
medical
expenses.
Both incorporated and unincorporated businesses (self-employed proprietors,
partnerships) can have PHSPs, but there are different restrictions on each.
The treatment for corporations is more favorable than that for unincorporated
businesses.
Corporations
The Income Tax Act does not place a limit on the amount of deduction
allowed for PHSP premiums.
A PHSP can be set up for a corporation with only shareholders as employees
Payments for medical expenses of shareholders will only qualify if the
shareholder received the benefit in his/her capacity as an employee, not as
a shareholder. In order for the benefits to qualify
the shareholder must be actively engaged in the business activities of
the corporation, although not necessarily collecting a salary.
the benefits must be reasonable, and be consistent with what would be
offered to an arm's length employee providing similar services.
The corporation can set different annual limits for PHSP benefits provided to
different employee groups in the company.
If the payment of shareholder medical expenses does not qualify as a PHSP
payment, this will be a taxable benefit to the shareholder, and will not be a
deductible expense for the corporation. In the 2004 Tax Court case Spicy
Sports Inc. v. the Queen, it was determined that a shareholder benefit had
been conferred on a shareholder/employee when a large payment was made from a
cost-plus PHSP.
There are many organizations which will set up and administer a PHSP, often
on a "cost plus" basis. However, payments made directly from an employer to an employee for
reimbursement of qualifying medical expenses may qualify as PHSP premiums, where
the employer is required by the employment contract to pay such expenses.
It is essential to have the employment contract properly set up, and
professional advice in this area is advised.
Unincorporated businesses
Income Tax Act s. 20.01
Payments made by an unincorporated business (self-employed individual or
partnership) to or under a PHSP may be deductible from business income, under S. 20.01 of the Income
Tax Act, if
the individual is actively engaged in the business on a regular and
continuous basis, and
in the current or preceding taxation year, excluding deductions for PHSP
expenses,
more than 50% of the individual's total income for the year is from
the business, or
the individual's income in the year from sources other than the
business does not exceed $10,000, and
the PHSP amounts are payable under a contract between the individual or
partnership and
a person licensed or authorized to carry on an insurance business or
the business of offering to the public its services as trustee,
a person or partnership in the business of offering to the public its
services as an administrator of private health services plans, or
a tax-exempt business or organization of which the individual is a
member, or
a trade union of which the individual or a majority of the
individual's employees are members
An unincorporated business cannot simply make payments directly from employer
to employee, as this will not qualify as a PHSP. It is necessary to have
an insurance plan through a third party. Further, if there are no
employees covered by the PHSP besides the sole proprietor, the CRA's view is
that a cost plus plan will not constitute insurance, so will not qualify as a
PHSP.
The allowable deduction for PHSP costs for an unincorporated business is
limited by S. 20.01(2) of the Income Tax Act. Where the business provides
coverage under the PHSP to full-time arm's-length employees, and 50% or more of
the employees of the business are arm's-length employees, the maximum allowable deduction for
the sole proprietor and dependents will be equal to the cost of equivalent
coverage under the plan in respect of the arm's-length employees.
Where there are no other employees, or fewer than 50% of the employees are
arm's-length employees, the maximum allowable deduction for the sole proprietor
and dependents will be an annual amount equal to the total of $1,500 for each of
the sole proprietor, spouse, and dependents age 18 or more, plus $750 for each
dependent under 18. Thus, for a sole proprietor with a spouse and 2
children under 18, the annual allowable deduction would be a maximum of $4,500.
Other resources
CRA IT-339R2
Meaning of private health services plans
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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