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Private Health Services Plans

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Business -> Private health services plans (PHSP)

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 of the employee for purposes of the medical expense tax credit.

S. 248(1) of the Income Tax Act defines a PHSP as

bullet a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or
bullet 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 only 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.

A Health Services Spending Account may qualify as a PHSP if it meets the criteria set out in IT-339 (see links at bottom).  See IT-529 below for more information on Health Services Spending Accounts and other flexible employee benefit programs.

There must be a document which outlines the coverage for employees under the PHSP.  If there are no limitations to the coverage, the plan will be unlikely to qualify as a PHSP.  In this document, the corporation can set different annual limits for PHSP benefits provided to different employee groups in the company.

PHSP for Corporations

bullet The Income Tax Act does not place a limit on the amount of deduction allowed for PHSP premiums.
bullet A PHSP can be set up for a corporation with only shareholders as employees
bullet 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
bullet the shareholder must be actively engaged in the business activities of the corporation - see CRA Technical Interpretation 2003-0050541E5 (pdf)
bullet the benefits must be reasonable, and be consistent with what would be offered to an arm's length employee providing similar services

In order to be considered an employee, besides being actively involved in the business, the shareholder should have an employment contract with the corporation.  Does a salary have to be paid to the shareholder/employee, or can payment be made by dividends only?  We have not found a clear answer to this question.  To err on the side of caution, it would be wise for the shareholder to receive at least a portion of compensation via salary.

PHSP for Sole Shareholder Sole Employee

Technical Interpretation 2014-0521301E5 (pdf) issued by CRA on June 25, 2014 indicates that a plan for a sole employee-shareholder would not likely qualify as a PHSP since it does not contain the necessary elements of insurance.  The conclusion of the interpretation is "Generally, where a sole shareholder is also the sole employee, CRA would consider the sole shareholder-employee to receive the benefits in his or her capacity as a shareholder unless he or she can demonstrate that employees, who are not shareholders, with similar duties and responsibilities to another corporation of a similar size receive similar benefits under a similar Plan."

Penalty Where Payment to Shareholder Does Not Qualify as PHSP Payment

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, so there is double taxation of the amount.  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.

Administration of the PHSP

There are many organizations which will set up and administer a PHSP for a business, often on a "cost plus" basis.

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.

PHSP for 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

bullet the individual is actively engaged in the business on a regular and continuous basis, and
bullet in the current or preceding taxation year, excluding deductions for PHSP expenses,
bullet more than 50% of the individual's total income for the year is from the business, or
bullet the individual's income in the year from sources other than the business does not exceed $10,000, and
bullet the PHSP amounts are payable under a contract between the individual or partnership and
bullet a person licensed or authorized to carry on an insurance business or the business of offering to the public its services as trustee,
bullet a person or partnership in the business of offering to the public its services as an administrator of private health services plans, or
bullet a tax-exempt business or organization of which the individual is a member, or
bullet 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.

Canada Revenue Agency (CRA) Resources:

bullet T4002 Business and Professional Income (unincorporated businesses) - search for Private Health Services Plan
bullet IT-339R2 Meaning of private health services plans
bullet IT-529 Flexible employee benefit programs
bullet IT-85R2 Health and welfare trusts for employees
bullet The following income tax folios were published on March 28, 2013 in consultation format to allow for feedback from the tax community.  They will be available until June 28, 2013:
bullet S1-F1-C1: Medical Expense Tax Credit
bullet S1-F1-C2: Disability Tax Credit
bullet S1-F1-C3: Disability Supports Deduction

Tax Tips:

Use a PHSP to provide tax-free benefits to your employees.
Get professional tax advice on your PHSP prior to setting it up, to ensure it qualifies.

 

Revised: December 17, 2014

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